Outsourcing means more than being cost effective. Its ultimate goal is the maximization of organizational flexibility and efficiency.
In recent meetings with IT industry contacts, I was frequently asked one thing: “Since your company has adopted IT outsourcing for some time, do you really think it cuts costs?” IT outsourcing has without a doubt become a common concern.
Most of IT managers have doubts about whether outsourcing is cost-effective when making decisions. It seems to me they’re confused because they only take HR costs into account. As far as I know, the price given by one standard IT outsourcing service provider is generally around RMB1,000 (US$145.8)/person/day in the domestic market. Assume a conservative price of RMB800 (US$116.6)/person/day, the monthly cost for each person will be RMB17,600 (US$2,566) (RMB800 multiply 22 working days), much higher than RMB5,000 (US$729), the average monthly salary paid to a full-time engineer employed by the company. No wonder so many IT managers have doubts about this.
I think IT managers need to make a comprehensive analysis of HR costs. The following four cost elements tend to be easily neglected when they decide whether outsourcing is cost-effective.
First of all, people easily confuse concepts of salary and HR cost. In the current Chinese HR market, salary x 2 = HR cost is the most widely accepted formula. The HR cost also includes rent, water and electricity, amortization of in-house service expenses, employee insurance and other costs. After the cost is adjusted by this equation, it can be found that there is not a big gap between the prices given by outsourcing service providers and the HR cost resulting from direct recruitment by an enterprise.
Cost of the learning curve is the second element. Generally, a minimum of three months is needed before a new IT employee becomes experienced enough to achieve 100% output. And if there is no comprehensive training system, the new employee may need more time to prepare. This part of cost is generally neglected by IT managers.
Third, IT managers will have a great deal of difficulty building a strong team of programmers unless they work for large organizations. If teams were not big enough, the general administration cost amortized to each programmer would be high. This is mainly attributed to the fact that the company needs to recruit management staff and establish and maintain the team management mechanism. IT managers easily neglect these costs, even though they do exit.
Last but not the least, IT managers need to take HR flexibility into consideration. I believe most IT managers encounter unstable demand from inside users. IT managers are thus placed in a disadvantageous position to influence their employers’ headcount decisions.
Usually, a company’s IT HR demand will change as shown in Figure 1. The figure and the specific rate of change vary from organization to organization. If IT managers develop HR along the Green Line, HR can almost be used to its fullest extent, while the information construction process can be impeded due to HR inefficiency. If IT managers plan HR according to the Red Line, there will be significant HR inefficiency although all IT demands can be guaranteed. IT managers usually tend to follow the Blue Line when planning HR, despite inevitable inefficiencies.
My department follows the Green Line when conducting HR planning in order to minimize HR resource management. Meanwhile, I adopt an outsourcing strategy to help “fill” the HR gap and effectively satisfy internal IT-related demands. The reason why I do it this way lies mainly in the fact that my company has almost entered the stable improvement stage after 10-year’s of IT construction, posing lower demand for HR. Furthermore, as a marketing company, we are facing high instability of internal users’ demands which need to be met in a more urgent way upon finalization. This explains why we adopt an outsourcing strategy to supplement the “gap” between HR supply and demand: it helps us control HR cost and meet dynamic demands.
In addition, putting aside the factor of HR cost control, as an IT manager, I personally prefer outsourcing for the following reasons:
1. Outsourcing can help improve management efficiency.
2. Outsourcing provides a good means to educate internal users about the cost of IT services. Unless the company’s IT department is a profit center, other departments tend not to care about cost when using IT department’s resources. Neither do they have the concept of IT cost. IT outsourcing may make them better aware of the value of IT resources.
3. Outsourcing provides an effective benchmark for IT staff’s performance. Outsourcing service providers are doing their jobs for profit, therefore they will not do business resulting in loss just for maintaining harmonious cooperation. Outsourcing can help an organization identify areas that need improvement.
4. IT service outsourcing can help IT staff be accurately positioned as project manager and system analyst, resulting in the improved position of the IT department as a whole. In my mind, a programmer’s job responsibilities should be classified as non-core competence for the IT department. I am even planning to turn to outsourcing in system maintenance so as to focus on building the core competence of the IT department.
Some peers ask another question: “In our company, internal user demands have been fully scheduled to the end of the year. There is no HR inefficiency mentioned from unstable demands. In such a case, do you still prefer the outsourcing strategy?” My answer is as follows:
1. In the case of heavy IT demand, which do you think your boss wants you to choose: (i) get more resources to satisfy demands and bring benefits to the company as early as possible; or (ii) motivate available HR resources to cater for demands in a step-wise but slow manner? For the boss, the choice is definitely (ii).
2. Despite the large volume of business in the current year, can you be sure there will be as much in the years that follow? Once the demands do not align with total output, you will sink into trouble when disposing of redundant staff.
I think outsourcing means more than cost-effectiveness and its ultimate goal is to maximize organizational flexibility and efficiency. This is exactly what IT managers need to think about when making outsourcing-related decisions.
http://www.cbfeature.com/china_cio/news/does_outsourcing_really_save_money
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