Outsource vs. In-source

As a student, you were invited by the Dean of the Institute of Computing to attend a seminar-workshop on information systems planning with some of the faculty members. In one of the sessions, a discussion of outsourcing came up. You have been asked to present your evaluation about outsourcing the information systems functions of the school.

Required:

You are to take a position- outsource or in-source and justify your position. (3000words)

Before anything else let me differentiate Outsourcing to Insourcing. And I will site advantages and disadvantages of both type of sourcing.

First, according to Wikipedia.org the definition of outsourcing is defined below.

Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company. The decision to outsource is often made in the interest of lowering cost or making better use of time and energy costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of land, labor, capital, (information) technology and resources. Outsourcing became part of the business lexicon during the 1980s. It is essentially a division of labor. Out sourcing in the information technology field has two meanings. One is to commission the development of an application to another organization, usually a company that specializes in the development of this type of application. The other is to hire the services of another company to manage all or parts of the services that otherwise would be rendered by an IT unit of the organization. The latter concept might not include development of new applications.

There are many reasons that companies outsource various jobs, but the most prominent advantage seems to be the fact that it often saves money. Many of the companies that provide outsourcing services are able to do the work for considerably less money, as they don't have to provide benefits to their workers and have fewer overhead expenses to worry about.

Outsourcing also allows companies to focus on other business issues while having the details taken care of by outside experts. This means that a large amount of resources and attention, which might fall on the shoulders of management professionals, can be used for more important, broader issues within the company. The specialized company that handles the outsourced work is often streamlined, and often has world-class capabilities and access to new technology that a company couldn't afford to buy on their own. Plus, if a company is looking to expand, outsourcing is a cost-effective way to start building foundations in other countries.

There are some disadvantages to outsourcing as well. One of these is that outsourcing often eliminates direct communication between a company and its clients. This prevents a company from building solid relationships with their customers, and often leads to dissatisfaction on one or both sides. There is also the danger of not being able to control some aspects of the company, as outsourcing may lead to delayed communications and project implementation. Any sensitive information is more vulnerable, and a company may become very dependent upon its outsource providers, which could lead to problems should the outsource provider back out on their contract suddenly.

While outsourcing may prove highly beneficial for many companies, it also has many drawbacks. It is important that each individual company accurately assess their needs to determine if outsourcing is a viable option.

Advantages of Outsourcing

1. Focus on Core Activities
In rapid growth periods, the back-office operations of a company will expand also. This expansion may start to consume resources (human and financial) at the expense of the core activities that have made your company successful. Outsourcing those activities will allow refocusing on those business activities that are important without sacrificing quality or service in the back-office.
Example: A company lands a large contract that will significantly increase the volume of purchasing in a very short period of time; Outsource purchasing.

2. Cost And Efficiency Savings
Back-office functions that are complicated in nature, but the size of your company is preventing you from performing it at a consistent and reasonable cost, is another advantage of outsourcing.
Example: A small doctor’s office that wants to accept a variety of insurance plans. One part-time person could not keep up with all the different providers and rules. Outsource to a firm specializing in medical billing.

Economies of scale save money when unit costs go down as volumes increase. External service providers can achieve economies of scale unavailable to individual firms when they combine the volumes of multiple companies.

In manufacturing, for example, an external vendor may have a shop that specializes in a certain type of machining. The machinery represents a significant capital investment. If larger machines are more efficient, and if they can be used to produce any sort of parts for any customer, then this vendor may very well produce parts at a lower cost than a firm could by setting up such a shop internally.

Economies of scale are not limited to physical processes. Other precious assets -- including money, relationships, and people -- may be shared.

The pharmaceuticals industry can be used to illustrate economies of scale in relationships. Clinical trials of experimental drugs require just the right patients -- healthy in most all respects but the one indication being treated, and willing to submit themselves to experimentation. It takes a significant investment of time and money to develop relationships with the hospitals and clinicians (and the triage nurses in their emergency rooms) that supply patients for the trials.

Clinical trials also require just the right medical investigators -- doctors and medical researchers who are well respected in their industries. Again, it takes size to attract the best investigators. The most sought-after investigators look for organizations that can supply them with interesting and publishable research projects and with support services (such as data collection and well-managed processes) that make their jobs easier and their results more reliable.

To be specific, there are three conditions that must be met before outsourcing saves money:

1. Economies of scale must exist. That is, there must be some economic advantage to larger size or greater numbers before outsourcing can pay off; for example, unit costs must drop as volumes increase.

2. The economies must be accessible across corporate boundaries. That is, savings only occur if outsourcers can combine the volumes of multiple clients.

For example, it's easy for many companies to share the huge fixed costs of a telecommunications infrastructure owned by long-distance carriers. Laying one's own fiber or leasing a private satellite channel is unlikely to be economic, so outsourcing is an obvious choice.

However, outsourcing an IT computer center may not work as well, since hardware may not offer significant economies of scale and many software licenses are corporation-specific.
There are many cases where inter-organizational sharing is possible, but each case must be examined carefully.

3. The savings must be sufficient to outweigh the additional cost of paying other shareholders a profit. Some executives have said that at least a 20% savings (after vendor profit margins) is necessary to compensate the firm for the legal costs and the risks of long-term dependence on people you can’t control.

3. Reduced Overhead
Overhead costs of performing a particular back-office function are extremely high. Consider outsourcing those functions which can be moved easily.
Example: Growth has resulted in an increased need for office space. The current location is very expensive and there is no room to expand. Outsource some simple operations in order to reduce the need for office space for example, outbound telemarketing or data entry.

4. Operational Control
Operations whose costs are running out of control must be considered for outsourcing. Departments that may have evolved over time into uncontrolled and poorly managed areas are prime motivators for outsourcing. In addition, an outsourcing company can bring better management skills to your company than what would otherwise be available.
Example: An information technology department that has too many projects, not enough people and a budget that far exceeds their contribution to the organization. A contracted outsourcing agreement will force management to prioritize their requests and bring control back to that area.

5. Staffing Flexibility
Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done.
Example: An accounting department that is short-handed during tax season and auditing periods. Outsourcing these functions can provide the additional resources for a fixed period of time at a consistent cost.

6. Continuity & Risk Management
Periods of high employee turnover will add uncertainty and inconsistency to the operations. Outsourcing will provided a level of continuity to the company while reducing the risk that a substandard level of operation would bring to the company.
Example: The human resource manager is on an extended medical leave and the two administrative assistants leave for new jobs in a very short period of time. Outsourcing the human resource function would reduce the risk and allow the company to keep operating.

Another type of synergy that can cross corporate boundaries is the sharing of risk. In financial circles, this is called the "portfolio effect."

In investing, it's best to diversify your portfolio rather than put all your money in one stock. By spreading your risk, you reduce your total risk.

Why does diversification reduce risk? If the whole market goes down, you'll lose, no matter what you do. But if the market goes up while one company makes some serious mistakes, the rest of your portfolio may still do well, and you are not as vulnerable as you would have been had you put all your money into a single stock.

In business investments, the same is generally true. Outsourcing may permit multiple companies to share risk.

To continue with manufacturing as an example, if all your work is done in one plant, an outage or a labor dispute could put you out of business. If you spread your workload across a number of plants, a labor dispute in one country may not affect the operations of other plants. Thus, you reduce your risk.
In a very large operation, it may be that the company can afford multiple plants. But in smaller companies or in the production of small-run specialty parts -- it may be cheaper to spread the work across a number of existing vendor plants via outsourcing than it is to build a number of small plants yourself.

The biotechnology industry demonstrates the concept of risk-sharing. Investors are reluctant to fund small biotechnology companies to build manufacturing plants for drugs which haven’t yet been approved. But manufacturing is required to produce experimental drugs for clinical trials in order to gain approval.
Bio-tech firms often outsource manufacturing during the clinical-trials phase of development. This demonstrates both economies of scale and risk sharing: The vendor's large plant, shared across a dozen firms at a time, is more efficient than a dozen small plants. Secondly, the risk of building infrastructure that may not be used is shared across many small pharmaceutical firms.

7. Develop Internal Staff
A large project needs to be undertaken that requires skills that your staff does not possess. On-site outsourcing of the project will bring people with the skills you need into your company. Your people can work alongside of them to acquire the new skill set.

Example: A company needs to embark on a replacement/upgrade project on a variety of custom built equipment. Your engineers do not have the skills required to design new and upgraded equipment. Outsourcing this project and requiring the outsourced engineers to work on-site will allow your engineers to acquire a new skill set.

Well-managed outsourcing can enhance the development of employees. Two strategies can accomplish this:

1. Contractors can be used to off-load less interesting "commodity" or end-of-life work, or to handle peak loads. This leaves staff free to pursue new, developmental opportunities. On the other hand, contractors should never be used to perform new, growth-oriented activities while internal staff is left with obsolescent work. This would deny staff learning opportunities, while building dependence on the vendor. Perhaps worse, it sends a message to staff that the company is not willing to invest in their professional growth.

2. Consultants and vendors can be used to bring in new ideas and to train internal staff. It might be useful to distinguish two terms: External "consultants" transfer their skills and methods to improve employees' effectiveness; they teach staff, often while working together on real projects. Consultants may be used by anyone whenever justifiable, since the benefits are lasting.

By contrast, "contractors" simply do work in place of employees. This is sometimes called “staff augmentation.” They should be limited to the commodity work described in point 1.

There are many cases that meet these four criteria where outsourcing pays off. But each case must be examined carefully to make sure the fundamentals are there. Remember: Paying other shareholders a profit margin makes outsourcing inherently more expensive. It's only worthwhile if these other benefits compensate the firm for its added costs

Disadvantages of Outsourcing

• At times, it is more cost-effective to conduct a particular business process, rather than outsourcing it
• While outsourcing services such as payroll processing services and tax preparation services, your outsourcing provider will be able to see your company’s confidential information and hence there is a threat to security and confidentiality in outsourcing
• When you begin to outsource your business processes, you might find it difficult to manage the offshore provider when compared to managing processes within your organization
• outsourcing can create potential redundancies for your organization
• In case, your offshore service provider becomes bankrupt or goes out of business, your organization will have to immediately move your business processes in-house or find another outsourcing provider
• The employees in your organization might not like the idea of you outsourcing your processes and they might express lack of interest or lack of quality at work
• Your outsourcing provider might not be only providing services for your organization. Since your provider might be catering to the needs of several companies, there might be not be complete devotion to you and your company
• By outsourcing, you might forget to cater to the needs of your valuable customers as your focus will be on the business process that is outsourced
• In outsourcing, you may lose your control over the process that is outsourced
• Outsourcing, though cost-effective, might have hidden costs, such as the legal costs incurred while signing a contract between companies. You might also have to spend a lot of time and effort in getting the contract signed
• With outsourcing, your organization might suffer from a lack of customer focus
• There can be several disadvantages in outsourcing, such as, renewing contracts, misunderstanding of the contract, lack of communication, poor quality and delayed services amongst others.

The disadvantages of outsourcing give organizations an opportunity to think about what they are stepping into. However the disadvantages of outsourcing are less than the advantages of offshore outsourcing. When outsourcing, you might not experience any of these disadvantages of outsourcing, if you find a reliable outsourcing partner. Before outsourcing take the interests of your customers and employees into consideration and then make an informed decision. If your organization is genuinely interested in outsourcing, let not the disadvantages of outsourcing stop you.

1. Loss of Managerial Control. Whether you sign a contract to have another company perform the function of an entire department or single task, you are turning the management and control of that function over to another company. True, you will have a contract, but the managerial control will belong to another company. Your outsourcing company will not be driven by the same standards and mission that drives your company. They will be driven to make a profit from the services that they are providing to you and other businesses like yours.

2. Hidden Costs
You will sign a contract with the outsourcing company that will cover the details of the service that they will be providing. Any thing not covered in the contract will be the basis for you to pay additional charges. Additionally, you will experience legal fees to retain a lawyer to review the contacts you will sign. Remember, this is the outsourcing company's business. They have done this before and they are the ones that write the contract. Therefore, you will be at a disadvantage when negotiations start.

3. Threat to Security and Confidentiality
The life-blood of any business is the information that keeps it running. If you have payroll, medical records or any other confidential information that will be transmitted to the outsourcing company, there is a risk that the confidentiality may be compromised. If the outsourced function involves sharing proprietary company data or knowledge (e.g. product drawings, formulas, etc.), this must be taken into account. Evaluate the outsourcing company carefully to make sure your data is protected and the contract has a penalty clause if an incident occurs.

4. Quality Problems
The outsourcing company will be motivated by profit. Since the contract will fix the price, the only way for them to increase profit will be to decrease expenses. As long as they meet the conditions of the contract, you will pay. In addition, you will lose the ability to rapidly respond to changes in the business environment. The contract will be very specific and you will pay extra for changes.

5. Tied to the financial well-Being of another Company
Since you will be turning over part of the operations of your business to another company, you will now be tied to the financial well-being of that company. It wouldn't be the first time that an outsourcing company could go bankrupt and leave you holding-the-bag.

6. Bad Publicity and Ill-Will
The word "outsourcing" brings to mind different things to different people. If you live in a community that has an outsourcing company and they employ your friends and neighbors, outsourcing is good. If your friends and neighbors lost their jobs because they were shipped across the state, across the country or across the world, outsourcing will bring bad publicity. If you outsource part of your operations, morale may suffer in the remaining work force.

The next is Insourcing,

Insourcing is the opposite of outsourcing; that is insourcing (or contracting in) is often defined as the delegation of operations or jobs from production within a business to an internal (but 'stand-alone') entity that specializes in that operation. Insourcing is a business decision that is often made to maintain control of critical production or competencies. An alternate use of the term implies transferring jobs to within the country where the term is used, either by hiring local subcontractors or building a facility.
Insourcing is widely used in an area such as production to reduce costs of taxes, labor (e.g., American labor is often cheaper than European labor), transportation, etc.
Insourcing is a business practice in which work that would otherwise have been contracted out is performed in house.
Insourcing often involves bringing in specialists to fill temporary needs or training existing personnel to perform tasks that would otherwise have been outsourced. An example is the use of in-house engineers to write technical manuals for equipment they have designed, rather than sending the work to an outside technical writing firm. In this example, the engineers might have to take technical writing courses at a local college, university, or trade school before being able to complete the task successfully. Other challenges of insourcing include the possible purchase of additional hardware and/or software that is scalable and energy-efficient enough to deliver an adequate return on investment (ROI).
Insourcing can be viewed as outsourcing as seen from the opposite side. For example, a company based in Japan might open a plant in the United States for the purpose of employing American workers to manufacture Japanese products. From the Japanese perspective this is outsourcing, but from the American perspective it is insourcing. Nissan, a Japanese automobile manufacturer, has in fact done this.

Advantages
• High degree of control.
• Ability to oversee the entire process.
• Economies of scale and/or scope.

Disadvantages
• Reduces strategic flexibility.
• Requires high investment.
• Potential suppliers may offer superior products and services.

The Verdict

For me it’s hard to say if we go for outsourcing or insourcing. But there are factors involve, what does the university really wanted in the issue. Do they want cheaper cost? Or do they want a high degree of control over its operations? These are only some questions that need to be considered. If the university wants cheaper cost then maybe they will go for outsourcing. Or if the university wants control over there operations then they will go for insourcing. But, regarding to the last issue when the last system that was used by the university was outsourced, the university protested because of the cost of the outsourced product. Now, the university changed to insourcing which is a good move on the part of the university. So maybe for me if we talked about insourcing or outsourcing the system of the university maybe for me I’ll stand with insourcing.

References:
wisegeek.com
en.wikipedia.org
sourcingmag.com
operationstech.about.com