Outsourcing it a Management Strategy

Outsourcing It

a management strategy that farms out non-core organizational activities to vendors who specialize in these activities in order to execute them more efficiently (Peled 2001)

Advantages

Cost Savings

Access to new skill sets

Access to cutting edge technology

Disadvantages

Loss of intellectual property

Poor Communication

High Costs

Limited Technologies

IT Outsourcing and acquisition

Acquisition of new skill sets

Business acquisitions

AT&T and IBM

CACI and American Management Systems

Systems Management Specialists (SMS) and the SMS business unit

IT Outsourcing has become a major phenomenon in the business world. Businesses have found that outsourcing reduces costs and allows for expansion. The purpose of this discussion is to investigate it outsourcing as it relates to acquisition. The discussion will include a review of the Advantages if it outsourcing such as; Cost Savings, Access to new skill sets and Access to cutting edge technology. In addition, the investigation will focus on the disadvantages of it outsourcing such as; Loss of intellectual property, Poor Communication, High Costs and Limited Technologies. The main focus of the discussion will be it Outsourcing and acquisition as it pertains to the Acquisition of new skill sets and business acquisitions. Management recommendation will also be provided. Let us begin this discussion with a definition of it Outsourcing.

Outsourcing it

The definition of outsourcing is rather uniform regardless of the industry. The journal, Public Personnel Management asserts that "outsourcing is a management strategy that farms out non-core organizational activities to vendors who specialize in these activities in order to execute them more efficiently (Peled 2001)." Antonucci (1998) asserts that 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 firms (Antonucci, 1998)."

Peled (2001) also explains that it outsourcing involves the organization of information networks, the training and support of employees, the development of computer infrastructure and applications, and the management and operation of computer facilities (Peled 2001).

An article found in the Journal of Organizational Computing contends that the cost associated with in house it functions can be astronomical. The article explains that the cost associated with the it function enters the Information systems budget of the business (Alpar, and Saharia, 1995). The article asserts, "The IS budget will typically include the cost of hardware, software license, and facilities, as well as compensation to employees (Alpar, and Saharia, 1995)." The authors add that the cost associated with maintaining in house it functions is not realized until after the project is complete and in some cases, it is not realized at all because of conflicts between managers and it teams. The authors contend,

Evaluating work done by software development teams is ridden with uncertainties and presents problems of measurement. The value of a system is realized after the project is complete, and often the cost of maintaining the product during the operational stage of the life cycle is comparable to or exceeds development costs. Additionally, many software projects tend to see cost overruns and are often behind schedule (Alpar, and Saharia, 1995)."

According to the article found in the Journal of Accountancy, because businesses rely so heavily on information technology to conduct business, finding ways to reduce it cost is essential.

In their quest to reduce such costs businesses have begun to rely on outsourcing. The article reports that there are certain advantages and disadvantages to it Outsourcing.

Advantages

Those advantages include the access to modern technology. In addition, the most significant advantage of it outsourcing is Cost savings. The article explains that ferocious competition has led many corporations to reorganize and scale back staffs in an attempt to reduce costs (Antonucci, 1998). The Vendors that handle the it outsourcing are able to save money for several reasons (Antonucci, 1998). For instance, the vendors "have much tighter control of fringe benefits and run much leaner overhead structures (Antonucci, 1998)." Additionally the vendors are able to utilize low-cost labor pools more aggressively and, with the help of modern telecommunications, can move data centers to low-cost areas (Antonucci, 1998).

The vendors are also able to apply excellent standards to the company's present it staff (Antonucci, 1998). Outsourcing also as the following benefit, more efficient bulk purchasing and leasing agreements for software and hardware; vendors have more power over software licenses because they better negotiators and because contractual pressure forces vendors to meet deadlines (Antonucci, 1998).

The author also explains that businesses must be flexible enough to adapt to a business environment that changes constantly, which means their it functions have to react rapidly to shifting demands. One of the most essential demands came with the advent of the internet and e-business (Hormozi, Hostetler & Middleton, 2003). An article found in SAM Advanced Management Journal, asserts that "the growth of the Internet has created forces that are driving companies to outsource (Jones, 2000), including highly competitive global markets and the rise of e-business. These trends compel companies to reorganize and utilize more outsourcing to gain higher e-business capacity, make predictable cost forecasts and cost reductions, attain well-defined and consistent service levels, acquire needed skills and expertise, gain access to best practices, and focus on core competencies (Hormozi, Hostetler & Middleton, 2003)."

Vendors can be beneficial in dealing with such rapid change because they can utilize a wide range of skills, resources, and capacities while a businesses' internal it staff may have limited abilities (Antonucci, 1998). The article also reports that 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 (Antonucci, 1998).

Antonucci (1998), concludes that many businesses believe that internal it functions lack the flexibility needed to compete in today's business worlds (Antonucci, 1998). For this reason, corporations are increasingly dependent upon outsourcing (Antonucci, 1998). However, there is evidence to suggest that it outsourcing doesn't necessarily mean a reduction in costs or higher technology flexibility (Antonucci, 1998).

Disadvantages

Although it outsourcing can be beneficial when it is implemented correctly, there are also some disadvantages associated with outsourcing. According to an article found in Business Perspectives, it outsourcing can be problematic (Frolick, 1992). The article asserts that the failure of it outsourcing has occurred in many cases. The author asserts that there are several reasons why it outsourcing can be problematic. These problems include the following;

Loss of important employees and intellectual property- in many cases the it professionals that worked in house are forced out when a company decides to outsource to a vender. This results in the loss of employees that played an important role in maintaining the in house information systems and possess skill sets that are not easily acquired (Frolick, 1992).

Poor Communication- it outsourcing often results in miscommunication between the business and the vendor; which results in wasted time because the vendors may not be ready available so that the situation can be remedied (Frolick, 1992).

Costs- disadvantages associated with costs occur when unexpected changes take place or when vendors bill companies for the licensing of software. These unexpected and costly charges can be counterproductive if the organization is attempting to reduce costs (Frolick, 1992).

Limited Technologies- in some instances the firm is limited to using the technologies (software and hardware) that the outsourcing vendor prefers to use.

This may be a disadvantage if competitors are utilizing more up-to-date, cutting edge technology (Frolick, 1992).

Inability to take it back in-house- the author argues that this is the single largest risk that organizations take when they decide to outsource information technology (Frolick, 1992). The article explains that "An organization can try outsourcing for a limited period of time and revert to an in-house operation if it is only a small portion of the total IS function. Otherwise, it simply takes too long and costs too much to rebuild the systems in-house (Frolick, 1992)."

The previous paragraphs demonstrate why the need for it outsourcing exists. In addition, it illustrates that managers must carefully deliberate upon the strategy of the business and the business goals to determine if it outsourcing is needed. Failure to do so can result in costly payouts to outsource vendors. Now that we have a succinct definition of it outsourcing let us discuss it Outsourcing as it relates to acquisition.

Acquisition and it Outsourcing

Acquisition of New Skill Sets

As was mentioned in previous paragraphs, it outsourcing allows for the acquisition of skill sets. The Public Manager explains that acquisition has become particularly significant in the face of an aging workforce. The article asserts, "smaller, aging workforce is dealing with the reality of keeping current skills sharp, and acquiring new skills, in an ever more technology-based field. Contracting officers today must have the skills or competencies required to become the business leaders of the future (Steele 2000)."

An article found in the ABA Banking Journal asserts that Chief Information Officers are interested in it outsourcing because companies are able to acquire it skill sets that may not be present at the internal level. In this article Siemers (1995), explains that One of the reasons CIOs believe that outsourcing is extremely important is the ability to supplement the existing it skill set, still characterized by the legacy environment, with the latest expertise in enabling technologies that provides direct benefits to the business...Staying current with the changes in technology, even as a person's sole responsibility in an organization, is extremely difficult. Therefore, the emphasis on strategic planning and partnering with a vendor well versed in high-technology is more crucial than ever (Siemers, 1995),."

As you can see, the acquisition of new skill sets is essential to the development and maintenance of a proficient it System. Businesses have come to the realization that acquiring such skill sets is difficult without the utilization of an outside vendor. The acquisition of such skill sets allows a company to operate efficiently and compete in the marketplace.

Business Acquisitions

AT&T and IBM

Another type of acquisition that has taken place because of it outsourcing is business acquisitions; Over the years, there have been several high profile acquisitions that have taken place. One of the largest acquisitions involving it outsourcing took place in 1998 between at&T and IBM. In this particular acquisition at&T acquired IBM's Global Network business for $5 billion and the companies entered into outsourcing contracts with one another (Acquisition: AT&T to Acquire IBM's Global Network Business for $5 Billion., 1998).

The article explains that IBM outsourced a large portion of its global networking needs to at&T. In turn at&T outsourced certain data center management operations and applications processing to IBM (Acquisition: AT&T to Acquire IBM's Global Network Business for $5 Billion., 1998).The article explains that "The IBM Global Network business at&T will acquire serves the networking needs of several hundred large global companies, tens of thousands of mid-sized businesses and more than 1 million individual Internet users in 59 countries. The acquisition boosts at&T's strategy to rapidly increase the company's revenue, especially at its fast- growing networking services unit, at&T Solutions. About 5,000 IBM employees will join at&T as part of the acquisition (Acquisition: AT&T to Acquire IBM's Global Network Business for $5 Billion., 1998)."

The article explains that the purpose behing the acquisition is to promote growth and expension for at&T (Acquisition: AT&T to Acquire IBM's Global Network Business for $5 Billion., 1998). The outsourcing of important and costly it services will allow at&T to devote time and resources to the development of new products and services. Likewise the acquisition will allow IBM to research new products. The article explains

The acquisition of IBM's global data network will accelerate our ability to deliver IP-based services to global customers. It will give us a sophisticated new platform for revenue growth." By providing customers with more attractive global services, Armstrong said the acquisition will enable at&T to compete more effectively with strong rivals for the provisioning of global managed data network services, including IP. "We are delighted that at&T will be the new home for our Global Network operation," said IBM Chairman and CEO Louis V. Gerstner, Jr. "With this agreement, the network will receive the management focus and resources necessary to maintain its standing as a world-class provider of connectivity to IBM and millions of customers (Acquisition: AT&T to Acquire IBM's Global Network Business for $5 Billion., 1998)."

This particular acquisition involved two of the largest and most well established corporations in the world. It is clear that the acquistion will be benefical to both companies and allow them to expand in the long run. Further research indicates that acquisitions also take place among corporations of all sizes.

CACI and American Management Systems

Another such acquisition took place in April of 2004 when CACI international acquired millions in contract for the Social Security Administration and the acquisition of the defense and intelligence unit of American Management Systems Inc. (Higgins, 2004). CACI has several subsidiaries, one which is CMS an information technology firm. This firm will now handle the technical support for the government agencies. The article reports "CACI paid $415 million in cash for the unit, which is expected to expand the company's presence in the defense, intelligence and homeland security government markets, said Chief Financial Officer Steve Waechter...The contract and recent acquisitions "are setting CACI up for continued double-digit growth that is in line with what they had forecasted (Higgins, 2004)."

The author goes on to explain that this acquisition has been wrought with caution because of the perceived slowdown in the amount of government technology spending (Higgins, 2004).

Nevertheless, with these acquisitions CACI is set to acquire over $1 billion in revenues by the fiscal close of 2004 (Higgins, 2004).

Additionally, forecasters conceded that the company would meet it target stock price of $50 per share (Higgins, 2004).

Systems Management Specialists (SMS) and the SMS business unit

In February of 2003 Business Wire reported that Systems Management Specialists (SMS), in colaboration with the Los Angeles-based private equity firm of Riordan, Lewis & Haden (RLH), acquired the SMS business unit from Marconi, plc. The article explains that Sytems Management Specialists is the preeminint supplier of classical it outsourcing for both medium and large firms (Systems Management Specialists Former Management Leads Acquisition of Classical it Outsourcing Firm, 2003).

SMS has existed as an outsourcing specialist for over 20 years. The organization has effectively aided companies in the round the clock operation of mission-critical information systems and offers firms a variety of computing resources and technology access on-demand (Systems Management Specialists Former Management Leads Acquisition of Classical it Outsourcing Firm, 2003) the article also asserts,

Customers who use SMS' outsourcing services achieve a variety of strategic business benefits including immediate cost savings, it expense predictability and enhanced levels of performance and availability. SMS offers an integrated call center providing 24-hour access to sophisticated monitoring, problem diagnosis and resolution capabilities (Systems Management Specialists Former Management Leads Acquisition of Classical it Outsourcing Firm, 2003)."

The article also explains that SMS has provided it outsourcing for firms such as Boeing Co., Beckman Coulter Inc., Countrywide Financial Corp., Fluor Corp., Scripps Health, Nestle USA, and Fidelity National Information Solutions. The report explains that the SMS business unit was purchased by Marconi, plc in June 2000. The private equity firm of RLH, which aided in the acquisition "has been successfully identifying and investing in growing middle-market companies based in California. RLH was attracted to this opportunity because of the strong growth trend in the outsourcing services sector and the proven track record of the SMS management team (Systems Management Specialists Former Management Leads Acquisition of Classical it Outsourcing Firm, 2003)."

The article contends that SMS is optomistic about the merger. Adding that the increase in the comlexity of information technology will increase the need for it outsourcing (Systems Management Specialists Former Management Leads Acquisition of Classical it Outsourcing Firm, 2003). Additionly, the company hopes that the expertise that it has already acquired will aid it in attracting new clients.

Reccomendations for managers

Surely this research has illustrated that in certain scenarios thatere is a dire need for it outsourcing. One of the most signifigant reasons why this outsourcing is needed is the rapid change in technological advances and an aging workforce. With many American workers reaching retirement age, acquiring new skill sets may not be feasible or cost effective. For this reason it outsourcing has become a viable alternative.

In addition, outsourcing can provide tremendous value to customers and cut costs dramatically. Outsourcing allows a company to downsize and add value simulatneously. In many cases it also allows for the utlization of more advanced technologies.

Though outsourcing can be a valuable tool, managers must take into consideration all of the scenarios that might arise. A managers first step should be to truly evaluate wether his/her firm need to outsource the it function. The manager should askquestions such as;

Will the cost savings justify such a program?

Are there signifigant hidden costs that may arise?

Is the company prepared to lay off valuable workers that have advanced skill sets; and will the goals of the company be met more rapidly if the company outsources it?