Assess Outsourcing

INTRODUCTION
Outsourcing
occurs when a company contracts with a supplier or vendor to
provide specific services and support for multiple information technology (IT)
activities. Note that outsourcing typically refers to services and not purchased
products. Providing an ongoing service means that there is a need for both a
managerial and technical relationship between the supplier and the customer
firm. Another observation is that most outsourcing agreements cover several
years (up to 5– 10 years in some cases). Why this long? Because of the time it
takes to come up to speed and become efficient as well as the practical infeasi-
bility of switching suppliers quickly.
Outsourcing of information systems (IS) has been going on much longer than
you might imagine. It began in the 1960s with facilities management. Compa-
nies had no IT or IS organization and did not know what to do. Therefore, they
contracted with firms such as IBM, Computer Sciences Corporation, and others
to run their computer center. Firms such as these also provided programmers and
systems analysts on-site to do work on a time and materials basis.
Another example was the use of service bureaus. Companies who required
data processing but could not afford their own computers used service bureaus.
They brought their data to the service bureau who processed it and returned out-
put to the company.
A third example was external timesharing. Computers inside companies in
the late 1960s and early 1970s were batch processing machines. To get access to
online systems, you had to use a service bureau or timesharing firm. Charges
were based on usage. This was extremely expensive, but firms had little choice.
Outside timesharing for some firms ate up 10% of their IT budget.
As the 1980s progressed, companies eliminated outside timesharing and
service bureaus and expanded their internal IT organizations. The height of this
centralized model was probably from 1979 to 1982—just prior to the introduc-
tion of the personal computer (PC) into corporations. With the introduction and
spread of local area networks (LANS) and more PCs, IT groups started to
outsource basic training, hardware maintenance, and some support. In the late
1980s the use of software packages increased as their capabilities rose and the
underlying fourth-generation languages improved. Outsourcing of business
activities began in this decade.
The 1990s saw the continued rise of the use of packages (a form of outsourc-
ing) as well as expanded outsourcing of specific tasks and work. The use of con-
tractor and consultant resources expanded. For some firms, more than 40% of
the overall IT headcount consisted of contractors. The 1990s also experienced
major attempts at outsourcing all the IT activities to one or several companies.
Some of these failed miserably and the firms had to bring IT back into their
organizations. In other cases, the firms began to contract out more narrowly
defined activities. Companies also focused on core business activities and
increasingly outsourced business functions.
What do these observations show? First, there is a substantial body of experi-
ence going back to before the late 1950s in outsourcing. This should be used to
help you today. Second, several basic findings can be noted:
• Although outsourcing in IT may be worthwhile, outsourcing of other busi-
ness activities may yield more benefits due to the size and nature of the
work being performed. Mundane activities, such as shipping, telephone and
utilities, and so on, are often outsourced. Many banks outsource their teller
operations.
• It is valuable to develop a strategy and approach for outsourcing due to the
complexity and interrelationships among IT activities. It is also important
because of the requirement by vendors to have multiple-year agreements.