Outsourcing 101 - A Primer Part Two: Outsourcing Categories

  • Written By: A.B. Maynard
  • Published: January 17 2004

Outsourcing Categories

Outsourcing is a very diverse market, and there are many different outsourcing options and outsourcing service providers to choose from. This part examines the four broad outsourcing categories:

  • Application software

  • I.T. infrastructure

  • Business process outsourcing (BPO), and

  • Manufacturing

This is Part Two of a three-part note.

Part One discussed the history of outsourcing, described outsourcing pros and cons, and introduced offshoring concepts.

This part defines and describes common types of outsourcing.

Part Three will recap outsourcing approaches and categories, describe recommendations for firms looking to outsource and describe recommendations for outsourcing providers.

Application Software Outsourcing

During the past 30 years, software has automated and simplified many work-processes, which has resulted in increased worker productivity and reduced costs for products and services. Nevertheless, the development and support of software is still a time-consuming and costly activity. As such, application software outsourcing evolved and expanded to reduce costs, improve service and help manage this growing area of work.

Additionally, Y2K created a tremendous demand for software resources. As there were not enough software resources in the U.S. and Western Europe to meet demands in those locations, the demand spread to other countries with educated resources. Consequently, the growth of outsourcing and the Y2K-driven demand for software resources fueled a tremendous growth in application software skills in many countries around the world. As a result, many countries invested heavily in their education systems, and are now producing large numbers of highly educated engineers and computer scientists who are quite capable of supporting and producing excellent software code. The list of countries with firms that provide application software services today include Belarus, Canada, China, India, Ireland, Israel, Malaysia, Mexico, The Philippines, Russia, South Africa, Ukraine, United States, and Vietnam. By far, the largest player today in application software offshore outsourcing is India, which is estimated to have greater than fifty percent of the market share in this outsourcing market, and more than 400 firms that provide outsourcing services.

These outsourcing firms provide many types of services, including

  • Maintenance and support of existing legacy software systems

  • Enhancements to existing software applications

  • Integration between multiple application software solutions

  • Development of new software applications

  • Migrating older applications to new technology, and

  • Quality assurance testing

Application software outsourcing firms provide these services to all types of industries such as financial services, insurance services, healthcare providers, manufacturing companies, as well as to independent software vendors who use outsourcing as a way to develop the software products that they sell. As with many trends, especially those involving technology, the Fortune 500 is leading the way with application software outsourcing.

Companies that wish to embark on application software outsourcing efforts have multiple approaches to consider. In some cases, a company will outsource its entire software organization. In other cases, a company will choose to outsource a portion of its application software development or support needs. A common approach is to outsource maintenance and support of older legacy systems, while using in-house staff to develop news systems or migrate to new technologies. Another approach is to use the outsourcer as a resource to supplement the in-house software engineering team. Each of these approaches has their individual strengths and weaknesses, and should be selected based on the needs and requirements of each company.

Additionally, there are multiple approaches to performing and delivering application software services. These services may or may not be performed at the client's location. Typically, there are some resources working at the client site and some working at a remote, off-site location. Recently, the mix has trended towards a small percentage (five to twenty percent) of resources working at the client's location (onshore), and a larger percentage of resources working at a remote location, usually in an offshore country. Some providers have strong opinions regarding the recommended mix of onshore to offshore resources. In most cases, customers should decide what mix is best for them given the skills, experiences and maturity of their organizations. Regarding maturity, many application software outsourcing firms are working towards or are already certified at level three, four or five of the Capability Maturity Model (CMM). The CMM was developed by The Software Engineering Institute (SEI) to be used as a benchmarking process. The CMM consists of a set of criteria to evaluate an organization's software development and maintenance efforts and considers, among other factors, the level to which processes are standardized and followed across an organization. The progression from an immature, unrepeatable software process (SEI-CMM Level 1) to a mature, well managed software process (SEI-CMM Level 5) is described in terms of maturity levels in the model.

Certification implies a high-level of process consistency. However, this process consistency comes at a price, both in terms of process rigor and probably in terms of cost (and therefore price to the customer). Certain small development projects or maintenance-only efforts may not require the same level of process rigor as a large-scale mission critical development project. On the other hand, many customers are not CMM certified, or do not operate at a level of process consistency that would achieve level three, four or five on the CMM scale. As such, the process rigor provided by the outsourcing provider may or may not be the best approach for a given customer at a particular time. Again, the customer should decide the level of importance to place on selecting an outsourcing firm that is CMM certified.

I.T. Infrastructure

I.T. infrastructure outsourcing involves the operations of the I.T. data center and the related network to or from all of the organization's various sites. This type of outsourcing was first pioneered by EDS, CSC, IBM and others. Typically, an I.T. infrastructure outsourcer is responsible for some or all of the following hardware and software components:

  • Data communications
  • Telecommunications
  • Internal network
  • Internet connections
  • Firewalls
  • VPNs
  • Mainframe computers
  • Servers
  • Desktop PCs
  • Laptops
  • Handheld devices
  • Printers
  • Phones
  • Operating systems and desktop software
  • E-mail

A company will typically look to outsource its I.T. infrastructure in order to obtain a more predictable cost structure, while receiving a well-supported and highly reliable system, with very high system uptime, and rapid response to problems. The following activities are typically included in the I.T. infrastructure outsourcing arena:

  • Physical facilities setup and maintenance
  • Site security and environment control
  • System security
  • Data storage, backup and recovery management
  • Disaster recovery
  • Hardware/software procurement
  • Help desk/end-user support
  • Desktop break-fix

Unlike application software, where a large percentage of the outsourced work will tend to be performed at a remote location (i.e. offshore), a majority of the I.T. infrastructure outsourced work will be performed at the client's locations (i.e. onshore or on-site). This is due to the nature of the work. Although new software solutions now make it easier to remotely monitor a client's I.T. infrastructure environment, much of the work must be physically performed on-site.

Business Process Outsourcing

Business process outsourcing (BPO) is the broadest category of outsourcing. It seems like almost every day some firm is introducing a new way to outsource a work process. There are some common activities that fall under the heading of BPO. These more typically outsourced activities include:

  • Transaction processingo Tax processing
    • Claims processing
    • Check processing
    • Card processing

  • Finance and accounting billing
    • Receivables management (AR)
    • Payment services (AP)
    • Creditors management
    • Financial accounting

  • Customer relationship
    • Call centers (non-IT)
      • Sales
      • Telemarketing
      • Customer care
      • Customer support
    • Collections

  • Human resources (HR) payroll management
    • 401-k processing o Benefits management
    • Payroll processing
    • Training o Recruiting
    • Records management

  • Supply chain management and logistics
    • Physical material control activities
      • Inbound transportation
      • Customs brokerage
      • Warehousing
      • Outbound transportation
    • IT-based supply chain services
      • Order management
      • Warehouse management/inventory management
      • Event management
      • Freight forwarding
      • Transportation management

Other areas that are emerging in the BPO space include:

  • Engineering/design
  • Drafting services
  • Design digitization (paper to CAD)
  • Design conversion (CAD to CAD)
  • Market research analysis,
  • Marketing analysis
  • Medical imaging and reading of x-rays and cat-Scans
  • Medical transcription
  • Language translation
  • Procurement services

Manufacturing Outsourcing

One of the most mature outsourced processes is manufacturing. Many firms in the U.S., and around the world outsource the manufacture of both intermediate goods and finished-goods. In fact, a majority of U.S. manufacturers are manufacturing some portion of their final product in countries such as Mexico, China, Malaysia or Thailand. Some of these companies have elected to go direct and build their own manufacturing operations in these nearshore or offshore countries, while others use contract manufacturers (i.e. outsourcing providers) to build their goods for them.

Successful outsourcing relationships in manufacturing have paved the way and validated the business model for rapidly growing software, technology and business process outsourcing markets.

This concludes Part Two of a three-part note.

Part One discussed the history of outsourcing, described outsourcing pros and cons, and introduced offshoring concepts.

Part Three will recap outsourcing approaches and categories, and offer recommendations for firms looking to outsource and recommendations for outsourcing providers.

About the Author

A.B. Maynard has over twenty years of technology, industry, management consulting and application software experience. He is an experienced executive with leadership experience in the software industry, Big 4 Consulting and Fortune 1000 industrial companies where he gained extensive experience in outsourcing, I.T. Services, and enterprise software solutions. In addition to the previous responsibilities and directing client outsourcing sites, he has managed offshore outsourcing provider selection, implementation and program management projects.

A.B. serves as the Outsourcing Specialist for Technology Evaluation Centers, and is President of Agilocity Consulting, a firm dedicated to helping companies improve their agility and velocity through technology, outsourcing and offshoring. A.B. can be reached at ab.maynard@agilocityconsulting.com

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