The ins and outs of outsourcing
Summary Description Newswire's 5 Minute Guides looks at the pros and cons of letting someone else do the work.
Author

Publication

Roullas Top10 Simon Vandore

Newswire
No


Editorial InformationArticle Location
Article Topic 5 Minute Guides
Story Order
Story Group 000806
Post Date 07/08/2000 07:47 AM Status Posted Entered by Simon Vandore on 02/08/2000 11:46 AM


ImagesLead Picture


Heading Image




Content
Introduction


Body
What is outsourcing?
Outsourcing is the practice of farming out tasks that an organisation might otherwise have handled internally -- especially in areas that are not part of the organisation's core competencies. For example, a law firm might outsource its computer and networking needs to an IT company, or an IT company might retain a law firm instead of setting up its own legal department.
In the technology industry, outsourcing can refer to anything from hiring temporary contractors with specialist knowledge, to putting the entire range of a company's technological requirements in the hands of a third party.
Is outsourcing an industry in itself?
Yes, following a trend towards outsourcing parts of a business which would previously have been considered too private, there are companies set up specifically to handle the outsourced needs of others. It's a fast-growing industry. For example, big data centres exist which handle the storage and data processing needs of many companies at once. Rather than buying their own hardware, then employing people to implement and maintain it, companies hand the task to a world-class specialist. The outsourcing industry also includes consultancies which provide teams of experts in a certain field, such as the modification of an old COBOL database or the introduction of new software to a bank.
What are the advantages of outsourcing?
Quite simply, the primary motivation for outsourcing is to cut corners and save money. Economies of scale apply when a company specialises in a field -- a consultant providing IT services for law firms is likely to get better prices on hardware than the law firm would if it set up an internal IT department. At the same time, the IT consultant may be required by contract to perform any repairs or upgrades that become necessary, all at a fixed cost. If the law firm were to do this internally, it would face variable IT costs in its budgeting. It can also be a way of patching up an area which has been going wrong for the company.
Outsourcing requires less up-front investment. The contractor arrives trained, equipped and hopefully very experienced, which in the short term beats recruiting, training and equipping someone to do the same job. But perhaps the biggest benefit of outsourcing is that it relieves organisations of tasks that are not related to their core competencies. The law firm can get on with practising law, rather than troubleshooting its PCs, while the outsourcer shares the risks of business.
Sometimes outsourcing also involves divestment -- for example, selling all existing IT equipment to the outsourcer who is to run it -- creating a short-term cash advantage.
How about the disadvantages of outsourcing?
What if the law firm finds itself troubleshooting the IT consultant? No contractor is perfect and the worst-case scenario in outsourcing occurs when fixing up the contractor's mistakes becomes more costly and time-consuming than doing the job yourself. Many outsourcing agreements end up being renegotiated after a few months, or dropped altogether.
Problems often occur when two business cultures clash. The assumptions and priorities of the hirer may be different from those of the contractor, and this may not become apparent until further down the track. The hirer may be expecting the impossible, or the contractor may have misunderstood the fine details.
There can also be a long-term benefit in bringing activities in-house. Though it may look good on the balance sheet for the first few months, outsourcing can be more expensive in the long term due to a contractor's high rates. Having someone trained, salaried and on call, can mean problems are solved faster. Providing they stick around, the high up-front cost of an employee can be a better investment than paying a transient contractor. After a while, suppliers of outsourcing sometimes exploit their position of power, imposing extra costs or limitations on the deal -- if the hirer loses control of the relationship, things get messy.
What are the latest trends in outsourcing?
The current Australian government is big on outsourcing, as it is on privatisation in general. Australian businesses are too, but there has been a recent reassessment of outsourcing's benefits. Most like to regard it as a tool which is appropriate in some circumstances, but not for every non-core area of a business.
IT is the fastest growing area of outsourcing around the world. According to Outsourcing Interactive, the major technology areas outsourced are maintenance and repair, training, applications and development, consulting and reengineering, and mainframe data centres. Non-IT growth areas for outsourcers include payroll processing (and other human resources functions), printing and reprographics, mailroom functions, field service, food and cafeteria services, telemarketing and transportation.


Related MaterialsRelated Articles


Related Links




Bulletin Summary5 Minute Guides: The ins and outs of outsourcing
Newswire's 5 Minute Guides looks at the pros and cons of letting someone else do the work.

WAP Summary

Cross-Publishing InformationShort Headline
5 Minute Guides: Outsourcing

Clipping Information

Corporate IT No This field should be marked 'Yes' for any story of interest to corporate readers
CIT Lead No Newswire Lead No Section Lead No (These fields are controlled by all those handy buttons and agents)