Outsourcing IS/IT services

A strategic decision has been made by many organisations over the last decade to concentrate on their ‘core activities’ and to ‘outsource’ functions which are not seen as core activities. However, organisations have reached different decisions as to what constitutes a ‘core activity’. The basis of decision-making has included:

– those seen as critical to current organisational performance;
– the ones that are seen as driving the future growth and innovation of the business;
– those that appear to offer the most scope for offering competitive advantage;
– those traditionally performed internally;
– those creating most problems of management or staffing;
– those where there is a thriving industry to provide external support.

For some organisations, all or part of their IS/IT activities have not been defined as core and have thus been candidates for outsourcing. The nomination of IS/IT for outsourcing has also been favoured in some cases because of difficulties in recruiting, retaining and fully utilising the necessary technical expertise to adequately staff the function in the competitive environment of the United Kingdom IS/IT marketplace, where there is a shortage of qualified experienced staff.

Outsourcing is a term, which embraces a number of different approaches. It involves purchasing the services required to perform business functions from outside the organisation . The organisation creates a contractual relationship with its supplier but relinquishes direct managerial control.

Different approaches to outsourcing

Total outsourcing
This is where an organisation enters into a contract with a specialist company to provide all of their IS/IT operations, maintenance and development activities. This is frequently described as Facilities Management, which is defined as the contracting out of the management and operation of an organisation’s IT services to an external source, at an agreed service level, over a fixed time period, to an agreed cost formula. An example is where an organisation contracts out all of its existing IS/IT staff and facilities to be managed by an external specialist company such as EDS or SEMA for a period of three to five years. The host organisation may seek to retain a small core of internal staff to oversee the management of the contract but it is difficult to retain sufficient ‘intelligent customer capability’ to maintain true independent control.

Multiple/selective sourcing
Where an organisation enters into agreements with a range of suppliers; it may create framework contracts whereby it can purchase specialist equipment or services with a degree of competition as and when required; the host organisation will retain its main IS/IT internal staff organisation.

Joint venture/strategic alliance sourcing
Where an organisation enters into a joint venture with a supplier on a shared risk/reward basis for a specific purpose – frequently the development of a software package or piece of equipment which is seen as having widespread application across other organisations. The host organisation will usually retain its in-house IS/IT function.

This is where an organisation buys in management or technical capabilities to accommodate the peaks of IS development work. The company retains its own centralised IS/IT function but buys in maintenance or development services from outside. An example of this approach is the use of ‘off-shore systems development’ whereby an organisation has a contract with a software house outside its own country borders to write (and in some cases maintain) the programs for a new application suite, with the specification of requirements being made by the host company. This have been particularly popular with UK companies entering into contracts with software houses in the Indian sub-continent and there has been some success claimed. The benefit is seen as access to lower-priced, skilled labour but frequently the difficulties in project management and communication have been under-estimated.

Overall the benefits of outsourcing have been seen as:

– Cost reduction – because of the economies of scale available in purchasing equipment and efficiencies in utilising specialist staff;
– Business improvement – by management being able to concentrate on core competencies because of – expertise and specialisation available to manage and staff the IT function;
– Avoid the growing shortage of IT and IS systems staff and keep up with technological change;
– Cost control – creating a ‘customer/contractor’ relationship tends to concentrate the focus on cost control which is sometimes lost when functions are performed internally.

Difficulties with outsourcing have been seen as:

– The host organisation and the outsource organisation will have different objectives.
– Frequently the host organisation is looking to improve information systems and facilitate – organisational change or competitive advantage.
– The contracting company will be seeking to minimise risk and maximise profit by maintaining stability and drive down its costs and is unlikely to suggest changes.
– Outsourcing may be seen as a way of off-loading problems rather than as the result of a strategic assessment of costs and benefits.
– Work that has been outsourced is difficult to switch to a new supplier if there are problems, or at the end of a contract period. This gives the external supplier significant bargaining power.
– Problems of security and loss of confidentiality – particularly where an outsourcing company is also working for competitors.
– Loss of flexibility – particularly when there is a need to respond to changing requirements, there may well be a competition between customers for access to the supplier's development staff.

A survey of organisations with outsourced IS/IT contracts has highlighted cost escalation, quality control, loss of independence and over-dependency upon suppliers, lack of supplier flexibility and shortage of management skills as major problems. Now that there is longer experience of outsourcing of IS/IT, the issue of maintaining and developing the host organisation’s organisational learning capability is becoming an issue.

There is always a need to nurture and develop a core of internal staff to initiate strategic thinking and development and to manage the outsourced contracts. To develop and retain these staff is difficult if all ‘action learning’ is performed outside the organisation. The knowledge and skills of internal staff tends to erode if they are not actively involved and it is difficult to develop the next generation of senior management if they are not able to get experience in key areas of the business. Any outsourcing decision needs to be treated with care; it can give apparent short-term advantages in cost-reduction but provide a hostage to fortune in the longer term.

Jim Stone is Subject Co-ordinator for Management at ACCA

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