Monday, March 22, 2004

Outsourcing + Insourcing Key to Smartsourcing

In today's high-speed global business environment, every organization is out to maximize its profits, enlarge its market share, and above all, put a check on ever-increasing costs. Management gurus are undertaking every effort and every possible mantra is being applied to re-think and re-adopt new processes, especially the buzzwords "outsourcing" and "insourcing."

Outsourcing is the process of procuring services or products from an external service provider with a view to curb costs, replace in-house capabilities, and thereby reduce the time period of projects. Outsourcing is thus a full transfer or delegation of an organization's facility management functions to an external firm. Outsourcing has emerged as an effective tool to revamp the strategies and benefits of business in a financially viable and pro-active manner.

Fundamentally speaking, outsourcing may be classified into two types: traditional outsourcing and Greenfield outsourcing.

a. Traditional outsourcing means that the staff of the organization does not perform the same jobs or tasks. Here, tasks to be performed are identified and the service provider usually hires the staff. For instance, IT outsourcing may include a transfer of responsibility for management of data centers and networks. In the field of facility management, the people working as property managers might become the staff of a facility management company.

b. Greenfield outsourcing, on the other hand, means that the organization can change its business processes without any hiring of staff by the service provider. The organization, for instance, may hire an up-and-coming company to provide a new service such as wireless remote computing, which was not previously handled internally.

Insourcing Challenges
Insourcing is a common approach where facility management officials reach out to external facility management firms as process experts. Here, the organization hires the professional help of an external service provider as a consultant to measure the scale of its operations levels and recommend necessary improvement measures. The internal staff, from this point onward, implements the suggested recommendations.

Today's IT and HR managers face several hard realities. In the first place there is an acute shortage of suitably qualified candidates to fill the available vacant positions. As a matter of fact, at any given time, according to reports, 10 to 15 percent of all IT positions are unstaffed and the growth rate of job openings exceeds the growth rate of the labor force in the IT industry. The US government alone estimates a shortfall of 1.3 million workers over the next 10 years.

The second factor involves economics. The cost of acquiring high-tech experts is growing, thereby maintaining consistency in the law of supply and demand. For instance, salaries of IT workers are increasing by as much as five times the rate of salaries of non-technical staff!

Insourcing has been instrumental in creating a viable supply of IT workers -- in fact, a better quality workforce combining both technical and business skills. Moreover, there has been a reduction in the cost of recruiting as well as the cost of integrating IT workers into the corporate culture. Above all, it has been helpful in stabilizing salaries and, finally, has resulted in an upswing in retention.

Outsourcing: The Perfect Motivator
Curbing costs and saving money have always been the perfect motivator for organizations to consider outsourcing options. Outsourcing revenues in the financial services sector are likely to soar to $30 billion by 2006, with companies in North America and Europe leading the way, estimates Boston-based research firm Celent Communications.

IT outsourcing is a fast-growing industry since it provides firms access to state-of-the-art technologies and is accompanied by the overall guidance of experts, thus curtailing the need to open up expensive in-house departments.

According to a report by IDC, global spending on IT services will soar to $700.3 billion by 2005, an increase from $439.9 billion. Many factors have converged to prompt firms to outsource.

The need to cut costs, globalization, and the increase in the number of ever-demanding clients mean that investment managers must revamp their operations, and thus outsourcing is high on their priority list.

Yet another trend is the emergence of offshore outsourcing and using organizations from developing countries to write code and develop applications. These organizations mainly perform mainframe programming for their clients and some related maintenance work. This practice is proving to be very cost effective. For any organization, IT involves huge costs, and by outsourcing these functions, internal IT staff can be deployed on new projects.

Organizations today are looking at outsourcing as an important option for leveraging resources and cutting costs, and the focus is on strategic and value-added services. Numerous countries have substantially well-trained IT professionals and clerical staff who have lower salary expectations compared to their US counterparts. Global outsourcing has thus become a small but rapidly growing sector in the overall outsourcing market.

Outsourcing - a New Surge

Recent trends clearly indicate that companies are generally avoiding traditional outsourcing risks and forming a deeper relationship with their offshore partners by setting up dedicated centers. A dedicated center is an extension of an organization abroad.

The dedicated center devotes all its efforts to the host organization and, to maintain consistence with the organization's standards, it follows their culture and methodologies to produce immediate results. The center enhances overall productivity, and more importantly, it results in considerable long-term cost savings.

Countries like China, India, Israel, and Russia, which possess highly skilled labor forces as well as outsourcing capabilities, have been the major gainers. Despite the fact that each of these countries has its own advantages or drawbacks, there has been a sudden upsurge of dedicated centers in these countries.

Smartsourcing: The Next Stopover?

Outsourcing and insourcing can be thought of as two sides of the same coin. Many analysts believe that if companies judiciously mix both outsourcing and insourcing properly, they will be the key to the next buzzword: smartsourcing. Today, numerous chip design companies are setting up developmental centers in India, striking the right balance between outsourcing and insourcing by designing and developing chips in-house while outsourcing the actual manufacturing of the chips.

Smartsourcing is yet another substitute for the basic challenge of outsourcing as a management technique. Smartsourcing can best be explained as the tactical use of specialized external resources to perform core and non-core SAP Basis activities, which were originally carried out by internal staff and resources. Smartsourcing provides the best available technology, services, and management to optimize network availability, performance, and reliability on a subscription basis. For those customers who want to out-task the design, management, and ongoing maintenance of their networks instead of relying on in-house network support resources, smartsourcing is perhaps the most lucrative option.

IT managers today are faced with increasingly complex technology, dwindling resources, and limited budgets. They are constantly on the lookout for alternative solutions for the success and growth of their business. Perhaps the answer lies in a delicate combination of outsourcing and insourcing, leading to the perfect solution: smartsourcing!

By Sabyasachi Bardoloi, Pinnacle Research Group, Pinnacle Systems, Inc.