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Essay/Term paper: Outsourcing

Essay, term paper, research paper:  Internet

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1 Abstract
2 Introduction
3 Fundamentals
4 The Main Strategy
5 Sucessful Outsourcing
6 Conclusion

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

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

Listed below are some of the major issues to be considered when using

- 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.

Successful 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, Suite 2000, New York, NY 10111


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