IT Outsourcing - Build Competitiveness in Companies

Tholons 2016 Top 100 Outsourcing Destinations reported that India is the most popular location of outsourcing destination followed by Philippines. Asia Pacific countries were on the top rank of outsourcing destinations.

Delloite’s 2016 Global Outsourcing Survey report had shown that the biggest business process to outsource is IT (72%), followed by legal (63%) and Real Estate and Facilities Management (60%). Outsourcing market headed to Finance Outsourcing (36%), Human Resource Outsourcing (32%) and IT Outsourcing (31%). These three markets present highest future opportunities for outsourcing growth as shown in Picture 1.

Picture 1: Business Function Outsourcing

(Source: Delloite’s 2016 Global Outsourcing Survey)

WHAT IS OUTSOURCING?

Outsourcing is a business practice used by companies to reduce costs or improve efficiency by shifting tasks, operations, jobs or processes to an external contracted third party for a significant period of time [1]. It is also sometimes mentioned to as "contracting out" a part of process in the business. There are four types of outsourcing in business such as in Picture 2.

Information Technology (IT) outsourcing initiative can involve a range of operations, from the entirety of the IT function to discrete, easily defined components, such as disaster recovery, network services, software development or QA testing [2]. IT outsourcing also includes utility services, software as a service and cloud-enabled outsourcing which helps clients to develop the right sourcing strategies and vision, select the right IT service providers, structure the best possible contracts, and govern deals for sustainable win-win relationships with external providers [3]. IT Outsourcing is under Service Delivery Outsourcing (SDO) which has two models, IT Infrastructure Outsourcing (ITO) and IT Services Outsourcing (ITS) as shown in Picture 1.

Picture 2: Outsourcing Types and Models

Companies may choose to outsource IT services onshore (within their own country), near shore (to a neighbouring country or one in the same time zone), or offshore (to a more distant country). Nearshore and offshore outsourcing have traditionally been pursued to save costs [2].

WHY OUTSOURCING?

According to Delloit’s, cost, enabling core business functions, and solving capacity issues are primary drivers to outsource. Leading practice organizations use outsourcing to drive transformational change and improve business results as shown in Picture 3.

Picture 3: Factors of outsourcing

(Source: Delloite’s 2016 Global Outsourcing Survey)

Information Technology (IT) is a major support function for any business. But all too often small to medium-sized businesses overlook IT as a critical business component, mainly because of the cost to develop and maintain an IT department. The main driver of IT outsourcing for many companies are to:

Reduce spending

Significant reduce with some estimates as high as 40 percent. It doesn’t take much to realize savings; a study by Gartner reported that simply outsourcing email would produce notable savings because the companies do not need to purchase computer hardware and dedicate expensive square footage to develop a data center. Companies also do not have to spend large amount of recruiting and hiring employees to perform IT functions; where all the functions of an internal IT team, from application development to hardware installations to end user support can be outsourced. Along with reduced payroll, the company also reduced expenses for training and benefits.

Increase focus on core business

For most companies, IT is a support function, not a core competency. Building and supporting the company’s own own data center isn’t likely to give them a competitive advantage. Outsourcing IT functions will lets management to focus more in core competencies and business development, rather than struggling with technology issues.

Access to expert and latest technology

The IT outsourcing provider usually complete with expertise and using latest technology. Therefore, the company get benefit to access on IT expertise and latest technology with a lower cost rather than insourcing.

Reduce risk and increase flexibility

Technology is expensive, and making wrong decisions is costly. An IT services provider has a solid base of experience that assists with making the right technical decisions. Outsourced IT services reduce the risk of data loss, IT outsourcing providers ensure that data centers have appropriate defences, such as firewalls and security information and event monitoring software.

Working with an IT services provider also provides flexibility that enables companies to scale up or down quickly when their needs change. Temporary projects can be accommodated, and the charges stop when the project ends. If a company is growing rapidly and needs additional capacity, an IT services provider can rapidly bring additional servers and storage online.

Increase employees morale

Poorly implemented outsourcing can lead to unhappy employees who worry about the security of their own jobs, but handled properly, outsourcing can actually increase your employees’ morale. Offloading IT work lets your employees focus on the jobs they were hired to do, while the more reliable systems provided by an IT outsourcing vendor can let them get more done. Because employees no longer have to perform tasks they are not an expert at and are more productive at their core tasks, they become more satisfied with their work and less likely to burn out and leave.

BEYOND OUTSOURCING

Companies decide to outsource sometimes not only to cut cost, focus on core business or others factors such as in Picture 2. Specifically for IT outsourcing, most of the company outsource their IT infrastructure or services because both involve with high cost of infrastructures and fast technologies change which make present technology dilute and absolute in 2-3 years. However, the essence of outsourcing is to remain competitive in the business. There are successful and failure IT outsourcing and both success and failure contributed by one key word which is “under or beyond control” and depends on the process of selecting the vendors and managing the contract.

Productivity Competitiveness

IT outsourcing also proven to increase competitiveness in term of productivity of employees. As example, German flag-carrier Lufthansa last year outsourced maintenance and support of its ticketing and reservations booking system. It saw money-saving benefits as well as a more efficient use of resources, as workers would be on hand when needed rather than being in-house and on standby at all times [4].

Financial Efficiency

IT outsourcing also increase competitiveness in the company. As example, British Airways subsidiary in India employs 1,200 workers to handle back-office operations for its parent company, as well as for nine airlines outside of its organization. These operations include maintaining frequent flyer programs, managing ticket processing and handling revenue accounting. The subsidiary is saving the company almost US$25 million a year in direct costs and has expanded its services to include ticketing work for the other airlines [5].

Other example is about Telco company in North America; AT&T forced to spend almost USD18billion in a single year to upgrade its wireless networks to handle onslaught of new traffic. Due to huge capital requirements, these investments could exert considerable pressure on the working capital of the carrier company.

An India-based carrier Bharti Airtel, the largest telecommunications services provider in India, outsources their tech work to external providers like IBM, Ericsson, HCL Technologies, and Wipro  had offered AT&T for mobile telecom service at $0.01 to $0.005 per minute, perhaps the lowest rates in the world based on capacity usage, not based on overall cost of equipment. That was such a huge different to AT&T which provide more easiness in their balance sheet.

Increase profitability and growth

Qatar Airways outsourced one of its non-core activities, revenue accounting, to further focus on its core function, flying. It opted to work with a service vendor that provided revenue-accounting software as well as processing services. By outsourcing its revenue-accounting function, Qatar Airways has improved profitability and overall efficiency. The airline benefits from well-defined service-level agreements; high-quality processing software; thorough documentation of its business processes; regular steering group meetings and communications; and access to detailed data for analysis [5].

Innovations

In the vitality changing of financial industry, bank or financial company need to keep up-to-date with technology to stay relevant against competitors. Banks must continually do innovate their technological solutions and procedures to survive. Now, banking sector not only outsource its supportive business, but maybe have to turn to outsource its core of competency.

Major threat to survival is the growing fintech (financial technology) sector. Fintech firms are making it a specialist area of business to target customer needs more specifically, with a niche perspective in many cases. Traditional bank branch-based services are losing relevance. Banks need to keep pace. As well as competition from fintech companies there is the growing digital-wallet (such as Apple Pay) market with which to contend as well as the plethora of new-age banking solutions (such as Facebook payments). Wearable technology in banking is also growing, and banks can address these market changes head-on with the proper outsourced specialist expertise [6].

Digital transformation is must for banks to grow and adapt to the current landscape of the financial industry and banks need to embrace and run a full digital adoption of their processes and make it quick. As few banks have the manpower and technology to carry out this unique skill set, it is but wise to outsource this service to the qualified and experienced provider [6].

OUTSOURCING LIMITATIONS

Outsourcing is one of the strategies of companies to remain in the industry. However, there are many cases that show, outsourcing not only pros, it also have its own limitations and “unintended consequences” that if not addressed earlier, can turn into bad business strategy. For example, the JP Morgan and IBM case of outsourcing as follow:

Financial services firm JP Morgan Chase has cancelled a groundbreaking £2.8bn outsourcing deal with IBM which was intended to run for seven years.

Outsourcing consultancy Morgan Chambers said the move showed there are alternatives for user organisations that are not satisfied with their outsourcing provider.

JP Morgan Chase said its merger with Bank One, announced earlier this year, would give it greater capacity to manage its IT infrastructure, and that it would bring its support staff in-house.

JP Morgan Chase will wind down its existing contract with IBM this year and will bring back 4,000 employees and contractors who transferred to IBM when the deal was signed in 2002.

At the time, the seven-year outsourcing contract was described as "the largest computer services deal in the financial services sector ever," by Eric Ray, vice-president of financial markets for IBM Global Services.

The original deal was for IBM Global Services to take over a range of JP Morgan's IT functions, including datacentre operations, helpdesk support and day-to-day operation of its distributed computing resources, as well as voice and data networks.

This is not the first time JP Morgan Chase has switched outsourcers. In January 2003 it dropped a £1.25bn outsourcing contract with CSC, Accenture (then Anderson Consulting), AT&T Solutions and Bell Atlantic in favour of IBM.

(Computer Weekly.com, 2004)

Based on the news reported above, JP Morgan has backsource the IT process in the organizational. The backsource can happen in any organizational because of below limitation in IT outsourcing:

Information technology evolves rapidly

IT evolves so fast, technology changes rapidly. Before this signing contract in 5 years maybe not affected most, however, predicting beyond three years is highly speculative. Hence, signing long-term IT outsourcing contracts is risky.

Mercurial economic situation

As technology change, the price of performance may different in the value. Although price performance improvements occur in every industry, in few do the underlying economics shift as fast as they do in IT. For example, a mainframe that cost $1 million in 1965 costs less than $30,000 today and probably will cost 20% to 30% less next year. This makes it difficult for decision makers to evaluate costs of outsourcing bids.

The cost of switching is high

A revamp has taken place among IT vendors, with mergers and takeovers becoming commonplace. Fewer suppliers will survive in the future, making it more difficult to hire the outsourcing provider for the right price. The smaller numbers of the industry players, the less flexible on price control.

Loss of control

When outsourcing IT, company has less control rather than inhouse IT team. The outsourcing provider might sign contract also with other companies which have same business and the outsourcing become easy to be replicated and therefore, it is not a source of sustainable competitive advantage. Outsourcing provides certain competitive advantages to early-movers --that is, to companies that adapt it first -- but it isn’t proprietary. It cannot be patented, preventing others from adapting it. For example, if outsourcing IT software manufacturing provides IBM a cost advantage; it also does for its competitors, such as the Hewlett-Packard, Dell Computers, and EMC that will follow suit [7].

Less flexibility

The outsourcing vendor provides the level of IT services specified in the contract using the technological platform it estimates appropriate. Unless specifically spelled out in the contract, a company may lose the flexibility of moving to new computing platforms [8].

CONCLUSION

IT outsourcing is important in Service Delivery of a company because the IT part is the largest support function of the company operation. Due to technology rapid change, the IT itself might become the core business of the company such as financial company which dealing with digital money where the financial companies have to change their way of business. Outsourcing gives substantial benefit to the outsourcers in term of cutting cost, improve efficiency and remain competitive in the business. The main focus before decide to outsource is firstly to keep the control inside the company and evaluate thoroughly the outsourcing provider capabilities. Before signing contract, the important thing is to keep flexibility in the terms of contract.

REFERENCES

1. https://www.quora.com/What-is-outsourcing
2. https://www.cio.com/article/2439495/outsourcing/outsourcing-outsourcing-definition-and-solutions.html
3. https://www.gartner.com/it-glossary/it-outsourcing/
4. https://www.ft.com/content/4a6ead0e-c54f-11e3-89a9-00144feabdc0
5. http://www.ascendforairlines.com/2014-issue-no-4/airline-outsourcing
6. http://www.infinitaccounting.com/blog/banks-need-to-embrace-digital-transformation-and-outsourcing-can-help-make-it-happen/
7. https://www.forbes.com/sites/panosmourdoukoutas/2011/12/09/the-unintended-consequences-of-outsourcing/#17cfd4397e36
8. https://www.journalofaccountancy.com/issues/1998/jun/antonuci.html
9. https://www.thebalance.com/what-is-outsourcing-2533662
10. http://www.tholons.com/TholonsTop100/pdf/Tholons_Top_100_2016_Executive_Summary_and_Rankings.pdf
11. https://www.cisco.com/c/dam/en_us/about/ciscoitatwork/downloads/ciscoitatwork/pdf/Cisco_IT_Case_Study_CiscoROS_CS.pdf
12. http://searchcrm.techtarget.com/opinion/IT-outsourcing-doesnt-provide-clear-cost-savings
13. https://inst.eecs.berkeley.edu/~eecsba1/sp98/reports/eecsba1d/project1/cisco.html
14. https://www.educba.com/how-does-outsourcing-reduce-cost/
15. https://www.strategy-business.com/article/19984?gko=e4f2f
16. https://www.informationweek.com/should-your-company-outsource-it-services/d/d-id/1083784
17. https://hbr.org/2012/05/telecoms-competitive-solution-outsourcing.html
18. http://www.computerweekly.com/news/2240062357/JP-Morgan-cancels-28bn-IBM-outsourcing-deal

Appreciation:
Special thanks to Mr Sukiman bin Hassan, Director of IT Division, Department of Fisheries Malaysia for thoughtful discussion and tremendous input for this assignment.

Disclaimers:
This write up is for fulfilling the MBA Study Requirement for Subject IT Management. There will be similarity in sentences structure and if there are any mistake or mislead statement, the sentences from original references must be referred.