A long-term strategic partnership with a specialized organization that agrees to perform an activity or a bunch of several activities on behalf of the businesses?
Core vs Non-Core Activities:
Before diving deep into Outsourcing and Odds in favor of it, it’s important to understand important concepts like Core Activities and its counterpart, non-Core activities.
Core: Strategic business processes that improve customer value, drives profit and helps expands business horizon.
Non-Core: Day-to-day business tasks with little or no value to business. Some of non-core can be categorized as value add to Core business processes.
Core and non-Core definition varies from business to business. Eg. A manufacturing company deciding to outsource its “Payroll Processing” to an external business categorizes "Payroll Processing" as non-core but performing organization (Outsourcer) categorizes it as its Core business process, aligned with definition above.
Drivers for Outsourcing:
Historically, key driver to outsourcing has been cost saving. Here, businesses identify non-core business processes and reach an agreement with an external organization that specializes in performing those non-core business processes.
Other equally driver for outsourcing is Improving Efficiency and Quality.
At business process level, those processes are outsourced that are low value, highly repetitive and those that require highly specialized skills.
Types of Outsourcing:
ITO - Information Technology Outsourcing
Businesses outsources its IT functions like application development, support, and data center and network operations.
BPO - Business Process Outsourcing
Outsourcing of specific business processes like Payroll, Customer Services, and Supply Chain etc
KPO - Knowledge Process Outsourcing
Outsourcing of relatively high level tasks that research processes, financial services, business and technical analysis services etc. Achievement of KPO objective is highly dependent on skills, knowledge and experience of people performing the tasks.
Dilemma: In-House vs Outsourcing of Application Development
When deciding whether to outsource application development or go for in-house development, companies should ask some key questions.
Impact to bottom-line: Will money be saved by outsourcing or in-house development. What will deliver added cost advantage?
Quality of Work: Will in-house development develop good quality applications?
Control of Work: If priority is to have control of the work, in-house development is the way forward. Question to ask is, will controlling the work add any value to the business?
Next, lets look at pros and cons of Outsourcing Vs In-House development of applications.
Outsourcing Application Development
• Outsourcing application development allows companies access a large pool of talent from specialized outsourcing provider. This helps in high quality & robust applications.
• Companies can seek expertise in business domain as well. Eg. a manufacturing company willing to improve its supply chain process may outsource application development to an IT Outsourcing firm specializing in Supply Chain processes. Backed by huge experience working with other manufacturers, this IT company can give key suggestions to the manufacturer to improve supply chain processes along with building applications based on these redesigned processes.
• For technology upgrade application development projects, outsourcing makes absolute sense. Outsourcing provider can suggest multiple ways to upgrade technology which includes upgrading on same technology, a newer technology or something reusable & portable.
• Testing is key aspect of any Application Development project. Because of economies of scale, an outsourcer can help in extremely robust testing of application. Availability of expensive automation tools that may not be cost effective in-house helps in robust regression testing.
• With its experience on application development project, outsourcer may have automated several aspects of application development stages. This reduces time-to-market for new or upgraded applications
• An IT Outsourcing companies puts a lot of emphasis on process discipline and incorporates industry standard frameworks into its application development lifecycle. These industry standards are robust and fail-proof for application development
• Application development is usually outsourced as project based outsourcing. If scope of the project is not clearly defined, it causes cost and time overruns.
• If business processes that an application supports is critical to the business, it causes exposure to such business processes to external vendor. This may cause huge loss to the company by way of leaks of secrets
In-House Application Development:
• Biggest benefit of in-house development is control. Companies have control on the scale of customization needed for an application. Every organization being unique, has unique processes as well that are dynamic in nature. To support this dynamic nature, application changes are needed at all time which is more cost effective if handled in-house.
• Another advantage is access to knowledge within the organization. Internal developers also become business domain experts over time and this combination greatly helps the organization. Such developers make less mistakes while writing code and thus anomalies like downtime are reduced.
• Other benefits include:
- No concerns on cultural boundaries
- No conflicts on who owns the code
• There is always limit to how many developers a company can hire. This leads them to having retrain same developers on newer technologies. This reduces depth in their technical knowledge thus not enough big picture to develop applications using robust technical architectures.
• Application upgrades is a tedious task. Handling this in-house can become cumbersome.
• Hiring of all kind of resources like a Project Manager, architect, designer etc takes a lot of effort. Attrition being a key factor for Software industry, keeping them with the company is very difficult.
In conclusion, in alignment with service based models, outsourcing application makes absolute sense for any type of business for benefits cited above. Also, by outsourcing application development companies can focus on their core work and bottom-line