- At some point, will outsourcing be more expensive than insourcing?
- If expectations are so important, how do you mediate them? Is governance the "silver bullet" (it was no accident that we talked about decision/input rights the same week as the panel!)
- How do you handle the "culture class" when deadline with offshoring partners (and sometimes nearshore ones)
- What stops firms from outsourcing core and strategic functions?
- What about rural sourcing, crowdsourcing, and the other emerging complexities of outsourcing governance?
I look forward to hearing your thoughts on outsourcing and your reflections!
I don't know if outsourcing will become more expensive than insourcing in the near future, but I do think that the price delta will shrink. There are three primary reasons for this. First, we primarily outsource to developing countries such as India and China. The economies in those countries are growing much faster than the US economy, which should cause their currencies to appreciate against the dollar, making it more expensive for US companies to purchase their services. (This is assuming that the governments of these countries will allow their currencies to float on the international foreign exchange markets and will not engage in currency manipulation.) Secondly, as the standard of living rises in these developing countries, IT workers will start demanding higher salaries in order to keep up with the rest of society. And finally, the US government has stated on multiple occasions that it will seek to make outsourcing less attractive through tax policies that penalize outsourcing or incentivize insourcing. These factors, working in concert, will ultimately narrow the price gap significantly. Whether it will make outsourcing more expensive than insourcing, however, is still uncertain.
ReplyDeleteOutsourcing can become more expensive than insourcing when the firm lacks strong strategic guidelines and leadership. "IT is a strategic partner": it's important to keep this focus as firms pursue outsourcing relationships. It seems like the temptation for firms who decide to outsource is to completely rely on the contract partner to handle every aspect of the outsourced function. The reality, however, is that it takes a lot of planning, strategy, management and leadership to have an efficient and profitable outsourcing relationship. Failure to realize the complexities and importance of relationship management when it comes to outsourcing can lead to the endeavor becoming more expensive the keeping the operation in house.
ReplyDeleteRural sourcing or crowd sourcing are expected to have less cultural and financial issues rather than offshoring. In an offshoring contract many factors such as cultural, communications, and time difference between two countries, many result in lower efficiencies in a business process. However rural sourcing is so limited and not all companies can find enough rural sourcing, but there is a great source of technical support in this field. For instance compare a small business unit working in a rural area with a mediocre company in overseas. If the rural company can provide our needs by the same price we will chose this company for a number of reasons. First we can make a relation with a local company and next we keep the benefits of our work inside of our country.
ReplyDeleteThanks for hearing,
I do not think that outsourcing will ever be more expensive than in-souring. I think that the prices are moving towards an equilibrium, and will eventually equal out. This is mainly because as foreign counties economies improve, so will their labor prices. Thus destroying any labor arbitrage advantage that you would normally get from out-sourcing.
ReplyDeleteExpectations need to be managed in manner that allows one to still accomplish more than expected. If expectation are set to high that at best, all you can do is what is expected. There needs to be room to do better than expected.
I think the best way to handle the diverse cultures when off shoring is to go through a middle man. I am sure there are companies out there that act as an intermediary between the two companies This would allow for a much smoother flow of information and also make sure both parties expectations are in line.
If a firm outsources there core strategic function they lose their competitive advantage. If it is a true core strategic functions than it should cost more to outsource it since it should be a strength of the company.
The different manners of outsourcing that are emerging are great as long as they are managed properly. These different methods challenge the traditional model and keeps prices in check; however, with the new model comes new problems. Mangers need to account for this when considering everything else.
Often times in mergers, the thing that kills the deal is that the company cultures cannot coexist peacefully. Now there is not as much mingling in outsourcing, but you still expect the two groups to effectively work together. In my opinion, you treat the situation like you would treat an extended house guest. The company should realize that these people are new and need to be taught certain things. At the same time, the new people need to understand that they are guest, and they need to adhere to certain customs they may find unusual.
ReplyDeleteI do not think that outsourcing will be more expensive than insourcing anytime soon. The decision to outsource involves an assessment of whether cost efficiencies can be gained. For outsourcing to continue, those efficiencies have to be present. Contractors therefore have to keep costs down for the companies in order to remain competitive and stay in business. I will say though that with innovation, the need to outsource may slow a bit because of the need to keep corporate secrets in house.
ReplyDeleteI don't think outsourcing will become more expensive than insourcing. But capabilities of companies and managers will eventually lead to the talent of managing outsourcing partners. The role of IT at many firms will depend on the ability of just a few individuals to control all of IT and when it is not a part of a firm. Part of that management process will function the same way as it does when everything is insourced, how we can better manage the implicit/explicit costs of technology while keeping our firm competitive.
ReplyDeleteIf the organization has a number of non-core processes which are taking plenty of time, effort and resources to perform in-house, it would be wise to outsource these non-core functions. Outsourcing in this case, would help the organization save on time, effort, manpower and would also aid in making quicker deliveries to customers.
ReplyDeleteIf the company requires expertise services in areas which do not fall under core competency, then outsourcing will be a good option as it can bring access to expertise services. For reducing costs and making faster deliverables, outsourcing is again a good option.
If the work involves production, then it would be more ideal for the organization to opt for insourcing, as it can save on transportation costs and exercise a better control over project.
However, it is not necessary to choose outsourcing over insourcing or vice versa. The organization can outsource and insource at the same time.
The cost of performing any business process alone is relatively very expensive in the US compared to the countries which are taking up the outsourced processes making Insourcing costlier. Baring any major reforms in tax laws for outsourcing companies, I can not see a way that Outsourcing can become more expensive than Insourcing any time soon.
ReplyDeleteAs we all learnt, Outsourcing can be disastrous if not managed properly with well laid governing principles, hence Outsourcing core processes is very risky. A minor blip can result in a lot of bad consequences causing company to loose it's competitive advantage and can ultimately lead to it's demise. Hence a company should always look to keep it's core processes in house.
Andy, thanks for the opportunity to contribute. I enjoyed the panel on Thursday and I hope I was able to offer something of value.
ReplyDeleteReading over these comments, it's clear that Pricing is on everyone's minds as they consider the viability of outsourcing for the future. I didn't get a chance to mention on Thursday that before selecting Chile as our destination, my company considered several other South American options, and discovered that to open a development shop in Brazil would be MORE EXPENSIVE than to keep the work here in Baton Rouge.
So it's clear that those who speculate that the price delta will narrow and possibly close are exactly right. It's my own belief (and hope) that free market competition will completely remove price as a factor -- with the result that all work will be done where it can be done most EFFECTIVELY relative to the business goals at hand.
Again, thanks for the chance to interact with your students and the other panelists. I enjoyed it.
"Expectations Management" is one of the most important issues in IT outsourcing. Hence, there should a clear understanding from both the parties.
ReplyDeleteA provider, just to get the deal, should not promise something that they later cannot provide. Similarly, on the other hand, Buyer, even though they are paying huge amount of money, should not be very demanding.
A very good communication should be established right at the beginning and the process should be followed accordingly. Even though a few changes might occur later as compared to that of the negotiation, it should be taken at the best interest and agreement of both the parties.
One of the key reasons a company outsources is because its cheaper than insourcing. If that changes anytime soon, outsourcing looses its competitive advantage. I do agree with my classmates who suggest pricing will move towards a equilibrium as countries improve labor, but outsourcing will almost always still the advantage.
ReplyDeleteCrowdsourcing and ruralsourcuing both have their strengths and weaknesses. They can provide a strain on IT governance if not handled properly. The outsourcing manager will spend more time managing these relationships in exchange for keeping capable employees. Ruralsourcing suits companies who struggle with the outsourcing to foreign companies for reason such as proximity or trust.