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Outsourcing


I'm writing a paper this semester about "What parts of IT have strategic value."

Here's the premise:

Premise:  If IT truly is a commodity, it could be completely outsourced.  The question is not to outsource or not, but what to outsource and when to outsource.  Once an organization answers the question, the things that cannot be outsourced are the areas of IT that are strategic assets.


----> For some companies, _ALL_ of IT will be a strategic assest - perhaps an ISV or ISP.  For others (Joe's ServiceMaster Franchise) NONE of IT will be of strategic asset.

Thoughts?

Matt H.
Wednesday, January 14, 2004

I think that you need to account for IT that can't be outsourced for practical reasons: an investment in legacy systems, strong competency in a particularly important IT area that keeps costs down more than average, etc.  In other words, yes, there are strategic reasons, but there's a lot of day-to-day practical reasons to counter them, and they may carry the day.

One of the big lessons I learned at my current employer is how little IT reasoning, cost analyses, projections and the rest matter if the organization isn't collectively ready to make the change, meaning that managers and employees are willing to give it a good faith effort to make it work.  Without acknowledging those 'irrational' factors, I think you're weakening your thesis.

Justin Johnson
Wednesday, January 14, 2004

To add one detail: my employer is a manufacturer of commodity plastic goods.  By your reasoning, all of our IT should be outsourced except for local tech support, but we've built an in-house development capability just to overcome problems we've had with relying on our Japanese parent company's IT department for new development.

Justin Johnson
Wednesday, January 14, 2004

Taking the premise further:

If IT is not your core activity, but your internal IT is a significant asset because it is significantly superior to the competition, then you should still out source because you are wasting a significant asset.

Even now, the profits in Software tend to be higher than in other markets.

Turn the IT department into a separate software company and the outsource to that separate company.

The newly formed software company can also seek to make clients of your competitors.

What is the purpose of a company?  To make widgets or profits?

What if the original company can no longer compete when it has lost the superior IT facilities?  Get rid of it!  If you are below competitive level at making widgets but above competitive level at producing software then you should be writing software, not making widgets.

Ged Byrne
Wednesday, January 14, 2004

The premise is just wrong.

IT is not a commodity, its a process and a medium.  Its the medium by which the company or organisation achieves that which its organised for. 

Why make your corpus of knowledge, your data a hostage to some third party?

Perhaps it does make sense to outsource IT support, make sense to those that simply see it as a supplied service; but the user within a department that cannot work because their machine is down and waiting for the external IT support who has no real idea of the priority or importance of their individual call.  Its not important because all calls are just as important as each other.

Certainly there are questions of scale, the smaller the company the less likely they are to have anything like an IT department, in that case they need to use consultants and suppliers that are sympathetic but it is often a difficult relationship.

Larger organisations though need to manage their own flow of information and systems, to do otherwise is slow corporate suicide.

One need only look at government information systems that have been outsourced to see that paralysis in action.

Simon Lucy
Wednesday, January 14, 2004

What is this "outsourcing" you speak of? I haven't heard about it before.

Mister Fancypants
Wednesday, January 14, 2004


More background:

My article is in part inspired by Nicholas Carr's Piece "IT Doesn't Matter"

http://www.nicholasgcarr.com/articles/matter.html

--> Originally printed in the the Harvard Business Review.  My premise:  The stuff about IT that _does_ matter is the stuff that's a strategic asset.

You might read my paper, go through the "some things to think about" section, and come to the conclusion that ALL of IT matters.  You might not.  It depends on your environment.

Perhaps "what part you can outsource" is bad word choice, Is should have said "the part you SHOULD not outsource is your strategic asset."

hmm

Matt H.
Wednesday, January 14, 2004

Keep the analysts. They transform the problem to a means of auditing the solution. If not them, who? The CFO?

Another problem is that most companies don't know how to account for the real cost of a project and thus will not know if they are saving money or not on a per project basis.

---


I think a larger question has to be asked of the value of an employee versus a non-employee. If you really feel that a non-employee employed by another company who is looking to make a profit will be more economical than using an employee and cutting out the middle man, then outsourcing seems valid. Some tasks don't require a full time employee (and that might apply to small IT shops) and would be a good candidate for outsourcing as you share this individual with other businesses. For much larger companies, a task that can fully occupy at least one employee is probably a good candidate to keep in house.

m
Wednesday, January 14, 2004

Another observation: we cut about $12K a year in maintenance agreements just by letting our sysadmin do routine maintenance on label printers.  This is a classic case where outsourcing is called for, by the premise in the OP, but we've had a decrease in expenses by bringing it in-house.

Justin Johnson
Wednesday, January 14, 2004


I think the "Outsourcers are trying to make money" / can you save money argument is a good one.  The question then becomes:

If you can save money by doing X instead of outsourcing it, does managing X detract from your core business?  If no, or you are saving a big pile of money, then keep it in house.

The idea is to have the paper generate those kind of heuristics.

Matt H.
Wednesday, January 14, 2004

Are you distinguishing between outsourcing here vs. outsourcing to India?

Justin Johnson
Wednesday, January 14, 2004

Its outsourcing in the original sense of the word which is to take a function which was a part of the organisation but not directly to do with the point of the organisation and give a service contract to a third party company to deliver the same service. 

Services such as cleaning, catering, security and IT.

Simon Lucy
Wednesday, January 14, 2004


Outsourcing = Hiring a different company to do the work.


For example, let's say you are a small manufacturing company with 200 employees but only 10 work stations.  Instead of having 1 full-time IT guy who buys your boxes and does support and upgrades your systems, you hire a company to manage your boxes and have someone on-site 1 day a week.

Service level goes down, but so does price.  That's outsourcing.

Software Development and Customer Service you might send to india, canada, Ohio, or 2 miles down the road. It's still outsourcing ...

One argument is "We make paper products, not technology, yet IT is a huge part of our budget.  I wish I could hire a company that ONLY does IT, could give them a bit of profit, and they could use competance and economies of scale to get me a net lower TCO ..."

things like that.  India is just appealing because of the cheap hourly rate; it has drawbacks.

regards,

Matt H.
Wednesday, January 14, 2004

It sounds like your argument for outsourcing is only applicable when a company has lousy in-house IT that they don't know how to manage.

Justin Johnson
Wednesday, January 14, 2004

Nick Carr's article was total bull IMHO. Bill Gurley gave a recent talk on "IT does matter" for some conference, forgot the website.

My take on outsourcing is this: Things you *can* outsource are the things which are not part of your core competency. In case of IT - most times it can give you a big strategic advantage, and those kind of projects should not be outsourced.

Comparing the outsourcing of plastics to IT is like comparing apples to oranges..

Prakash S
Wednesday, January 14, 2004

Any part of IT which you may soomeday want to take back in house should not be outsourced.

That is any part which you can easily change vendors for can be outsourced ... mail servers, database, 3rd party crms (though for all this you should keep data backups stateside) why? because your outsourced IT vendor may not want to give you back those data components, and good luck chasing em down in India much less China or Rumania.

The Artist Formerly Known as Prince
Wednesday, January 14, 2004

> The question is not to outsource or not, but what to outsource and when to outsource.

This was discussed in an article I liked that I read recently: The Pitfalls of Outsourcing Programmers http://www.forio.com/outsourcing.htm

The article makes a point of not outsourcing your core competency. Basically it states outsourcing hurts innovation, but sometimes innovation doesn't matter.

Quoting: "Offshoring is a mistake when technology companies confuse operational effectiveness and strategy. Operational effectiveness is about working cheaper or faster. Strategy is about the creation of a long-term competitive advantage, which for technology companies is usually the ability to create innovative software.

Outsourcing programmers works when the software developed isn't a key part of the pipeline of innovation for products a company actually sells. For example, when website design or back-office software such as payroll or inventory control is outsourced, that can be good because it improves operational effectiveness.

But writing innovative software cannot be done on an assembly line. It requires hard-to-find development and design skills. Farming out development to legions of programmers overseas will not create a differentiation advantage. When a technology company outsources software development, that company loses its capacity to innovate and its competitive advantage."

simman
Wednesday, January 14, 2004

In my opinion IT is the core technology of most companies.  No major corporation could run today with out a significant amount of IT.  As one executive told me in my first years in this industry, "information is everything," and I still believe him.  Once you out source IT, you've outsourced your process and information.  What is to prevent that from being used against you?  I don't expect the Romanian or Indian governments to come to my rescue.  It isn't an issue of race, it is an issue of politics. 

christopher baus (www.baus.net)
Wednesday, January 14, 2004

Matt H. asked a great question: "If you can save money by doing X instead of outsourcing it, does managing X detract from your core business?"

I would also factor the reciprocol question into an analysis. We all know and agree that the one thing you get when you outsource an IT project is a MUCH bigger management hassle. Design decisions must be specified to umpteenth level of detail because the outsources will blindly follow directions given precisely. Thus one has to factor in this additional cost of management and evaluate not just the higher cost of this management but also ask what opportunity cost is lost by having strategic managers doing low level specifications for the outsourcing firm instead of adding value through strategy.

Dennis Atkins
Wednesday, January 14, 2004

wow, i am a newbie with software the kind topic especially with you the natives for i come from fuzhou city in China. But i absolutely agree what you said that if it doesn't affect the core operation then why not just outsource the necessary part of the work, saying maybe management, IT part, or other operations with high cost inside while economically efficient  outside?

Please don't say i am sellin my software product so do i comment. Nevertheless,to tell the truth, i really want you to have a look at our biz software for its excellent functions and reasonable price, which is sure to be accepted by all wise and  far-eyesighted enterprises and corations.

mark tong
Thursday, January 15, 2004

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