hSenid's blog on Outsourcing

Outsourcing — the practice of using outside firms to handle work normally performed within a company — is a familiar concept to many entrepreneurs. Small companies routinely outsource their payroll processing, accounting, distribution and many other important functions — often because they have no other choice. Many large companies turn to outsourcing to cut costs. In response, entire industries have evolved to serve companies’ outsourcing needs.

But not many businesses thoroughly understand the benefits of outsourcing. It’s true that outsourcing can save money, but that’s not the only (or even the most important) reason to do it. As many firms discovered during the outsourcing “mania” of the early 1990s, outsourcing too much can be an even bigger mistake than not outsourcing any work at all. The flat economy caused many companies into huge layoffs and subsequently outsourced functions that were better kept in-house. Wise outsourcing, however, can provide a number of long-term benefits:

Control capital costs. Cost-cutting may not be the only reason to outsource, but it’s certainly a major factor. Outsourcing converts fixed costs into variable costs, releases capital for investment elsewhere in your business, and allows you to avoid large expenditures in the early stages of your business. Outsourcing can also make your firm more attractive to investors, since you’re able to pump more capital directly into revenue-producing activities.

Increase efficiency. Companies that do everything themselves have much higher research, development, marketing and distribution expenses, all of which must be passed on to customers. An outside provider’s cost structure and economy of scale can give your firm an important competitive advantage.

Reduce labor costs. Hiring and training staff for short-term or peripheral projects can be very expensive, and temporary employees don’t always live up to your expectations. Outsourcing lets you focus your human resources where you need them most.

Start new projects quickly. A good outsourcing firm has the resources to start a project right away. Handling the same project in house might involve taking weeks or months to hire the right people, train them and provide the support they need. And if a project requires major capital investments (such as building a series of distribution centers), the startup process can be even more difficult.

Focus on your core business. Every business has limited resources, and every manager has limited time and attention. Outsourcing can help your business to shift its focus from peripheral activities toward work that serves the customer, and it can help managers set their priorities more clearly.

Level the playing field. Most small firms simply can´t afford to match the in-house support services that larger companies maintain. Outsourcing can help small firms act “big” by giving them access to the same economies of scale, efficiency and expertise that large companies enjoy.

Reduce risk. Every business investment carries a certain amount of risk. Markets, competition, government regulations, financial conditions and technologies all change very quickly. Outsourcing providers assume and manage this risk for you, and they generally are much better at deciding how to avoid risk in their areas of expertise.

Offshore business outsourcing is very common among the nations of world and resulting in exchange of productive development activities between nations. Outsourcing has become development tool for web products & services in the world of web. It has created new arena for web related professionalism, where transfer of new technology through various web based business activities is providing solutions to complex web development problems.

Business world is changing with every step of development in advance technology and increasing demands of business. Role of internet is not measurable in words and figures in the development of offshore services.

Exchange of business services in world is flowing like water due to internet impact and involvement for all activities needs to decrease the distance. Outsourcing of information technology is popularizing world wide and creating a knowledge base industry in the world of business. Online marketing of products and services for any business is very common among the nations and increasing trend of online marketing leads to offshore outsourcing. Web masters are overloaded with online web related work. In order to shift the workload and requirement of better quality they use to hire developing professionals from other countries. There is large number of software outsourcing companies among the nations of world.

Following are few important reasons for outsourcing:

• Increasing trends of online presentation of products & services
• Low cost availability of professionals
• Increasing complexity in online business
• Customize solutions
• Internet impact
• Increasing competition
• Global free trade/ liberalization effect

Increasing online interaction between nations regarding business resulted in great positive effects on world business. Technology transfer is one of the major benefits for both developing and developed nations of the world.

Following are few positive gains for business industry due to offshore outsourcing of information and technology:

• It helped in decreasing global unemployment
• New innovations
• Economic development
• Technology transfer.

1. What are my goals?

A good place to start is to ask yourself what you hope to achieve by insourcing, says Ruckman. Cost savings? Improved service? Faster innovation? Once you’ve identified your goals, assess your existing costs, service, quality, process efficiency, and personnel requirements against competitive market standards. Keep questioning your assumptions to make sure they’re realistic, says Ruckman. “A good business case will take at least two to three months and involve 20 to 30 reviews,” he says.

2. Do I have a solid business case?

Complete a detailed calculation of insourcing costs. Organizations often underestimate the time and effort involved in bringing IT operations back in house, says Mathers. Some insourcing expenses include hosting facilities, separation of shared assets, application migration, staff training and transfer, new hires, and hardware and software investments.

Legal issues can be particularly challenging, Mathers says, like working through employment contracts, maintenance agreements, and software licenses.

“The transfer costs [for software licenses] are shockingly high,” Ruckman notes.

As a general rule of thumb, Ruckman says you can plan to spend at least five to ten percent of your monthly outsourcing costs on transition until you are fully insourced in a low complexity transfer and as much as 15 to 25% on high complexity situations.

Also calculate your ongoing cost for in-house support. “Again, businesses underestimate the internal staffing and expertise requirements to manage the operation,” Mathers says.

It can be especially difficult to evaluate in-house skills, quantify the new resources you’ll need, and factor in the cost of recruiting and relocating qualified staff. Replacing skilled offshore staff is especially difficult.

3. What are my termination rights and responsibilities?

Factor in fees for early termination if your contract is not near its end. “Most contracts have prohibitive contract clauses regarding termination so early, and rightly so,” says Strichman. “The vendor usually makes seven-figure investments to transition environments, and it is costly to undo that so soon.”

4. Who the heck knows what’s going on?

When a company makes the decision to outsource, both client and vendor bring their technical teams together to define requirements. When you insource, you’re on your own. And most of your technical experts who were on your staff when the original outsourcing deal went into effect are now employed by the outsourcers.

“[The vendor team may] clam up on the helping front. They’re not getting paid to develop a new solution for you,” says Strichman. It’s not that they’re trying to be difficult, he adds. They simply can’t offer to help.

Find out who knows where the bodies are buried and create incentives to help with the transition, if possible.

5. Can in-house IT support my future state?

Whatever the sourcing strategy, you have to consider future requirements, says Mathers. Develop a future state vision statement that reflects your economic and business assumptions in order to consider what sourcing approach will yield the most benefits long-term.

6. How much of this is my fault?

If you’re considering insourcing because outsourcing has yielded disappointing results, take a long, hard look in the mirror.

“Never forget that the client is always part of the reason things are the way they are,” Mathers says. “Unless you are honest with yourself about your role in the current state, you risk spending a lot of time and money and not fixing the underlying problems.”

7. Do I have business buy-in?

Nothing will kill an insourcing project faster than a lukewarm reception from business leaders, says Ruckman. Get key stakeholders involved in the discussion early. And make sure to assess what impact insourcing will have on major projects that are mid-flight in order to address business users’ concerns.

8. How long will insourcing take?

“There are about 20 to 30 variables that are unique to each sourcing deal,” says Ruckman. “At a macro level, the complexity of an insourcing project must factor in what functions were outsourced and what percentage of the staff is still local to the client.”

For example, if the client systems remained in their data center and weren’t moved to the sourcing provider’s delivery center, the project will be less complex. Plan on a four to six month transition for low complexity transfers, says Ruckman, and nine to 16 months for high complexity situations.

How long it will take to see a return on insourcing is an even greyer area. “I have seen deals reach a positive ROI from insourcing in less than 10 months, and some take ten years,” says Strichman. “There are no simple rules. I know that sounds like what a consultant would say, but it’s true.

9. Who can help me?

Third party help can be invaluable in assessing the insourcing option and tackling the transition in-house. But should you hire the same sourcing consultant that worked with you on the outsourcing deal? Maybe not.

Some sourcing consultants are better suited to insourcing situations. “Many firms view outsourcing as the solution to all problems. They don’t have a process tailored for insourcing,” says Strichman. “And it is not just ‘outsourcing in reverse’.”

Many consultancies shy away from insourcing because outsourcing is where the money is, and with a multi-year deal, it can keep flowing in. “When we do an insourcing gig, we are essentially working ourselves out of a job–if done right,” Strichman says.