Page 471 - Using MIS

Q3 What Are the Advantages and Disadvantages of Outsourcing? 439

Note, too, that it’s not just Lucas’s time. It is also time from more senior managers who
approve the purchase and hiring requisitions for that activity. And those senior managers,
like Kelly, will need to devote the time necessary to learn enough about server infrastructure
to approve or reject the requisitions. Outsourcing saves both direct and indirect manage-
ment time.

Cost Reduction

Other common reasons for choosing to outsource concern cost reductions. With outsourcing,
organizations can obtain part-time services. Another benefit of outsourcing is to gain econo-
mies of scale. If 25 organizations develop their own payroll applications in-house, then when
the tax law changes 25 different groups will have to learn the new law, change their software to
meet the law, test the changes, and write the documentation explaining the changes. However,
if those same 25 organizations outsource to the same payroll vendor, then that vendor can make
all of the adjustments once, and the cost of the change can be amortized over all of them (thus
lowering the cost that the vendor must charge).

Risk Reduction
Another reason for outsourcing is to reduce risk. First, outsourcing can cap financial risk. In a
typical outsourcing contract, the outsource vendor will agree to a fixed price contract for ser-
vices. This occurs, for example, when companies outsource their hardware to cloud vendors.
Another way to cap financial risk is as James recommends: delay paying the bulk of the fee until
the work is completed and the software (or other component) is working. In the first case, it
reduces risk by capping the total due; in the second, it ensures that little money need be spent
until the job is done.
Second, outsourcing can reduce risk by ensuring a certain level of quality or avoiding the
risk of having substandard quality. A company that specializes in food service knows what to do
to provide a certain level of quality. It has the expertise to ensure, for example, that only healthy
food is served. So, too, a company that specializes in, say, cloud-server hosting knows what to
do to provide a certain level of reliability for a given workload.
Note that there is no guarantee that outsourcing will provide a certain level of quality or
quality better than could be achieved in-house. If it doesn’t outsource the cafeteria, Google
might get lucky and hire only great chefs. James might get lucky and hire the world’s best
software developer. But, in general, a professional outsourcing firm knows how to avoid giv-
ing everyone food poisoning or how to develop new mobile applications. And, if that mini-
mum level of quality is not provided, it is easier to hire another vendor than it is to fire and
rehire internal staff.
Finally, organizations choose to outsource IS in order to reduce implementation risk.
Hiring an outside cloud vendor reduces the risk of picking the wrong brand of hardware or the
wrong virtualization software or implementing tax law changes incorrectly. Outsourcing gathers
all of these risks into the risk of choosing the right vendor. Once the company has chosen the
vendor, further risk management is up to that vendor.

International Outsourcing

Choosing to use an outsourcing developer in India is not unique to PRIDE. Many firms head-
quartered in the United States have chosen to outsource overseas. Microsoft and Dell, for
example, have outsourced major portions of their customer support activities to companies
outside the United States. India is a popular source because it has a large, well-educated,
English-speaking population that will work for 20 to 30 percent of the labor cost in the United
States. China and other countries are used as well. In fact, with modern telephone technology