Case Study Iv Analytic Report - Outsourcing

Case Study IV-3 - IT Infrastructure Outsourcing at Schaeffer (A): The Outsourcing Decision

Date June 23, 2013

Offshore outsourcing, the sending of jobs to lower wage countries, has become a very popular practice amongst U.S. companies seeking ways to cut back on their operating costs. The idea of outsourcing has made for a highly emotional situation because of two dramatically different effects: it leads to layoffs and dislocations for workers. Well-educated workers in other countries are willing to work for a fraction of the wages paid to Americans, resulting in massive savings for American companies. The U.S. imports goods that would cost higher to produce domestically, and it creates and sells to other countries goods that would cost more for them to create on their own. The immediate problem resulting from outsourcing jobs is workers in the U.S. can become unemployed. The problem that causes a debate over outsourcing is even though it promises a better life for all involved; it causes hardships on the American workers when they are laid off. Economists argue that outsourcing is a bad choice because of the workers that are being laid off and displaced.
In analyzing the Case Study IV-3 - IT Infrastructure Outsourcing at Schaeffer (A): The Outsourcing Decision, both sides of the outsourcing debate are well represented. Once the Schaeffer board assigned the highly ambitious growth goals to Reitzel, the Vice President of Human Resources made the recommendation that they outsource some of its IT processes and resources. During the initial evaluation of the possibility of outsourcing, Schaeffer determined what the benefits would be of having a vendor manage their IT. They determined that they would be able to focus on core activities during growth periods, which would help them to meet the goals set forth by the board. Outsourcing IT will allow them to remain focused on those business activities that are important without sacrificing quality or service to their customers.
Next, they would be able to achieve reduced overhead costs and better operational control. An outsourcing company could bring better management skills to a company than what would otherwise be unavailable to them. Another added benefit would be staffing flexibility. Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when needed and release them when they are finished. Outsourcing these functions can provide the additional resources for a fixed period of time at a consistent cost.
Continuity and risk management would also be greatly improved because when you have periods of high employee turnover which add uncertainty and inconsistency to the operations, outsourcing would provide a level of continuity while reducing the risk that a substandard level of operation would impact the company and its customers.
They also determined that outsourcing could help diversify and develop the staff by bringing in people with skills that are needed within the company and by providing training opportunities that had not previously been available for current staff.
Once the idea of outsourcing was presented, a task force was created to analyze their current processes and map them in as great a detail as possible. This would help them to determine exactly what their outsourcing needs were going to be. They brought on an outside consultant who provided them with advice on how to proceed as well as detailed templates to assist them in gathering the necessary information to help them create the Request for Proposal (RFP). They determined that they wanted to outsource the data center, distributed computing (all desktops), voice (telephones), data networks, and the helpdesk. It was also determined that they did not want to outsource their development resources. The task force spent a year gathering data and filling out the templates so that they had a complete picture of their current services to better understand their outsourcing needs. They then spent several months preparing a 200-page RFP that could be provided to possible outsourcing vendors. After receiving two strong proposal responses, it was determined that ABC Corporation would be the best fit for Schaeffer’s outsourcing needs. There was a lot of negotiation to be able to bring the price within the needs of the company, but after several weeks of back and forth an agreement was reached. The next step was to get Schaeffer’s top management’s buy-in to the task force’s recommended solution.
However, once the task force report was circulated internally, there were a lot of perceived disadvantages raised by its managers. One of the first concerns that was brought up with the consistency and priority of service that Schaeffer would receive. Most outsourced IT contracts are for a relatively long time-period. This is because of the high cost of transferring assets and employees as well as maintaining technological investment. The long time-period of the contract can cause three particular problems. One, difficulties in getting out of a contract if the supplier turns out to be unsuitable; two, problems in foreseeing what the business will need over the life of the contract hence creating difficulties in negotiating new services; and three, almost insurmountable problems in re-creating an internal IT department after the contract period is over or the relationship is terminated.
Another major concern that was discussed was the impact to employee morale with the inevitable reduction in Schaeffer IT personnel, where some would be absorbed by the vendor but most would be given a severance package and laid off. And the employees who remain may distrust management after outsourcing because they will become fearful that their position could be targeted next. Administration should treat morale problems seriously and will need to work with staff to rebuild their trust and loyalty. The company is a major employer in the area so the decision to outsource could also have a ripple effect in the community by damaging their reputation.
The vice president for finance of the Colbert division brought up the concern that the major benefits of outsourcing would only be beneficial to the Reitzel division whereas the other two divisions would incur additional costs without additional benefits. This concern led to a third alternative being suggested; outsource the IT infrastructure just for the Reitzel division.
Based on the information included in the case study for all three alternatives, outsourcing should be the chosen solution. It is the most flexible solution for their growth goals. Outsourcing would allow for them to expand in areas more quickly without all of the time and costs associated with startups. The vendor already has the infrastructure to support the areas that they most want to expand into, allowing for quicker turnaround times in meeting customer needs and wants, especially for new business growth.
If they kept the IT in-house, they would need to make a substantial investment of both time and money in expanding their services and support that would be needed for new business and it would need to be done very quickly to be able to meet the goals set by the Board of Directors.
If they tried to adopt the third alternative, of only outsourcing the IT for the Reitzel division, it would negate all of the time and cost savings of the consolidation of the divisional IT groups into a shared services solution. It would then cause duplication of work and processes between the in-house IT team and the outsourced group, which would be impactful to the overall costs for all divisions.
Each solution had its own pro’s and con’s, and needed to be evaluated against the best interest in achieving Schaeffer’s overall goals in the marketplace. Like it or not, change is an integral part of today's business climate. In the workplace, changes can occur as a result of new thinking, advances in technology, innovation and progress, knowledge and communication, as well as mergers, takeovers, layoffs, and downsizing.
A lot of the concerns and disadvantages were voiced after the task force’s recommendation had been developed, presented, and circulated within the company. Communication is key! This could have been avoided by having better communication throughout the life cycle of the whole process, from the information gathering, to the development of the RFP, and the presenting of the final recommendations. A lot of people probably felt blindsided by the proposed solution to outsource the IT infrastructure because they have been conditioned to fear change. We must not lose sight of the fact that change is normal, and most of us will experience unpredictable changes throughout our professional lives.
However, there is no doubt that everyone views change from a different perspective than everyone else. Many employees believe that management doesn't understand their side of the story, and managers often feel it is the employees who don't understand why the change is necessary. This is why communication is so vital during any change circumstance. It's been said that lack of communication is the number one reason why relationships deteriorate between employers and employees. Change will require open communication on both sides.
None of us want to acknowledge that we doubt our ability to integrate new ideas, use new technology, or adapt to new organizations. We don't even want to think about what's ahead when outsourcing a whole department: new management structure, new processes and procedures, new terminology, new titles and job descriptions, not to mention the loss of longtime co-workers, friends, and family.
The more we fight and resist the change, the more painful and frightening the changes will be. Resisting doesn't keep a new idea from taking hold; it simply makes the process longer and more painful. Change will happen no matter what. We will handle it better when we learn to move with the change – not against it.
It's natural to fear the unknown and lack of control when it comes to embracing a new concept such as outsourcing that goes completely against the traditional workplace structure. There will be a lot of struggle during the transition period. We know we will have to work a lot harder. Are we willing to let go of the present to embrace the future? We may not know what the future will bring, but we are responsible for what we bring to the future.