Pros and Cons
What is outsourcing? In short, it involves a service previously provided internally, or in some cases not at all, being procured from a third party.
On hearing the word "outsourcing", the first thought that springs to mind is probably cost cutting; a way to enjoy the same services at a reduced price. For many organisations this is why they outsource, particularly in a depressed economy. But it is not the only reason. Outsourcing properly done gives an opportunity to access new resources and skills and to manage change. It can also give new strategic focus to an organisation.
On the other hand, if an outsourcing relationship does not work, it can cripple a company. A good contractual basis will help to avoid an outsourcing project becoming a disaster. Trust and cooperation between the parties involved is also crucial to success.
There can undoubtedly be financial benefits in outsourcing a service. Firstly, many service providers enjoy advantages of scale by offering the same or similar services to several clients: systems and personnel can be used more efficiently than is possible in-house. Service providers do not need to maintain the same level of unused capacity for times of peak demand because the peaks and troughs of their various clients level each other out. Depending on the pricing structure negotiated by the customer, it can obtain significant benefits from paying only for what it uses. Service providers operate against direct competition in the marketplace, which should work to keep costs down. Finally, outsourcing services enables transparency on costs. If the reporting and pricing structure is sufficiently transparent to show which users within a company represent the highest usage volumes, the customer will be able to further optimise IT provision across its organisation.
The share of any cost reductions passed on to the customer will depend on the customer's negotiating skills when price comes up for discussion. However, if the customer focuses on nothing more than driving down price, the service it receives may well fail to meet its expectations. The service provider should also receive a fair return for its efforts so that it has an incentive to do a good job.
Accessing Resources and Skills
Aside from financial considerations, outsourcing can bring significant benefits. IT service providers will generally have more sophisticated equipment and better technological capabilities than a customer can justify buying for its in-house operations. An obligation on the service provider to keep its technology up-to-date allows the customer to benefit from technological advances on an ongoing basis.
Where a company splits itself in two (i.e. in instances of de-merger), at least one of the de-merged companies will no longer have the IT-resources it needs. Outsourcing may be the only way, and in most cases the fastest way, to build up an adequate IT capability. Likewise, where two companies merge, outsourcing may provide a neat solution to the problem of whose IT system to use.
Outsourcing can also provide a quick route into new markets. A global service provider may already have operations in markets that the customer wishes to enter. This saves time for the customer and gives it access to a source of local knowledge and experience.
Outsourcing represents a certain loss of control and this brings with it risks. Retaining control over the process may reduce the risks involved. However, keeping tight control also means losing some of the benefits of outsourcing. Handing over responsibility to the service provider will give it more freedom to innovate and to find ways of reducing costs. A fine balance is required.
Here we look briefly at a few particular types of risk and possible ways to minimise their impact.
There is a risk that the outsourced service is not delivered as expected. This may be for any number of reasons. The risk can be minimised by a careful choice of service provider, but cannot be removed entirely. Contingency plans and an effective business...
IT - Outsourcing In Switzerland
|Author:||Dr. Roger Staub and Nicola Benz|
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