Software Outsourcing: Why, When, What

Software Outsourcing
www.softheme.com
Why, When, What

www.softheme.com Outsourcing to Softheme™ Software Outsourcing: Why, When, What
Table of Contents
 Preface
 Historical Background
 Why Do Firms Outsource?
 When to Outsource?
 What to Do and Not Do
 Factors that Support Outsourcing
 The Risks of Outsourcing
 Core Competencies and Critical Success Factors
 Outsourcing Trends and Future Projections

Today’s business environmental, organizational, and technological factors
require businesses to operate efficiently and effectively in order to be competitive.
Toward those goals, managers employ many strategies to improve productivity,
including standardization, automation, and business process reengineering. Additionally,
they restructure the business organizations to be lean and flat so that they can become
flexible in responding quickly to changes in environment and customers’ needs.
Outsourcing is another valuable strategy managers use to achieve the above goals.
Preface

Historical Background
The predominant supply chain model for several
decades was vertically integrated. Each member of a supply chain
was considered to be part of the same industry. All the ancillary
activities that support the supply chain directly or indirectly were
included.
Steadily, products became complex and the scale of
operations increased and management of entire operations within
one corporation became less feasible. This resulted in the increasingly popular use of
outsourcing and has resulted in vertical disintegration of corporations and supply chains. As
travel and communication became easier in the 1970s and 1980s, as trade restrictions
increased, and as the gap in wages between developed and developing countries increased,
outsourcing began to move off-shore.

In 2002, for instance, India had 90% of U.S. organizations’ information
technology (IT) off-shore business.
China looms as India’s biggest competitor, although some consider
the two as noncomparable at this time. Other countries considered to
be attractive as off-shore outsourcing sites include Malaysia, the
Czech Republic, Singapore, the Philippines, Brazil, Canada, Chile,
Poland, Hungary, Russia, and Vietnam.

In the age of the Internet and World Wide Web, a company’s location
hardly matters. In the past, the educated and skilled labor from low-cost countries
immigrated to the U.S. During the last decade, faster communications and
improved information allow companies to easily send information oriented work
to any location on the globe. Ultimately, countries with low-paid but well-educated
workers will benefit greatly. However, the country of origin of the outsourcing also
benefits.

Why Do Firms Outsource?
Companies outsource functions for reasons that are organizationally
driven, improvement driven, financially driven, revenue driven, or cost driven.
Outsourcing can be viewed as a component of corporate and industry international
expansion and restructuring.
Five horizons of the global industry value chain
Market entry
Product specialization
Value chain disaggregation
Value chain reengineering
New market creation

Why Do Firms Outsource?
Market entry
Entering a country for purposes of market expansion
Specialization takes place in different locations. Each
location may engage in final goods trade with each other
Value chain disaggregation
Product components are manufactured in a certain location
and assembled elsewhere
Value chain reengineering
Reengineering processes to capture additional advantages
from production cost differentials
New market creation
New market segments are penetrated as a matter of capturing
the full value of the company’s global activities.

When to Outsource?
Factors that Support Outsourcing
Characteristics of today’s outsourcing environment are many and varied. The
strategic change to outsourcing is highly evident in the software industry. Frequent changes to
software especially often result in an organization turning to outsourcing as a solution. Reasons
studied for this can be generalized to all outsourcing, and include:
 The turbulent market will need corporations to be customer
focused
 There are pressures on corporations to continuously develop new
product at reduced cost
 Extensive customization is enabled by IT through mass
customization
 The market need can be fulfilled by flexible and adaptable
organizational structure which is possible with IT-enabled processes

When to Outsource?
Previously identified factors include
time compression, short product life cycles,
strategic discontinuity, increase in knowledge
intensity, and customer-focused approach.
These changes are:

When to Outsource?
Customer focus
Shrinkage in product/systems life cycle
Competition and real-time operations
Societal, political, and ethical factors3
4
1
2
Global economy
Changing workforce and job loss
Technological innovations and obsolescence
Organization structure and corporate culture
5
6
7
8

What to Outsource?
The Risks of Outsourcing
Despite the purported benefits of outsourcing and the wide
range of success stories that have stimulated an unprecedented growth
rate, there are potential risks as well. An outsourcing project might fail
because of poor selection of the vendor, mismanagement of the
outsourcing contract, inferior performance by the vendor, lack of
acceptance by the end consumer, or other reasons
Selection of the Vendor
Mismanagement of the Outsourcing Contract
Inferior Performance by the Vendor
Lack of Acceptance by the End Consumer

What to Do and Not Do?
Core Competencies and Critical Success Factors
Decisions as to what and whether to outsource should be tied to an
identification and understanding of an organization’s core competencies and
its critical success factors. Such an identification and understanding can be a
lengthy process. However, it is the one true way to determine whether a
project should be or should not be outsourced.

Core Competencies and Critical Success Factors
If a task is a both a core competency and a
critical success factor, it should not be
considered for outsourcing. Such tasks are at
the heart of the company.
Tasks that are core competencies but not
critical success factors should be reassessed.
Those tasks which are not core competencies
are the most likely candidates for outsourcing.
If an organization intends to bring an
outsourced task back in-house a some future
time, managers should be cautious. Once the
expertise has been released to the outsourcer,
it is difficult — if not impossible — to regain
such expertise in-house.

Outsourcing Trends and Future Projections
 Outsourcing of information technology functions
 Outsourcing of pharmaceutical functions
 Outsourcing of customer care functions
 Outsourcing finance and accounting (F&A) functions
 Outsourcing of human resource (HR) functions
 Outsourcing of research and development (R&D) functions

Outsourcing of information technology
functions is a huge marketplace. IT outsourcing
began as a cost-reduction tool, but has evolved into
a component of businesses’ overall corporate
strategies. It has grown from simple applications to a
much wider set of business functions: logistics,
payroll, human resources, legal, and so forth. It has
become pervasive and strategic.

“Back-sourcing”
IT off-shoring
Web-based and
e-business
outsourcing
partnerships
Application
service provider
(ASP) industry
Growth Areas
in
IT Outsourcing

Outsourcing of pharmaceutical functions traditionally has taken the form of
outsourcing drug development and manufacturing to contract research organizations
(CROs) and contract manufacturing organizations (CMOs).
Outsourcing of customer care functions by moving entire contact centers
off-shore has become very popular. The functions performed by customer service
centers are more important than their location. The discrepancy between labor, real
estate and infrastructure costs on-shore vs. off-shore, makes this a logical function to
outsource. Customer contact centers are a $650 billion industry (Cleveland, 2003).

Outsourcing of human resource (HR) functions, such as
payroll, recruitment, hiring, training, benefits management, employee
assistance programs, executive compensation, as well as health, safety,
and regulatory compliance, is gaining momentum.
Outsourcing finance and accounting (F&A) functions have
been prevalent since the beginning of business. Now, there is a growing
trend for F&A functions to be outsourced off-shore, primarily to save
labor costs.

Outsourcing of research and development (R&D) functions takes
various forms. Drug companies contract with outside firms to explore new
compounds for possible testing and launching. A different form of R&D
outsourcing is used by companies such as Dell, Motorola, and Philips which buy
complete design of digital devices from Asian developers, tweak them to their own
specifications, and attach their own brand names. Another approach is that used
by Boeing Co. which contracts with India’s HCL Technologies to co-develop
software for everything from the navigation systems and landing gear to the
cockpit controls for its upcoming 7E7 Dreamliner jet.

Thank you!
2010 | Softheme Team | Kyiv, Ukraine | Software Outsourcing Solutions
www.softheme.com » Outsourcing to Softheme™
Questions? → info@softheme.com

Software Outsourcing: Why, When, What

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