Successful IT Outsourcing

While most organizations have gone the way of outsourcing their peripheral activities while managing their core competencies in-house, a recent happening in the Wireless industry seemed to have changed this rule. March 18 witnessed an announcement from Vodafone that they have decided to outsource the administration of their large wireless network in the UK to none other than Ericsson. In another story that made it into media around the same time, Orange network made a similar contract with Nokia.

Previously, companies have mostly been reluctant to outsource their core tasks at that may mean giving away your strength and cash cow into the hands of others. Besides, it may also deprive them of the competitive advantage gained through experience and years of management. However, these British wireless operators are now applying their entire capabilities on marketing and sales.

Vodafone has been considering this outsourcing option since the middle of 2008 and has now gone into a 7-year contract with Ericsson. The company has high hopes this deal will bring greater cost efficiencies over the entire lifecycle of the contract. In addition, the beauty of this deal is that Vodafone won’t lay off the employees; it has rather arranged it such that the employees will migrate to Ericsson and work under their management starting this year. While Ericsson would work to save operational and maintenance costs, Vodafone wishes to use these monetary savings for innovating new services and products for its clientele.

In the other deal, Orange has arranged a similar transfer of employees with Nokia, where the latter will inherit over 200 employees and will supervise the Orange network for the coming five years. It’s worth mentioning here that Vodafone previously outsourced its operations in Holland to Ericsson around 3 years back.

Some experts predict that the wireless industry may gradually move towards sharing a single network for greater cost efficiencies. Though that seems difficult to happen in the near future, a prolonged recessionary period may act as a speeding catalyst in this regard.

As we have stressed time and again, IT outsourcing is an already appreciated practice and we should now move over the debate of outsourcing vs. in-house development. And the need to outsource your non-core activities increases in times of economic hardships such as the current global financial crisis. That’s the route JP Morgan is taking now, thanks to its acquisition of Bear Sterns and WaMu that have put more pressure to cut costs and meet shareholders’ expectations. In a recent BusinessWeek story, it was reported that JP Morgan has decided to increase its outsourcing spend in India by a whopping 25%.

So this means the second largest bank in the United States will put in around $400 million into its Indian outsourcing channel within the next 12 months. At the moment, JP Morgan is spending anywhere between $250-300 million in a year on outsourcing, most of which went to TCS, Accenture and Cognizant. Guy Chiarello, the Chief Information Office for JP Morgan, wants to make sure that his firm can reduce their overall IT expenditure, reported an expert who wanted to stay clear of any media popularity. Although the news has leaked to mainstream through a reliable source, the Indian and US offices of JP Morgan didn’t reply when contacted by some media folks.

In the light of the current financial crisis where banks were hit very hard, it would be no surprise if others followed the same path of outsourcing. But still, many other banks seem unsure of the route they will take when it comes to IT expenditure. The main problem is that large scale mergers and acquisitions of various financial institutions have necessitated big changes to the information architecture now.

This would basically involve merging each institution’s database so that customers don’t face problems even if they had an account in the bank that has been acquired by another one now. And besides, these companies also need to merge their software and online trading applications to present users with a single interface. All these changes require a huge budget and IT outsourcing seems to be the most feasible way to execute these tasks in the most efficient manner, given that Indian outsourcing service providers already have vast experience in dealing with offshore US-based clients.

While these are large banks with big budgets, the same thing can be done by small businesses too. With the future profitability of banking and real estate sector in jeopardy, people who have saved money now need to invest them elsewhere. Starting a new business may not be a very bad idea in this regard. And hiring offshore staff to take care of your IT needs is a good way to start with a low budget initially.

With the success of IT Outsourcing, people are now just entering into offshore outsourcing contracts without giving much thought to the whole process. One size doesn’t fit all and you need to view and analyze your specific requirements and your internal workforce before you even decide to outsource.

Then comes the decision to find a feasible outsourcing model. What do you essentially need? Is your current workforce insufficient to handle all the various internal tasks? Or did some customer ask you to perform a task that you can’t handle in-house? Depending on such questions, you have to decide whether you want to hire full time staff, outsource a specific IT function or hire offshore providers for a particular project. That’s what we will be looking at in this article.

Firstly, let’s see the need for a full time employee. This is basically the need when you start getting more work than your current workforce can manage easily. You need to increase your employee strength but you also realize that the increase in work load may be temporary and not long term. Besides, hiring permanent in-house employees means increase in fixed costs like extra PCs, chairs, etc. for all the new entrants. And if the workload reduces in the near future, it will be difficult to layoff this extra workforce.

Contract workers are usually too expensive to afford, especially in these tough economic times. So the best option is to hire an offshore employee like a virtual assistant who will do all sorts of administrative tasks. But take care that you hire dedicated staff as you want the offshore workers to be focused only on your jobs, not on the jobs of multiple employers. We can name this model personnel outsourcing, where the aim is to increase the workforce for managing additional work without hiring in-house employees. Usually, for these types of services you don’t need to hire people with highly specialized skills.

Secondly, sometimes you get clients who need a variety of services and your current workforce might not possess the necessary skills to execute all those required services perfectly. At other times, some services are closely related to your core activities but can still be handled without much collaboration within various departments. For example, help desk activities can be handled separately if employees have access to necessary database information within the company records.

So it makes sense to outsource this specific function to an offshore IT service provider. This model of outsourcing, which we can classify as function outsourcing, is also feasible when a specific IT function can be handled in a better and cheaper way by offshore providers.

Finally, we have project-based outsourcing, where we outsource only specific IT projects. Projects usually have pre-specified targets and milestones. And the deliverables in projects can be easily defined. Project-based outsourcing is usually done for a short period and the deal ends with successful completion of the project.

Sometimes these three models can seem overlapping but your choice would usually depend on your current skill set and requirements.

Like almost all other industries and practices, IT outsourcing also has had its share of myths and misconceptions. While these myths haven’t been able to stop the flow of outsourcing, they have done some damage to small businesses that wanted to benefit from the numerous benefits of outsourcing their IT tasks. Let’s see and debunk some of the common myths running in this sector.

First of all, people think outsourcing is doing harm to the local economy. While I am not saying that jobs aren’t affected by offshore outsourcing, the hype that the practice of outsourcing is bad for the economy is a myth certainly. Ask yourself. If your business really benefits from a practice, won’t it be good for your local economy too. If you can reduce your expenses, won’t you be able to give your shareholders more profits. Then, most of the technology from fiber optic cables to internet telephony are manufactured and powered by western nations. So while offshore IT outsourcing can reduce some jobs, it brings others to cover up the gap.

Moreover, some companies hold the misconception that outsourcing to offshore staff is a shameful act. This is probably the influence of propaganda by people who are against outsourcing for their own reasons. However, many large multinational firms outsource IT tasks, not only to cut expenses but also to focus on their core competencies. In fact, the main philosophy behind business is to increase profit and to expand. By outsourcing, western companies benefit from the talent of an offshore population, which isn’t much different than hiring Indians living inside our own nation.

Some believe that outsourcing can result in higher expenses after you consider all the intangible costs associated with it. Yet some others think the savings from IT outsourcing are usually overstated. However, if you compare the hourly salaries of workers in Asian countries like India and Indonesia, you will realize that there are huge saving potentials. Moreover, you eliminate all the fixed costs associated with a larger workforce, like extra PCs, electrical devices, transport arrangements, etc. This significantly reduces risks for new and small businesses, and allows them to start with minimal investment. And with this statement, we also debunk the myth that outsourcing is feasible only for large-scale companies that have resources to monitor work in different regions.

Finally, there are some myths that actually arise because of poor work by some outsourcing providers. Managers and entrepreneurs in western countries usually don’t take the necessary measures to avoid outsourcing failures because they lack experience in this regard. For example, people think your offshore service provider will never deliver with time. This has actually more to do with good selection than offshore outsourcing. You can even find people in your own country who won’t meet deadlines.

Then, many a people face communication problems while dealing with offshore workers. You can usually solve this problem using latest technologies like VoIP, frequent emails, and so on. These problems usually arise when you select individual service providers who take more projects than they can handle. So hire dedicated staff that would work for you and only for you.