Outsourcing theories and models, benefits and challenges for outsourcing companies india

iFour Consultancy

IT OutsourcingIts’ advantages vs disadvantages

TERMINOLOGY IN OUTSOURCING

OUTSOURCING

Outsourcing can be defined as turning over all or part of an organizational activity to an outside vendor.

OR

IT outsourcing describes a process whereas an organization decides to contract-out or sell the firm’s IT assets, people and/or activities to a third party vendor, who in exchange provides and manages these assets and services for an agreed fee and over an agreed time period.

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TERMINOLOGY IN OUTSOURCING

CLIENT

The buyer (client, customer) is a firm that desires the technology. This firm is sometimes called the sourcing firm.

VENDOR

The seller (vendor, supplier) is a firm that has the technology. This firm is sometimes called the source firm or the outsourcer.


Theories of Outsourcing

Theory of Core Competencies

Organizations focus only on internalizing those components critical to the product or service in which the organization has distinctive competency, and outsourcing components that are peripheral to the organization. Outsourcing is then used to reap cost savings from suppliers with clear comparative advantages. Such savings can then be redeployed towards competence more central to the core skills and abilities of the organization.


Theories of Outsourcing contd.

Resource-based Theory

Outsourcing is a strategic decision which can be used to fill gaps in the firm’s resources and capabilities. Strategic resources are valuable, rare, non-substitutable, inimitable and manageable. All organizations find themselves dependent on some elements in their external environment.


Theories of Outsourcing contd.

Transaction Cost Theory

Organizing an organization’s economic activities is to balance production cost advantages with costs involved in negotiations and market exchange. Transaction costs refer to effort, time, and costs incurred in searching, creating, negotiating, monitoring, and enforcing a service contract between buyers and suppliers.


BENEFITS

Lower costsImproved productivityImproved technology and servicesHigher qualityHigher customer satisfactionTime to marketAbility to focus on core areasDownsizing and rightsizingAccess to knowledge


IT Outsourcing Risks

Unexpected transition and management costsSwitching costs (including lock-in, and repatriation and transfer to another

supplier)Disputes and litigationService debasementLoss of organizational competencies


IT Outsourcing Risks

Cost of delayed delivery/non-deliveryPoor quality and reliabilityDamages due to security breachLoss due to vendor’s opportunism, including loss in future revenueVendor lock-inLack of trustBusiness uncertainties


Challenges

Vendor selectionVendor managementWhat to outsourceCommitmentCultural barriersSet up governanceContract design


Best practices

Empowerment/escalationStrategic issues reviewPeer relationshipsInformal communicationsEstablish a special entityPrioritize action itemsSteering committeesStakeholder buy-inCorporate communicationsAdditional managers


Thank You

Technology

Outsourcing theories and models, benefits and challenges for outsourcing companies india