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What Every CIO Needs to Know About Outsourcing

What Every CIO Needs to Know About OutsourcingCompanies have been outsourcing for many years, but often they have been outsourcing the wrong functions and for the wrong reasons. Lower labor cost repeatedly lures investors and executives, without considering the real total cost. Are you disappointed about the results you have been getting from your outsourcing initiatives? In this article, we will explore the reasons, benefits and potential disadvantages of outsourcing technology functions, such as development and testing. We will also cover a few important things to consider before you decide to embark on an outsourcing initiative.


Benefits of Outsourcing

There are many valid reasons why a company may choose to outsource, and when done correctly, outsourcing can bring abounding advantages. Here are a few examples of reasons for outsourcing along with their potential benefits (Jacobs and Chase, 2013).

  1. Organizationally Driven Reasons
    1. Improve company effectiveness by allowing the company to focus on core competencies; what we do best.
    2. Enable the company to concentrate on more critical business processes.
    3. Increase flexibility to meet changing business conditions, technologies, and demand for products and services.
    4. Delegate routine tasks that employees may not want to do, such as testing.
    5. Reduce stress for internal managers.
  2. Improvement Driven Reasons
    1. Obtain expertise, skills, and technologies not available internally.
    2. Shift certain risks and liabilities to the outsourcing provider.
    3. Get additional resources when your employees are too busy working on other projects.
    4. Swiftly get numerous skilled resources. The alternative is to hire employees or contractors yourself, which would be very time-consuming and may substantially delay the project.
    5. Develop applications much faster.
    6. Achieve 24/7 operations while resources work in the day time based on their time zone.
    7. Improve quality.
  3. Cost Driven Reasons
    1. Lower labor cost.
    2. Reduce operational cost through superior provider performance and the provider’s network.
    3. Turn fixed cost into variable cost.
  4. Financially Driven Reasons
    1. Reduce investments in capital assets and free up these resources for other purposes.
  5. Revenue Driven Reasons
    1. Accelerate expansion by tapping into the provider’s developed capacity, processes, and systems.


Disadvantages of Outsourcing

Even when you do things right, you may encounter some inherent problems with outsourcing. For example:

  1. Loss of control
  2. Potential exposure of confidential data
  3. Possible layoffs
  4. Former employees may be hired back by the outsourcing partner with lower salaries and fewer benefits


Important Considerations

Outsourcing is sometimes a double-edged sword and will meet the company’s expectations only when executed effectively. Therefore, you need to take the following things into consideration when outsourcing.

  1. Maintain core competencies in-house.
  2. Keep inside the company projects and activities that are strategic or critical, although you may hire consultants and contractors. You can always outsource tactical projects, simple projects, repetitive tasks, and simple tasks.
  3. Establish appropriate metrics to evaluate the results.
  4. Define a fair process to manage requirements and scope changes.
  5. Appoint a competent person or team to manage the outsourcing company and contract.
  6. Provide crystal business requirements of the project or process.
  7. Delineate clear expectations and responsibilities between the client and the outsourcing provider.
  8. Understand the geographic, time zone and cultural differences, and make sure they don’t clash with those from your company.
  9. Visit the vendor’s facility.
  10. Make sure the outsourcing firm is reliable and trustworthy.
  11. Verify that the vendor’s employees/contractors are trained adequately and regularly.
  12. Corroborate that the partner has proper certifications.
  13. Make sure your intellectual property is sufficiently protected or is hard to imitate.
  14. Ensure security and privacy of sensitive information. Today we have several significant security breaches per month. Therefore, it is imperative to ensure that the outsourcing partner takes the safety and security of its customers' data seriously.
  15. State who owns the new intellectual property.
  16. Understand the total cost of outsourcing and make sure it is truly lower than the cost of doing it internally.
  17. Establish an effective Service Level Agreement (SLA). For instance:
    1. Availability of resources
    2. Fixing bugs free for 30 days
    3. On-site project manager
  18. Spend enough time planning the management transition.
  19. Consider starting with a pilot project before giving a large project to the vendor.


We have explored the reasons, benefits and potential disadvantages of outsourcing technology functions, such as development and testing. We also covered a few important things to consider before you decide to embark on an outsourcing initiative. Do you have any additional recommendations? Please write a comment below.



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