The pros and cons of IT outsourcing.As companies rely more on information technology (IT) to conduct business for example, accessing large market research databases to find new customers and using the Internet as a storefront IT development and maintenance costs have exploded. It is easy to understand, therefore why companies consider transferring IT assets, leases and staff to third-party vendors that promise savings without losing ground to the competition. In one of the largest U.S. outsourcing ventures, DuPont hired Computer Science Corp. (CSC) and Andersen Consulting See Accenture. for $4 billion over a 10-year period to develop and manage its IT. Other landmark IT deals include Xerox's $3 billion deal with EDS (Electronic Data Systems, Plano, TX, www.eds.com) Founded in 1962 by H. Ross Perot (independent candidate for the President of the U.S. in 1992), EDS is the largest outsourcing and data processing services organization in the country. and the McDonnell Douglas McDonnell Douglas was a major American aerospace manufacturer and defense contractor, producing a number of famous commercial and military aircraft. It merged with Boeing in 1997 to form The Boeing Company. $3 billion deal with ISSC ISSC International Ship Security Certificate ISSC Interstate Shellfish Sanitation Conference ISSC International Social Sciences Council ISSC Integrated Systems Solutions Corporation ISSC Information Systems Steering Committee ISSC Information Systems Sub-Committee . But this is not simply a big company trend. Smaller companies also are taking advantage of outsourcing's benefits, often contracting out portions of their IT to industry-specific consultants or facilities management The management of a user's computer installation by an outside organization. All operations including systems, programming and the datacenter can be performed by the facilities management organization on the user's premises. companies. For example, short-term contract specialists, such as Users Inc., cater to the credit union industry. Smaller companies also outsource IT maintenance functions, such as help desk and training departments. CPAs in public practice and industry, heavy IT users, are increasingly involved in the design, control and operation of information systems for their clients and companies. Therefore, they have to stay on top of these out-sourcing trends. However, it is crucial that they stop and reflect on several important questions before they recommend that their companies or clients hire third-party vendors: What problems will outsourcing solve? Will a vendor really save them money? What are the risks? Whether you are an IT outsourcing expert or simply considering the option for your client or company, you will benefit from this look at the pros and cons pros and cons Noun, pl the advantages and disadvantages of a situation [Latin pro for + con(tra) against] of IT outsourcing. WHAT IS OUTSOURCING REALLY? Today, IT outsourcing generally is defined as contracting with outside vendors to do various IT functions such as data entry, data center operations, application maintenance and development, disaster recovery and network management and operations. Vendors may be individual IT professionals, consulting firms, employee leasing companies, fullservice providers and CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. firms. BENEFITS CHECK What are the advantages and disadvantages of looking outside the company to manage and support IT? Outsourcing proponents cite several reasons for choosing outside vendors. Access to state-of-the-art technology. The volatility of information technology can quickly make IT skills obsolete. Software is updated and replaced very rapidly--by the time an entity invests in and trains its full-time staff, the technology may no longer be state-of-the-art. Outsourcing specialists must be well trained and up-to-date to survive. Cost savings and quality. Fierce competition has led many businesses to restructure and downsize Downsize Reducing the size of a company by eliminating workers and/or divisions within the company. Notes: When a company downsizes, it is attempting to find ways to improve efficiency and increase profitability. It is sometimes referred to as trimming the fat. staffs in an effort to save money. As in the case of General Electric, even thriving companies do whatever possible to reduce staff and costs. Vendors may save money because they * Have much tighter control of fringe benefits fringe benefits, n.pl the benefits, other than wages or salary, provided by an employer for employees (e.g., health insurance, vacation time, disability income). and run much leaner overhead structures. * Use low-cost labor pools more aggressively and, with the help of modern telecommunications, can move data centers to low-cost areas. * Apply world-class standards to the company's existing IT staff, all of whom have to requalify for appointment at the time of outsourcing. * Can employ more effective bulk purchasing Bulk Purchasing is when products are bought in large quantities. This often results in a lower price per item, or Unit price. Wholesale is selling or related to selling goods in large quantities for resale to the consumer. and leasing arrangements for all hardware and software. * Have better control over software licenses In computing, software that is copyrighted and licensed under a software license is done under a variety of licensing schemes. For end-users there are proprietary licenses and there are free software licenses, and there are proprietary Within these schemes are further classifications. because they often are more informed negotiators. * Must meet deadlines because of contractual pressures. Flexibility. Companies must be flexible enough to adapt to a business environment in constant flux, so their IT functions have to respond quickly to changing demands. Vendors often can tap a wide range of resources, skills and capacities while internal IT staff may have limited capabilities. Job security for regular employees. Companies often hire outsourced staff with the understanding they'll be employed for a limited time. Thus, they can more easily drop or add people to the workforce without jeopardizing the company's reputation as a stable employer. More important, the use of outsourced workers buffers regular employees from fluctuations in demand and enables the company to establish a stronger relationship with its regular workforce than would otherwise be possible. BALANCING REWARD WITH RISK As users become more aware of the possibilities and limitations of information technology, they tend to become more critical of the internal IT function. A recent study revealed that a majority of senior managers viewed their companies' IT functions as cost burdens rather than as strategic resources. They also perceived internal IT departments as being outdated, inflexible, expensive, unmanageable and lacking a customer orientation Customer orientation (CO) is the set of beliefs in sales that says that customer needs and satisfaction are the priority of an organization. It focuses on dynamic interactions between the organization and customers as well as competitors in the market and its internal stakeholders. . It is not surprising then that IT outsourcing has experienced such growth. Nevertheless, there is no conclusive proof that outsourcing always will lead to more focused organizations, higher flexibility, lower costs and staffing levels and economies of scale or to the solution of all problems with internal IT departments. In fact, outsourcing is not for every company or client. With all the media attention focused on the projected benefits of major IT outsourcing deals, several questions emerge: "Is IT outsourcing really as effective as proponents say it is? What are the risks, disadvantages and hidden costs?" Here are some answers. Media hype and outsourcing benefits. In Beyond the Information Systems Outsourcing Bandwagon, the authors concluded that managers often reported glowing success stories during the honeymoon period honeymoon period A timespan after diagnosing a disease before its impact is manifest, fancifully likened to the HP of early marriage, during which the husband and wife are most cordial and passionate with each other Diabetology A period of residual β cell when the outsourcing contract was first signed. At that point, the client and vendor possess high outsourcing expectations. Projected savings often make the headlines while exorbitant fees for amendments to contracts are not made public because few companies wish to advertise mistakes. IT is not easily outsourced. Because IT permeates an entire organization, it is not like other resources a company successfully outsourced in the past. IT outsourcing cannot be compared with outsourcing of security, logistics, legal services legal services n. the work performed by a lawyer for a client. , advertising or the procurement of raw materials and components. Information technology evolves rapidly. Because IT evolves so fast, predicting beyond three years is highly speculative. Hence, signing long-term IT outsourcing contracts is risky. Mercurial mercurial /mer·cu·ri·al/ (mer-kur´e-il) 1. pertaining to mercury. 2. a preparation containing mercury. mer·cu·ri·al adj. economics. Although price-performance improvements occur in every industry, in few do the underlying economics shift as fast as they do in IT. For example, a mainframe that cost $1 million in 1965 costs less than $30,000 today and probably will cost 20% to 30% less next year. This makes it difficult for decision makers to evaluate costs of outsourcing bids. The cost of switching is high. A shakeout has taken place among IT vendors, with mergers and takeovers becoming commonplace. It is likely that fewer suppliers will survive in the future, making it more difficult to shop for the right price. Loss of control. Critics of IT outsourcing argue that no out side vendor can match the responsiveness and service levels offered by an in-house function, largely because the outsider is not subject to the same management direction and control as employees. In addition, concerns exist with outside vendors about confidentiality of data, strategic applications and provisions for disaster recovery. Bad for employee morale. Outsourcing often results in layoffs or the transfer of existing employees to the IT vendor. Such displacement can set morale into a tailspin tail·spin n. 1. The rapid descent of an aircraft in a steep, spiral spin. 2. Informal A loss of emotional control sometimes resulting in emotional collapse. and cause even talented staff to fear for their employment security. Less flexibility. The outsourcing vendor provides the level of IT services specified in the contract using the technological platform it deems appropriate. Unless specifically spelled out in the contract, a company may lose the flexibility of moving to new computing platforms. Being held hostage. IT professionals argue that outsourcing allows the user to become a "hostage" of the vendor--the company may lose technical staff and be locked into the vendor's proprietary software and hardware. In a long-term contract, the customer has more leverage in negotiations, but the vendor has more leverage after outsourcing is under way. Cost savings? Many managers assume that outsourcing vendors are inherently more efficient due to economies of scale. (The economies-of-scale theory says large companies can achieve lower average costs than small companies due to mass production and labor specialization efficiencies.) In the outsourcing arena, however, this model may not always apply. For example, small companies may have lower costs than large companies by employing older technology, offering below-market wages and maintaining tight controls and procedures. When vendors submit bids that indicate savings, CPAs should always consider whether they can achieve similar results themselves. If the vendor is not inherently more efficient, perhaps the company can reduce its own IT expenses through data center consolidation and resource optimization. Subcontractors. Companies that outsource often are unpleasantly surprised to find that their vendors aren't working on their projects--someone else is. Outsourcing vendors in search of hard-to-find technical skills often subcontract portions of their computer system work to small, unknown companies--all without the knowledge of their clients. These subcontracts can cause problems, including viruses brought in by subcontractors, poor communications, high costs and low-quality service. CHOOSE WISELY Outsourcing major IT functions will continue to grow at a rapid pace. The continued strong growth of both the depth and breadth of IT outsourcing suggests that this management practice is more than just a passing fad and that, under the right circumstances, IT outsourcing may provide the advantages noted by its proponents. For companies that have successfully outsourced various IT functions, the question is not "Should we outsource?" but, rather, "How much should we outsource?" However, IT outsourcing is not a panacea for all IT problems; in some situations, it may create as many problems as it is intended to resolve. Given the important implications of IT outsourcing, CPAs should carefully weigh the risks and benefits of this management practice when advising clients and working with IT vendors. [GRAPHS OMITTED] RELATED ARTICLE: The total U.S. market for outsourcing services will increase to over $300 billion in revenues by 2001 from the 1996 level of $100 billion--a 218% increase. IT outsourcing is projected to record revenues of $184 billion by the year 2001. RELATED ARTICLE: EXECUTIVE SUMMARY * CPAs IN PUBLIC PRACTICE AND INDUSTRY--heavy users of information technology (IT) themselves--are increasingly involved in the design, control and operation of their clients' and companies' information systems (IS). Therefore, they must advise clients or companies on using outside vendors to manage and support IT. * IS AND IT OUTSOURCING vendors may be individual IT professionals, consulting firms, employee leasing companies, full-service providers and CPA firms. * IT OUTSOURCING provides businesses with the ability to focus on core competencies, access state-of-the-art technology and increase flexibility and cost savings. * CRITICS OF OUTSOURCING IT ARGUE that it creates too much loss of control, less flexibility, questionable savings and the risk of being held hostage to one vendor or subcontractor. * IT OUTSOURCING IS NOT A PANACEA for all IT problems: in some cases, it may create as many problems as it is intended to resolve. CPAs should weigh carefully the numerous risks and benefits when advising clients or considering outsourcing for their companies. RELATED ARTICLE: What Companies Say The dimensions and the related perceived benefits of outsourcing have grown dramatically. A survey of over 1,200 companies by the Outsourcing Institute--a professional association that provides information and products on outsourcing (see the contact list sidebar, page 31)--reveals why managers like both long-term and short-term outsourcing contracts. The top-five shortterm pros include 1. Lower operating costs operating costs npl → gastos mpl operacionales . Access to the outside provider's lower cost structure is one of the most compelling short-term benefits of outsourcing. In a recent Outsourcing Institute survey, companies reported that on average they saw a 9% reduction in costs through outsourcing. 2. More capital funds. Outsourcing reduces the need to invest capital in noncore business functions, thereby making capital funds more available for core areas. Outsourcing also can improve corporate financial measurements by eliminating the need to show return on equity from capital investments in noncore areas. 3. A cash infusion. Outsourcing can involve the transfer of assets The conveyance of something of value from one person, place, or situation to another. The law recognizes that persons are generally entitled to transfer their assets to whomever they wish and for whatever reason. The most common means of transfer are wills, trusts, and gifts. from the client to the provider. Equipment, facilities, vehicles and licenses used in current operations all have a value and are, in effect sold to the provider as of the transaction, resulting in a cash payment to the client. 4. Access to new resources. Companies may outsource because they do not have access to the required resources within. For example, if an organization would like to expand its operations, especially into a new geographic area, outsourcing is a viable and important alternative to building the needed capability from the ground up. 5. Better overall IT management. Outsourcing is certainly one option for managing an out-of-control IT function. Outsourcing does not, however, mean abdication abdication, in a political sense, renunciation of high public office, usually by a monarch. Some abdications have been purely voluntary and resulted in no loss of prestige. of management responsibility, nor does it work well as a kneejerk reaction kneejerk reaction n (fig) → instinktive Reaktion f by companies in trouble. The top-five long-term benefits are 1. Improved business focus. Outsourcing lets the company target broader business issues while leaving operational details to an outside expert. For many companies, the single most compelling reason for outsourcing is to relieve management of the "how" issues that siphon off Verb 1. siphon off - convey, draw off, or empty by or as if by a siphon siphon, syphon draw, take out - take liquid out of a container or well; "She drew water from the barrel" huge amounts of management's resources and attention. 2. Access to world-class capabilities. By the very nature of their specialization, outsourcing providers bring extensive worldwide, worldclass resources to meeting the needs of their customers. 3. Accelerated reengineering benefits. Outsourcing is often a byproduct by·prod·uct or by-prod·uct n. 1. Something produced in the making of something else. 2. A secondary result; a side effect. Noun 1. of another powerful management tool--business process reengineering. It allows an organization to realize immediately the anticipated benefits of reengineering by having an outside organization--one that is already reengineered to world-class I standards--take over the process. 4. Shared risks. There are tremendous risks associated with the investments an organization makes. When companies outsource, they become more flexible, more dynamic and better able to adapt to changing opportunities. 5. Free resources for other purposes. Every organization has limits on the resources available to it. Outsourcing permits an organization to redirect its resources from noncore activities to activities that have a greater return in serving the customer. RELATED ARTICLE: Best Reading Books * Beyond the Information Systems Outsourcing Bandwagon. Mary Lacity and Rudy Hirscheim. John Wiley John Wiley may refer to:
New York City City (pop., 2000: 8,008,278), southeastern New York, at the mouth of the Hudson River. The largest city in the U.S. , 1995. * Information Systems Outsourcing Decision Making: A Managerial Approach. L. A. de Looff. Idea Group Publishing, Hershey, Pennsylvania, 1997. * Information Technology Outsourcing Information Technology Outsoucing or ITO is a company's outsourcing of computer or Internet related work, such as programming, to other companies. It is used in refence to Business Process Outsourcing or BPO, which is the outsourcing of the work that does not require so much Transactions, Process, Strategies and Contracts. John K. Halvey and Barbara Murphy Melby. John Wiley & Sons, New York City, 1996. * Leading Trends in Information Services See Information Systems. . Deloitte & Touche LLP LLP - Lower Layer Protocol , New York City, 1996. * Outsourcing for Impact--Partnering for Excellence. Andersen Consulting, Chicago, 1996. Articles * "How to Manage an IT Outsourcing Alliance." F. McFarlan and R. Nolan, Sloan Management Review. Winter 1995. * "Information Systems Outsourcing." H. Rao, K. Nam and A. Chaudhury, Communications of the ACM (publication) Communications of the ACM - (CACM) A monthly publication by the Association for Computing Machinery sent to all members. CACM is an influential publication that keeps computer science professionals up to date on developments. , July 1996. RELATED ARTICLE: Due-Diligence Checklist Useful questions to help CPAs determine if a vendor has the right resources and experience their companies or clients need. * What is the vendor's reputation? Are there any conflicts or problems? Will the vendor's culture fit with the company's or client's? * What is the vendor's history? How long has it been in business? Have there been any unusual peaks or valleys? Has the vendor been in any significant/relevant disputes or litigations? * Is the vendor financially secure? What is the vendor's market share? Are there any pending or threatened claims that could affect the vendor's financial standing? Has the vendor acquired or divested entities recently? Ask for a copy of the most recent financial statement or annual report. * How is the vendor organized? BY industry? By value of contract? Is there one international outsourcing entity or is there a web of local entities that work together? * How does the vendor handle resource distribution? Where are the vendor's data centers? Where are the vendor's employees located? Does the vendor have resources in the company's or client's city? What is the extent of these resources? * Does the vendor have experience with your current or future technology environment? Does the vendor have the capabilities to provide other services, such as reengineering? Ask for examples and references. * Does the vendor have experience dealing with organizations in your client's or company's industry? Ask for examples and references. * What is the vendor's experience transitioning employees? How many transitions has the vendor done? In what states/countries? Has the vendor ever been sued in connection with a transition? * What is the vendor's experience with implementing new systems? * Does the vendor typically partner with another entity to provide certain services? If so, who? What is the relationship with the partner? * Ask for references and contact names. RELATED ARTICLE: CONSULTING Outsourcing Contacts (U.S. and International) Andersen Consulting 33 West Monroe West Monroe, city (1990 pop. 14,096), Ouachita parish, N La., on the Ouachita River, opposite Monroe, in a forest and lake area; inc. 1851. Its chief industries are lumber and paper milling. Street Chicago, Illinois 60603 312-372-7100 www.ac.com ALLTEL Enterprise Network Services 4455 LBJ Freeway Suite 1100 Dallas, Texas “Dallas” redirects here. For other uses, see Dallas (disambiguation). The City of Dallas (pronounced [ˈdæl.əs] or [ˈdæl. 75244 972-866-1400 www.alltel.com AT&T 25800 Science Park Drive Cleveland, Ohio "Cleveland" redirects here. For the Cleveland metropolitan area, see . For other uses, see Cleveland (disambiguation). Cleveland is a city in the U.S. state of Ohio and the county seat of Cuyahoga County, the most populous county in the state. 44122 216-292-2668 www.att.com Cap Gemini 130 Shaftesbury Avenue
Shaftesbury Avenue is a major street in London, England, named after Anthony Ashley Cooper, 7th Earl of Shaftesbury, that runs in a north-easterly direction from Piccadilly Circus to New Oxford London W1V 8HH England 171-434-2171 www.capgemini.co.uk Coopers & Lybrand Client Service Office State Street Centre 80 State Street Albany, New York For other uses, see Albany. Albany is the capital of the State of New York and the county seat of Albany County. Albany lies 136 miles (219 km) north of New York City, and slightly to the south of the juncture of the Mohawk and Hudson Rivers. 12207-2591 www.colybrand.com (CSC) Computer Sciences Corp. 2100 East Grand Avenue El Segundo, California
El Segundo is a city in Los Angeles County, California on the Santa Monica Bay, incorporated on January 18, 1917. The population was 16,033 at the 2000 census. 90245 310-640-0285 www.csc.com Daimler-Benz InterServices (debis) Systemhaus Fasanenweg 9 D-70771 Leinfelden-Echterdingen Germany 49-711-972-2664 www.debis.de Deloitte & Touche Consulting Group 600 Renaissance Center The Renaissance Center, nicknamed the RenCen, is a group of seven interconnected skyscrapers in Detroit, Michigan, and the tallest building in Michigan since 1977. Located on the Detroit International Riverfront, the entire Renaissance Center complex is owned by General Suite 900 Detroit, Michigan “Detroit” redirects here. For other uses, see Detroit (disambiguation). Detroit (IPA: [dɪˈtʰɹɔɪt]) (French: Détroit, meaning strait 48243-1704 313-396-1704 www.us.deloitte.com Digital 111 Powdermill Road Maynard, Maine 01754 978-493-5111 www.digital.com EDS 5400 Legacy Drive Plano, Texas Plano (IPA: /ˈpleɪnoʊ/) is a wealthy suburb of Dallas, Texas, located to the north, mainly within Collin County, but also extending into Denton County. According to the 2000 U.S. 75024 972-604-6000 www.eds.com Ernst & Young Business Transformation Synergy Group Synergy Group is a Latin American conglomerate owned by Bolivian-born Germán Efromovich, an entrepreneur holding dual citizenship of Colombia and Brazil. The group operates several airlines in South America and one in Africa, and is active in the exploration of oil and Denny Seese 515 South Flower Street Los Angeles Los Angeles (lôs ăn`jələs, lŏs, ăn`jəlēz'), city (1990 pop. 3,485,398), seat of Los Angeles co., S Calif.; inc. 1850. , California 90071 213-977-4355 www.ey.com/btoutsource/ Fiserv 255 Fiserv Drive Brookfield, Wisconsin 53045 414-879-5000 www.fiserv.com GSI GSI - Gensym Standard Interface International Consulting Group 55 University Avenue Suite 1601 Toronto, Ontario, Canada MfJ 2H7 416-777-2525 www.gsigroup.com IBM (International Business Machines Corporation, Armonk, NY, www.ibm.com) The world's largest computer company. IBM's product lines include the S/390 mainframes (zSeries), AS/400 midrange business systems (iSeries), RS/6000 workstations and servers (pSeries), Intel-based servers (xSeries) Old Orchard Road Armonk, New York Armonk is a census-designated place (CDP) located in the town of North Castle in Westchester County, New York. As of the 2000 census, the CDP population was 3,461. Armonk is home to the headquarters of IBM. 10504 800-426-3333 www.ibm.com KPMG KPMG Klynveld Peat Marwick Goerdeler (accounting firm) KPMG Kaiser Permanente Medical Group KPMG Keiner Prüft Mehr Genau (German) KPMG Kommen Prüfen Meckern Gehen Peat Marwick Outsourcing Solutions Philip A. Garland National Partner in Charge 2001 M Street, N.W. Washington, D.C. 20036 202-739-8680 www.us.kpmg.com/consulting/ solutions/outsourcing/ Outsourcing Institute 45 Rockefeller Plaza New York New York, state, United States New York, Middle Atlantic state of the United States. It is bordered by Vermont, Massachusetts, Connecticut, and the Atlantic Ocean (E), New Jersey and Pennsylvania (S), Lakes Erie and Ontario and the Canadian province of , New York 10011 212-348-5507 www.outsourcing.com MCI (1) (Media Control Interface) A high-level programming interface from Microsoft and IBM for controlling multimedia devices. It provides commands and functions to open, play and close the device. (2) (Microwave Communications Inc. Systemshouse 200 Park Avenue 6th Floor New York, New York 10166 800-234-4586 www.systemshouse.mci.com Philips Electronics 10960 Wilshire Boulevard Los Angeles, California 90024 800-883-3767 www.softsearch.com Price Waterhouse Thomas O. Beyer 6500 Rock Spring Drive Bethesda, Maryland 20817 301-897-5900 www.pw.com/bpo/ SIMS Software P.O. Box 607 Solana Beach, California Solana Beach is a city in San Diego County, California, United States. The population was 12,979 at the 2000 census. Geography Solana Beach is located at (32.995393, -117.260380)GR1. 92075 619-481-9292 www.simssoftware.com Unisys P.O. Box 500 Blue Bell, Pennsylvania Blue Bell is a census-designated place (CDP) in Whitpain Township in Montgomery County, Pennsylvania, in the United States. As of the 2000 census, its population was 6,395. 19424 800-874-8647 www.unisys.com YVONNE LEDERER ANTONUCCI, PhD, is an assistant professor of management at Widener University, Chester, Pennsylvania. FRANK C. LORDI, CPA, is an associate professor of accounting and chairman of the Accounting and Taxation Department of Widener University. JAMES J. TUCKER III, CPA, PhD, is an associate professor of accounting at the university. |
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