4 The Main Strategy
5 Sucessful Outsourcing
Outsourcing and how it can help IT Managers enhance their projects.
With computer systems / projects and there implementations getting more complex with every day that passes , the tendering of IT responsibilities to external parties is becoming more and more attractive to the IT Managers of large organisations. The common name for this type of operation is "Outsourcing". It is the attempt of this paper to explain outsourcing , it's pro's and con's and how it can help our friendly IT Manager enhance developments or implementations.
Outsourcing can be defined as a contract service agreement in which an organisation hires out all or part of its IT responsibilities to an external company.
More and more companies are leaning towards outsourcing it could be said that this may be caused by the growing complexity of IT and the changing business needs of an organisation. As a result, an organisation may find that it is not possible to have all its IT services supplied from within its own company. Given this, an IT manager may decide to choose to seek assistance from an external contractor/company to supply their services the organisation lacks. In addition, the business competition has set the pace for an organisation to continue to strive for internal efficiency. It also needs to look for a way to transfer non-core activities or "in house" services and support activities to external specialist organisations who can deliver quality services at a lower cost.
In deciding whether to use outsourcing or not, the main objective of outsourcing is based on the price of delivery of services by an external contractor/company. Although price of delivery is a primary factor for outsourcing, other issues should be considered e.g. price should be measured against the overall package offered by the external contractor/company. Briefly if it's a good competitive price in relation to the services rendered by the company and in respect to their skills/competency and experience, and timely delivery. The organisation also needs to consider outsourcing in light of its long term strategic directions and its information needs.
Competition is a another area to be carefully considered. Competition opens up opportunity for all potential suppliers to conduct business with the organisation. Through the competitive process, it allows organisations/IT managers to derive the best outcome. From the open and effective competition, the organisation is then able to judge soundly in determining the best strategy after it has taken into account of the competition and value for money principle.
IT managers can go through lengthy procedures to minimise problems with outsourcing, but still things can go wrong and intended objectives may not get achieved. To overcome such mistakes, it may be prudent to look at other companies that have undertaken outsourcing and learn from their successes and mistakes
Listed below are some of the major issues to be considered when using outsourcing:
· An IT manager that undertakes outsourcing must be able to clearly identify its long term IT strategic directions and long term information needs.
· Organisation must be able to clearly define its business objectives.
· To avoid unnecessary friction between the organisation and the external service provider, it would be prudent to incorporate an "extraordinary events" clause into any contract entered into. This clause should cover any extraordinary changes in circumstance that should occur . This also allows a lot of flexibility between the two parties.
· The IT manager should identify all the external and internal stakeholders and the impact that the outsourcing may have on stakeholders.
· Learn from other companies, use their mistakes and successes to avoid duplication and waste of manpower.
· The IT manager should communicate regularly with anyone in the organisation who is affected by outsourcing, even if the affect is very small.
· The IT manager should make sure that the external service provider should know exactly what is expected of them e.g. the exact services required.
· The IT manager should allow adequate time and the correct resources to the problem at hand , this is to ensure the best possible outcome from the service arrangement.
· The IT manager should assign skilled staff to manage the external contractor and to monitor closely the external contractors performance.
· The IT manager should monitor and assess the contractor to ensure quality of the service not just price of the delivery of services.
The Main Strategy
In an organisation, the IT infrastructure components are comprised of a number of technical and service areas. Before going through any outsourcing decision process, the organisation needs first to assess its sourcing across the entire IT infrastructure. Once this is done, the organisation can then determine the best sourcing strategy against a number of perspectives.
In order to determine the optimum sourcing strategy, an organisation needs to look at a number of perspectives or alternatives and then balance these perspectives with the benefits and risks of outsourcing. With this information, an organisation can derive a more structured methodology for a balanced view of the IT infrastructure and its components.
It can be stated that there is no one approach to outsourcing. However, in practice there are three common methods used by the practitioners. They include:
1 Outsourcing a significant proportion of the IT services and technical areas. This approach has a lower co-ordination cost and also has a greater organisational impact;
2 Assessing each IT service and technical area independently. A number of vendors are used to match the needs of each outsourcing event. This approach selects the best vendor and deal for each outsourcing arrangement. However, it involves higher internal costs and synergy problem;
3 Selecting a prime contractor. The prime contractor can select and manage all other vendors. This approach depends on the importance of learning curve and therefore, it takes longer.
As part of the determination of outsourcing strategy, it is useful for the organisation to incorporate any experience derived from other organisations that have outsourced and other forms of outsourcing that the organisation has undertaken. The organisation should also perform an initial investigation on the potential vendors background. Furthermore, the organisation should examine different kinds of outsourcing forms that the vendors are able to provide.
The organisation must identify all the internal and external stakeholders and the impact that outsourcing may have on them and their objectives. The internal stakeholders include IT staff, users and management and, the external stakeholders include unions, customers, and existing suppliers (IT and non-IT).
The IT manager should also undertake cost benefit analysis of all internal costs and external provisions. This provision include capital investment, ongoing expenses and the commitment of time and resources. Once a cost baseline is developed, an organisation can come up with a more objective cost analysis. It can then assess the related components of the vendor's
proposal against this cost benefit analysis before making any decision regarding the outsourcing.
For an IT manager to successfully outsource its IT functions, there are a number of factors that need to be addressed.
An organisation that has outsourced its IT functions to an external contractor, should not abdicate itself from the responsibility from the activity that it has outsourced. In other words, there is still a need for the organisation to retain overall control of its IT services being outsourced. In addition, the organisation needs to regularly monitor the external contractor to ensure that they continue to deliver quality service and to perform at the required standard as agreed in the contract arrangement. To be able to do this, the organisation must ensure that it can maintain sufficient technically competent "in house" staff to oversee the contract service agreement.
Before an organisation outsources its IT functions, it is very important that it prepares a sound full cost estimate for all existing internal computer systems so that it can determine whether the outsourcing is cost effective. Failure to do so can be critical.
The costing issue of Outsourcing is discussed in more detail in the section headed
"The Economics of Outsourcing"
For any successful outsourcing, a good solid contract is essential. The contract should also allow for flexibility as it is difficult, in the life cycle of the contract, to predict every circumstance or cover every eventuality. Successful outsourcing should be based on partnership between the organisation and the external contractor.
Outsourcing an organisation's IT functions without proper consultation with employees can cause a lots of stress among IT staff and reduce their morale. The result may be a loss of some key technical and specialist staff from the organisation. A more open and timely communication with employees can minimise this impact and uphold the staff morale. Organisation can allay the fears by outlining career options and opportunities for its staff within and outside the organisation and also by explaining the benefits of outsourcing to those affected employees.
The Economics of Outsourcing.
There are many reasons a company may choose to outsource its software development function. These couple of paragraphs address the two main reasons for this action
1 The conception that outsourcing is cheaper
2 The expertise for developing the required software product does not exist
within the company.
In the past, it was difficult to compare the cost of outsourcing a software product against the cost of in- house development, mainly because there was no functional sizing metric agreed upon prior to the start of the contract. As function points grow in popularity and gain wider acceptance as an accurate measure of software size, more firms will be better equipped to compare outsourcing firms with in-house development teams. In all sophisticated industries cost per unit (or average cost) is an important consideration, where average cost is total cost divided by total output. The same concept can be applied to software development using function points. Total development cost divided by total function points is an average cost calculation. Once average cost is determined, all prospective developers, in-house and outsource, can be compared on an equal basis.
Just as important is the ability to adequately evaluate the delivered product, considering several factors: size, quality, time to market, and so on. Using functional metrics total delivered function points can be contractually agreed upon prior to the start of the contract, assuming the company contracting the software development has clearly defined the final product. This is a dramatic change in the way software projects historically are managed. Any change in the number of total delivered function points once the project begins will impact the average cost calculation. Changes, additions, and even deletions to the software become more expensive per unit as you move through the development life cycle. Since the consumer of the custom built software wants to minimise unit cost, it is therefore in their best interest to sufficiently define requirements prior to the start of the project.
The ability to compare cycle time, or time to production, is also important. Time to production is defined as total number of function points delivered divided by elapsed calendar time. The least expensive developer also may be the one whose delivery date is the latest out. The buyer of the software must decide if quicker time to production is worth the extra expense.
The number of acceptable defects delivered per unit of size is another important evaluation metric; with higher quality comes higher development costs. But delivering software with numerous embedded defects will be expensive to maintain and will cost more in the long run.
The considerations of outsourcing change dramatically when you view the relationship from the perspective of the outsourcing firm.
It is important to the outsourcing firm that the average unit cost for software development be kept to a minimum. Fixed-price contracts create an environment that pushes average costs lower for subsequent projects.
Outsourcing firms have a great incentive to maintain a software library: reuse of components in future projects. If this library is thoroughly tested, insuring that it is nearly defect free, and documented so it can be easily understood, it can be used with confidence to lower average costs over time.
Additionally, outsourcing firms have a great incentive to keep their staffs trained in the latest software languages, tools, and techniques. As more outsourcing projects are undertaken, the responsibility to keep staff knowledgeable and up-to-date transfers from the in-house development team to the outsourcing firm. The outsourcing firm assumes the risk of investing in the technical staff - if their people are not trained on the latest software technologies, they cannot remain competitive with other outsourcing firms who have staffs with state-of-the-art skills. They willingly assume the risk with the expectation that these training initiatives will lower future average costs.
Unfortunately, it is still the norm in the software development arena, and in outsourcing cases in particular, for an organisation to be ignorant of the average size and average cost of a software project. All other sophisticated industries calculate and monitor their per unit average cost. As the software industry continues to mature, not only will it be common practice to know average costs in dollars per function point, it will be required.
Outsourcing should not be viewed as a solution in resolving problem service areas within the organisations. If an internal service area is not performing effectively and by transferring it to an external contractor could only magnify the problem. Therefore, it is important that an organisation that undertakes outsourcing must be able to clearly identify its long term IT strategic directions and long term information needs. The IT manager is the prime candidate to fulfill this role . Once the organisations have understood and addressed its long term IT strategic directions, it can then go on to decide which IT service areas should be outsourced. Organisations undertake outsourcing of their IT service areas should do so based on the basis of costs and benefits analysis and it is justified on cost effectiveness and must be based on sound business decision.
Although many different books references and web sites were researched the following Instsitute yielded a most comphrehesive supply of information. That ultimately became the basis of this report.
The author would strongly recommend any party investigating Outsourcing to contact the below institute.
The Outsourcing Institute
45 Rockefeller Plaza,
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