Page 71 - DCAP307_PLANNING_AND_MANAGING_IT_INFRASTRUCTURE

Unit 4: Business Process and IT Outsourcing

 To Cut or Stabilise Costs: The top reason to outsource is to cut or stabilise costs. Outsourcing Notes
service providers typically have a lower cost structure due to greater economy of scale,
specialisation, or expertise, which means they can perform the work at a much lower cost
than their clients. In addition, the fundamental costs of doing business in a developing
country—employee health care, retirement, and unemployment; taxes; and environmental
and regulatory compliance—are much lower than those in a developed country. Such cost
advantages tip the scales in favour of outsourcing and offshore outsourcing. Thus,
organisations that do not outsource probably have greater recruiting, training, research,
development, marketing, and deployment expenses. These costs must be passed along in
the form of higher prices to the customer, placing the firms at a competitive cost
disadvantage.
One firm that exploits outsourcing to its advantage is Pizza Inn, headquartered near
Dallas, Texas. Pizza Inn operates more than 360 restaurants domestically and
internationally, and had recent annual sales of about $150 million. The firm outsourced its
warehouse management and delivery services and realised a significant reduction in its
operating costs. As a result, Pizza Inn was able to reduce the prices of products distributed
to its franchisees, thus improving their profitability and, in turn, boosting the firm’s
operating income. In the fiscal quarter following completion of the outsourcing, general
and administrative expenses were slashed 30 percent ($391,000) due primarily to lower
payroll costs, plus a reduction in property taxes and insurance expenses.
 To Improve Focus: Another reason for outsourcing is to enable an organisation to focus on
its most important priorities. It is highly ineffective to divert the time and energy of key
company resources to do routine work that does not require their unique skills and
intimate knowledge of the firm, its products, its services, and its customers. Outsourcing
“frees up” a large amount of resources and management effort that can be redirected to
other more strategic issues within the company.
Many of the services required to operate an insurance firm, such as billing, human resources,
and transaction processing, are important but not essential to future growth. So, insurance firms
increasingly are turning to outsourcing to enable them to reduce costs and grow, as they can
now focus on their core business.

Example: AIG Entrepreneur specialises in property and casualty insurance for small and
medium-sized enterprises. It signed a 10-year, $100 million agreement with the outsourcing
firm Accenture to provide IT hardware and software plus insurance support services. The goal is
to simplify, automate, and optimise AIG business processes to increase profitability, improve
operational performance, and enhance services. Annuity, life insurance, pension, property, and
casualty services will be provided through Accenture’s multilingual service centre in Bucharest,
Hungary. Underwriting, policy, and claims services will be supported by Accenture computer
hardware and software.
 To Upgrade Capabilities and Services: Often, an outsourcing service provider can perform
a business process better than its clients ever could. The outsourcing provider might be
highly efficient, with world-class capabilities and access to new technology, methods, and
expertise that would not be cost effective for its clients to acquire and maintain. Thus,
outsourcing a function can provide a considerable upgrade in capabilities and service.

Example: Mumbai International Airport Limited contracted with Tata Consultancy
Services to implement and manage the IT infrastructure at Chhatrapati Shivaji International
Airport (CSIA). The primary goal was not savings, but to introduce the best technology solutions
to build the country’s busiest airport into a model, world-class experience that rivals any airport
in the world.

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