Outsourcing Strategy

Information Technology Outsourcing Strategy for a Logistic Company

Abstract

Many companies worldwide in the recent years have been asking themselves whether to outsource some tasks and activities of their IT operations. Some firms have already outsourced their internal IT department to IT vendors.

Organisations are increasingly embracing outsourcing, leveraging cost savings opportunities to raise competitiveness, helping to enlarge profit potential in their addressable markets. It enables them to utilise highly specialised services to recognise the benefits of increased business flexibility.

Combined this allows managers to concentrate on new opportunities and future products and positions you to better capitalise on the firms core competencies.

From the literature review we understand that cost reductions of the overall IT spend can be obtained, but they are not as impressive as predicted when preparing the outsourcing business case. We also realize that outsourcing the information management and information systems which are being considered as core competence of every business is not necessarily the ideal solution for companies.

One the main aspect of the Company's strategy is to reduce overall complexity and operating costs of the company. The application of IT outsourcing will help to support the strategy of the Company.

The objective of the dissertation is also to build an outsourcing framework for Maersk Mauritius Ltd that will cover all aspects of the outsourcing strategy such as costs, processes, service level agreements, service quality.

List of acronyms

IT - Information technology

ITES - Information technology Enables services

ICT - Information and Communication Technology

ITO - Information Technology Outsourcing

LAN - Local Area Network

KPI's - Key Performance Indicator

BPO - Business Process Outsourcing

EDS - Electronic Data Systems

GM - General Motors

SLA - Service Level Agreement

EU - European Union

CIO - Chief Information Officer

RE - Risk Exposure

ICT - Information Communication Technology

DOI - Digital Opportunity Index

NASSCOM - National Association of Software and Services Companies

Chapter 1 - Introduce Topic

Maersk Mauritius Ltd is a division of the A.P. Moller Group. It is amongst the world's class group, known, shares values and principles of business of a world class company and highly respected. It is an attractive business partner and employer, and promotes good corporate citizenship.

When the founder of Maersk Mr. A.P. Møller wrote "No loss should hit us, which could be avoided with constant care ", he summarized in a few words one of the central matter of Maersk Line's business philosophy.

The company's culture embedded living with the seas and respecting nature and matches their quest for constant care. This concept has a wide and deep meaning at Maersk Line. "Constant care” implies a strong commitment to promote the health and safety of the company's employees and others in the industry and even around us in the world.

Our values

The Maersk Group's core values include regard for their employees, the demonstration of humbleness, constant care, uprightness and protection of the company's goodwill. Maersk's reputation and success depend on the way they fulfill these values while conducting shipping business.

Maersk Vision and Mission Statement

Our vision

We create opportunities in global commerce

Our mission

“The company shall fulfill its vision by:

•Truly understanding our clients and their business.

•Offering second -to -none transportation solutions.

•Being profitable -and delivering sustainable, profitable growth.

•Continuously reducing costs and increasing efficiency.

•Offering our colleagues personal growth and a motivating place to work.

•Being innovative.

•Being good corporate citizens.”

The main elements of their business strategy are to:

•Fill the ships with money-making cargo

•Supply the most consistent product required by its customers

•Supply fast, responsive service which is close to the customers

•Eliminate cost and complexity.

(This extract has been given by the company tius Ltd's management)

The current organization structure of the IT department is as per below:

The responsibilities of the IT department are listed below:

Table 1: IT Job Description

The shipping industry is undergoing transformation due to a combination of economic, legal, political, technological, social and competitive forces. As the competition becomes more aggressive, companies are forces to innovate and find ways to reduce their operating costs.

Companies are constantly reducing the freight, which is the main income when doing import and export needs to reduce the costs to remain competitive and therefore offer best freight rates to its customers.

Increasingly shipping companies are saving money by outsourcing several of their business processes to 3rd party companies. For e.g. the processing of shipping documents like Delivery orders, Bill of Lading and payroll accounting are being processed by BPO companies.

Obviously the Information Technology activities which are used to support the business are also being outsourced.

The overall objective of the dissertation is to align the IT strategy with the Company's global strategy that is to reduce complexity and costs.

The study will determine whether outsourcing can bring a cost reduction in the overall operating costs of the IT department of Maersk Mauritius Ltd.

It will also build a framework that will take into account all the elements necessary for Maersk Mauritius Ltd to accurately evaluate the strategic initiative of outsourcing its internal local IT department in order to achieve not just cost reductions, but also improved value service to the end -uses performing their activities with the technological tools and processes.

The dissertation will consider numerous aspects of outsourcing such as advantages/drawbacks, mains drivers, communications, processes, planning, execution and strategy.

Chapter 2 – Literature Review

2.1 Outsourcing / Offshoring

“The term Information Technology (IT) has gain popularity in the recent years and the developments made in this sector has transformed the way organizations conduct business. Today, Information Technology has expanded to include many aspects of computing and technology, and the term has become very recognizable.

IT professionals perform a variety of duties that range from installing applications to designing complex computer networks and information databases. A few of the duties that IT professionals perform may include data management, networking, engineering computer hardware, database and software design, as well as the management and administration of entire systems. Outsourcing is the act of obtaining services from an external source.” (Brown & Wilson, The Black Book of outsourcing, 2005, p. 18)

The guiding principle of outsourcing is that non-core and even critical activities of an enterprise could be handed over to companies with lower labor costs and with expertise in those activities, thereby freeing internal resources to focus on enhancing the value-add of its core business. (Vashista & Vashista, 2006, p. 45)

We can simply say that outsourcing can be seen as a process where firms assign some of its in-house tasks/activities or processes to a third party vendor. Therefore outsourcing is a transaction which necessitates a transaction contract where one company purchases services from another while keeping the ownership and eventual responsibility for the processes.

Organization employs this method to contract or hire with an external agency, vendor or individual to perform a process or operation rather than utilizing internal staff to do the same work.

According to (Innocenti & Labory, 2004), “Subcontracting and, more generally, productive outsourcing have diffused in all industrialized countries in the last thirty years. Attention to this phenomenon arose in the field of organized vertical markets in which vertical co-ordination by large firms has been progressively substituted by decentralized network of suppliers, governed by principles of lean production and just-in-time. Outsourcing has also been the more significant source of downsizing in local systems of small firms, implying that small firms remain small. The result has been the growth in the informative and strategic interdependency among firms with numerous implications, ranging from the fragmentation of labor markets to the intensified use of information technology.”

Organizations in the field of IT turned to outsourcing for a number of reasons and at the same time satisfying a multiplicity of their needs.

As (Hayes, 2004) concludes “Whether the goal is to reduce costs or to obtain expertise, to offload helpdesk operations or application maintenance, outsourcing is here to stay. The typical outsourcing agreement might last for a number of years, and be governed by a contract setting the terms and conditions between the client and outsourcer for the duration of their relationship”

2.2 Introduction to Information Technology Outsourcing

The Information Technology Outsourcing has developed to a great extent in the past years and outsourcing of software engineering and routine maintenance tasks are being adopted by global IT companies.

According to analysis firm Datamonitor, the IT outsourcing market grew by 37% to $163 billion in 2004 according to the analysis firm Datamonitor. However it was characterized by a larger number of smaller contracts and greater contest among suppliers.

IT outsourcing is extensive and spreading quickly, according to John White, who served as CIO for Texas Instruments. John White has remained active in the industry by being a member of board of directors for a numerous private high-tech companies.

“Companies, in order to be competitive, have to outsource much of their software development,” White says. “Even high-tech companies are outsourcing software development and maintenance work,” he adds. White projects the number of jobs to move offshore in the next few years to be measured in the many thousands, possibly even hundreds of thousands.” (Wright, 2005)

“Offshoring is the collective consequence of globalisation, telecommunications developments, and cultural interactions between different countries. Organisations sought to exploit the opportunity to get work done at a rate lesser than the in-house wages. Offshoring provided the further opportunity to gain productivity by outsourcing activities to economically less developed countries.” (Brown & Wilson, 2005)

Perhaps the first instance of IT outsourcing occurred in 1963 when General Motors in the U.S decided to outsource its IT division by forming a new company, Electronic Data Systems (EDS).

Ever since Kodak's landmark decision to outsource the bulk of their IT functions in 1989, IT outsourcing has been a widely-publicized practice. There is a number of other high-profile IT outsourcing mega deals besides Kodak where companies have outsourced significant portions of their IT functions by transferring their IT assets, leases, licenses and staff to outsourcing vendors such as British Aerospace, British Petroleum, Chase Manhattan Bank and Enron.

According to the (Brown & Wilson, 2005)“the first company to outsource was Eastman Kodak, which was at the time in an extremely difficult financial state because of debts in the billions of dollars related to corporate acquisitions. While being one of the largest firms in the United States, Kodak was pressed to find ways to cut costs and improve profitability, so they have outsourced their information processing to another New York state-based firm IBM. Eastman Kodak's decision to outsource the information technology systems that's supported its entire business enterprise was considered revolutionary in 1989, but it was actually the result of rethinking what their business was about.”

One of the most current issues in Information Technology Managers is to whether outsource some of the information technologies or even all to specialized-services firms. The shift from internal computing management to outsourcing is accelerating. This is not a momentary phenomenon. IT managers will need to decide on how, when and where to outsource as this is prone to be one of the information management concerns that will be raised continuously during board meetings reviews.

As explained by (Strassmann, 1998) “There is only one good explanation that fits almost every case of outsourcing information technologies: The outsourcing corporations are trying to return to profitability by cutting employment. The plain fact is that top executives have become disenchanted with their capacity to digest information technologies. Massive divestment of a corporation's IT resources appears to be more like an emetic than a miracle cure.”

It is a fact that top management is no more capable of assessing information technologies. They are now talking about partnership for innovation and going towards more of a disposal of the company's IT resources.

2.3 Case for IT outsourcing

It is nearly impossible to mention all the reasons for outsourcing. The benefits of outsourcing defers between the different industries in which it is being applied.

As per (Strassmann, 1998), “It has become the computer business' fastest-expanding segment. In 1995, worldwide outsourcing revenue was $76 billion, with the United States making up 48 percent of that total. Most of the outsourcing (64 percent) was for processing standard transactions such as claims, billing, and credit cards. Only 33 percent was for IT services. Maintenance and support of centralized computing facilities accounted for about half of these services. Only a small fraction of that (less than 10 percent) was for systems planning, integration, and implementation.”

In the last 10 years, the corporation has been transformed by outsourcing. That change was mainly due to IT, which generally defined a collection of IT services which spread through every department of a company. These services were data centre, call centre, HR department and logistics.

2.3.1 Core competency

Many firms have chosen selective outsourcing so that they can concentrate on the core competencies of their business.

“The practice of outsourcing select IT applications to vendors while retaining other IT applications in-house, referred to as “selective outsourcing”, “smart outsourcing,” or “right outsourcing,” eschews the all-or-nothing approach in favor of more flexible, modular outsourcing” says (Lacity, Wilcocks, & Feeney, 1998).

In the mid 1990s, there was a distinctive approach between public and private sector when defining the degree of outsourcing within administrative works.

The aim of the public sector seeks to develop best practices, to improve the cost control skills of managers, to help senior executives to focus more clearly on the core competencies of their ministries, to improve the quality of the service. On the other hand the aims of private companies are mainly to realize reductions in cost.

However firms should be careful and not outsource their core competencies, business functions and staff. IT companies should keep their vital engineering assets and intellectual property internal. They should beware of outsourcing too a lot to reduce costs.

As Microsoft Corp. Chairman and Chief Software Architect (Gates, 2005) told a group of Japan's top businessmen at the Nippon Keidanren (Japan Business Federation), Japan's biggest and most influential business group “"If you rely too much on people in other companies and countries ... you are outsourcing your brains, where you are making all the innovation,".

2.3.2 Cost Drivers

One of the main benefits of outsourcing and which all firms try to achieve is to save costs. However a company can pull out hundreds of millions in cost and transforms the business only when the outsourcing process has been executed well.

As (Wright, Robyn, 2005) states, “By and large, a combination of cost savings and opportunity are driving the market for U.S. IT organizations and software product suppliers to outsource work to service organizations using developers in other countries.”

“The most elemental driver is labor arbitrage with rates that can cut service or development labor costs between 50% and 80%. says Erik Keller, an analyst at AMR Research in Boston. After the labor cost savings is had, companies are finding that foreign partners are more than up to the task to assist with strategic issues and projects.” (Keller, 2005)

ServiceWare Technologies which is a provider of Web-based knowledge management solutions for customer support and service in Pittsburgh has been able to sun-contract the entire of its development and quality assurance to EPAM Systems for more than three years. ServiceWare also has achieved profit of leverage, flexibility and knowledge as a result of outsourcing.

“We estimate that we have saved 60% to 70% of total costs related to R&D. In our case, this is several million dollars.” says (Schwartzman, 2005)

2.3.3 Competitive Advantage

In order to remain competitive many companies have to outsource a great part of their software development. Routine maintenance work and software engineering are being off shored by high technology companies. In the coming few years thousands and probably even hundreds of thousands of jobs will be move offshore.

For e.g. Serviceware which is a company which is a company specialized in computer software was entirely conscious that's it is going to benefit from the various technical abilities of EPAM (Global Outsourced vendor in software engineering) programmers, since the later already employs a range of highly skilled staff from Java programmers to VB.net.

“While cost is a definite consideration in outsourcing, the major factor for LogicLibrary is agility. EPAM can locate skills, meet a project and fill a project. If we know we have a project coming up and need Java skills, for instance, we can ask EPAM to fill that. We don't have to worry about staffing up for that type of skill. We're not left with those ongoing costs” says (Wright, Robyn, 2005)

2.3.4 Service Availability 24/7

The time zone differences have been a great benefit to many firms in Europe and in the US. Staff in the US can send their work to the offshore vendor based in India even after office hours and obtain the results the next morning.

As reported by (Wright, Robyn, 2005) ServiceWare had software on every platform possible, before starting to use EPAM Schwartzman says. The company built its product using Visual Basic, a fat Java client and C++. “The first thing we did was have [EPAM] reverse-engineer the entire platform and port it onto the Java platform,” Schwartzman says. “We needed a unified architecture and chose Java because our target market was/is large enterprises where Java (J2EE) was often the desired architecture. It was a Herculean task that they did in approximately three to four months.”

Many clients in the US have found advantages to the time difference between their country and EPAM. The customers can give the global software company a program to build during the day and the later work on it overnight. The customers come in the morning and the tasks have been completed. Many companies use instant messaging to overcome the barrier of communication challenges. Furthermore the staffs are note even paid overtime.

2.4 Drawbacks of Outsourcing
2.4.1 Risks

While outsourcing can bring various advantages, it also involves some risks. The risks linked to an IT Outsourcing contract must be appraised and controlled as it is the case in any other types of business ventures or investments.

Any business decision carries a certain degree of risk. Capital investments, implementation of innovative technology and development of new products are used as examples of risky business ventures. They often lead to huge benefits but may also result in important losses. As the other types of investment, outsourcing decisions and the contractual agreements involved in an IT outsourcing deal is another example of an uncertain business venture.

While outsourcing can lead to new business enterprise, economies of scale, lesser costs and access to expert resources, outsourcing can have unnecessary effect such as rising costs, poor service levels, and loss of know-how, to name a few.

However we should not conclude that outsourcing is bad in itself. It only means that, as in other risky business projects, risk assessment and risk management are extremely essential factors to take into consideration for the success of an IT outsourcing venture

The concept of risk exposure is explained by (Aubert, Dussault, Patry, & Rivard, 1998) in 2. “Consider the following undesirable outcome which is sometimes associated with IT outsourcing: service debasement. There exist four possible scenarios for this outcome. In the first scenario (low RE), the characteristics of the outsourcing contract are such that there exists a small probability that it will result in poor service quality. Moreover, in this example, it is estimated that no serious loss is related to poor service quality. Consequently, the level of risk exposure of the project (with respect to this undesirable outcome) is low. In the second scenario (high RE), both the probability of service degradation and the loss related with poor service quality are high. In such a case, there is a high level of risk exposure. The other two scenarios will result in medium levels of risk exposure. In one case, the probability of service degradation is high while the potential loss related to it is low. In the other instance, there exists only a small probability of service debasement, yet the loss related to this outcome is high.”

Definitely outsourcing has been a success for many organizations, but it can also conduct to business- destructive nightmares.

Certainly, outsourcing has worked well for many companies, but it can also lead to business-damaging nightmares, says Larry Harding, founder and president of High Street Partners, a global consultancy that advises company on how to expand overseas.

In his consulting, (Harding, 2008) founder and president of High Street Partners, a global consultancy that advises company on how to expand overseas, has seen many outsourcing horror stories, from corrupt general managers "with all sorts of conflicts of interest" (such as service providers getting kickbacks from landlords on the leased space) to projects torn apart by huge turnover rates. You end up with project teams that are hugely inconsistent. You might have a good team in place, but a month later, three-quarters of the team has transitioned”

Selective outsourcing offers managers with a larger array of options but it is also confusing. As (Lacity, Wilcocks, & Feeney, 1998) stated “managers may make the wrong decisions about which IT services to outsource and which services to retain in-house, neglect the technical issues involved in outsourcing, and miscalculate the log-term economic consequences.”

2.4.2 Loss of staff & Transfer of staff – Change Management

It seems that whenever corporate management discovers it must write off a large portion of existing systems assets and enter into another round of modernization, the first reaction is to replace their computer chiefs. To avoid any confrontations with accumulations of neglectful practices, the new CIO then launches a program of modernization calling for brand-new applications. Old programs thus become useless junk and the software branded euphemistically as "legacy software."

The act of writing off the accumulated knowledge of prior years, whether in people or software, opens the door to outsourcing contractors. Unencumbered by maintenance or operating problems, there's a hope that these experienced mercenaries are more likely to get the job accomplished. Meanwhile, the talent that previously guarded the information assets of the organization gets the unglamorous custodial task of keeping daily operations going while waiting for the newcomers to collect all the prizes. No wonder this creates conditions ripe for a disaster.

Announcements of the dismissal or transfer of computer personnel featured imaginative stories telling why a function with the reputation of being one of the corporation's critical success factors should now be transferred into the hands of complete outsiders. Some corporations claimed that their information technologies were not an essential part of their business anymore but, rather, like electric power or the water supply. For others, the divestment of routine processing was expected to make it possible to concentrate on strategic systems. One also heard that outsourcing was preferable because the contractors offered technical expertise that the firm could not muster by other means.

(P. Strassman (1998) ‘Outsourcing IT: Miracle cure or emetic?', Across the Board, May,http://www.strassmann.com/pubs/outsourcing.shtml, accessed 7 October 2004.)

Globalisation of services is another part of the organization of the future,where jobs are easily exportable and labor markets grow where there are talented people willing to work to lower wages. Offshore outsourcing helps companies prepare for whatever the future holds

(Atul vashistha/ avinash vashista (2008)The offshore nation. United

States of America: Tata McGraw -Hill)

2.4.3 Cost Savings - Fiction & Hidden Costs

The IT community has consistently ranked, in a wide range of surveys, as one of the least admired corporate functions and therefore becomes an attractive target when there is a new quota regarding how many bodies must leave. Cutting staff, divesting business and getting rid of hundreds of person-years of accumulated skill seems to be a prevailing compulsion among large firms that are seeking to improve profitability by shrinking their size. Although the number of papers that deal with outsourcing is considerable, only a 1993 work by MIT researchers Erik Brynjolfsson and Loren Hitt has studied the relationship between outsourcing and profitability.

They noted that, "Companies that try to jump on the outsourcing bandwagon may be chasing a parked car. We found no association between outsourcing and success. If anything, companies that outsourced more of their information systems work tend to have lower productivity and profitability. The only performance measure heavy outsourcers did well on was stock-market returns. In the short term, the market reacts favorably to outsourcing. Whether the market will continue to react favorably, especially if productivity doesn't improve, remains to be seen."

(P. Strassman (1998) ‘Outsourcing IT: Miracle cure or emetic?', Across the Board, May,http://www.strassmann.com/pubs/outsourcing.shtml, accessed 7 October 2004.)

The most frequent reason companies turn to outsourcing is the need to increase profits. Replacing premium-priced labor with workers earning less has led to lower costs for products and services. That in turn has led to an increase in the purchases—that is outsourcing—of materials, components, parts and services by the companies. The value of outsourced goods and services for U.S. companies now averages 65% of the value of their sales. This kind of calculation is in the spotlight because this phenomenon has become the central concern of what's called the "globalization" of commerce. Accordingly, firms with a higher ratio of outsourcing purchases to sales would tend to be more profitable since they would be substituting lower-cost goods and services from global sources for higher-priced U.S.-produced equivalents.

First, the decision to outsource IT shouldn't be taken in isolation and without full exploration of the potential effects on the overall financial performance of a company. Sure, one can always show savings by passing IT tasks to someone who can do it cheaper. But IT accounts for only a small share of the total costs that a company incurs. The damage from mismanaged outsourcing will always exceed the potential benefits from anticipated IT cost reductions.

Second, any company bidding on an outsourcing contract should ascertain whether the potential client is a loser or a winner. There are many cases that demonstrate why delivering services to losers with already damaged systems are risky. Whenever IT work is outsourced, even under an ironclad contract, there is the likelihood that the losers' damaged operations systems can't be fixed by handing over custody for critical applications to a contractor. Both the winner of such an outsourcing contract and the company doing the outsourcing will end up worse off and in hard-to-reconcile finger-pointing.

(P. Strassman (2004) ‘Outsourcing still for losers', Computerworld, 2 February, http://www.computerworld.com/managementtopics/outsourcing/story/0,10801,89533,00.html, accessed 8 October 2004.)

In the pantheon of outsourcing horror stories, the $4 billion deal between the U.S. Navy and global services provider EDS stands out as one of the most horrific. It started back in 2003 when the Plano, Texas, vendor beat out the likes of IBM and Accenture for the contract. The deal was to manage voice, video, networking, training, and desktops for 350,000 Navy and Marine Corps users. But just one year later, EDS was writing off close to $350 million due to its inability to come even close to fulfilling its obligations.

(Larry Harding - Painful lessons from IT outsourcing gone bad

http://www.infoworld.com/d/adventures-in-it/painful-lessons-it-outsourcing-gone-bad-032)

Joseph Feiman, research vice president for Gartner in Stamford, Conn., agrees that the expectation of the potential cost savings for organizations that outsource is driving the market. However, he doesn't think firms are getting what they expect. Companies expect a cost savings that is proportional to eight times that of what it would cost for them to do the outsourcing task themselves, he says. They're not accounting for the communication factor, the measure of cultural and geographical distance, he adds.

“What they're missing,” Feiman says, “is that the application development life cycle consists of phases. Each and every phase could be outsourced, but not every phase could be done off-site.” Feiman says only two phases in application development are really good for outsourcing: construction (meaning programming and coding) and unit testing. So companies are expecting to save, and Feiman agrees they can save money. “But they're expecting that savings will be proportional to the cost of labor. It never will be,” he says.

(2005 – April 2005 Successful IT outsourcing: Dividing Labor for success – Magazine Business for IT Robyn L. Wright - http://www.softwaremag.com/l.cfm?doc=2005-04/2005-04outsourcing)

2.4.4 Lost of control/ Held hostage

We pay dearly for outsourcers and consultants that arrest the development of our organizations' internal capabilities and cause us to place the future well-being of our company in the hands of people who have no emotional stake or connection to our business.

(J. Gregoire (2004) ‘The Vanishing IT Department', CIO Magazine, 1 June, www.cio.com/archive/060104/peer.html, accessed 7 October 2004.)

Of course, outsourcing endeavors do have their share of drawbacks. One drawback facing ServiceWare in offshoring its development is that the source code is offshore. “It's in the hands of different people,” Schwartzman says. Some companies also worry about IP protection, but ServiceWare has written that into its contract with EPAM.

Some outsourcing risks remain constant every year, such as change management, government, service-level agreement compliance, cultural fit between buyer and supplier and supplier longevity. Other risks vary. The top risks in 2005, according to an Outsourcing Journal poll of 34 attorneys and outsourcing service provider executives, include offshoring, privacy, rising interest rates and technology.

(2005 – April 2005 Successful IT outsourcing: Dividing Labor for success – Magazine Business for IT Robyn L. Wright - http://www.softwaremag.com/l.cfm?doc=2005-04/2005-04outsourcing)

2.5 Issues with IT Outsourcing
2.5.1 Service Level Agreements / Metrics

A service level agreement (SLA) is an essential part of any outsourcing project. It defines boundaries of the project in terms of the functions and services that the service provider will give to its client, the volume of work that will be accepted and delivered, and acceptance criteria for responsiveness and the quality of deliverables. A well-defined and crafted SLA correctly sets the expectations for both sides of the relationship and provides targets for accurately measuring performance to those objectives.

At the heart of an effective SLA is its performance metrics. During the course of the outsourcing engagement, these metrics will be used to measure the service provider's performance and determine whether the service provider is meeting its commitments. When properly chosen and implemented, the SLA metrics:

Measure the right performance characteristics to ensure that the client is receiving its required level of service and the service provider is achieving an acceptable level of profitability.

Can be easily collected with an appropriate level of detail but without costly overhead, and

Tie all commitments to reasonable, attainable performance levels so that “good” service can be easily differentiated from “bad” service and giving the service provider a fair opportunity to satisfy its client.

(Metrics for IT Outsourcing – IanS.Hayes - http://www.clarity-consulting.com/MetricsforIToutsourcing.pdf)

For long-term arrangements, Service Level Agreements supported by automated tools are an ideal way to objectively manage performance, resolve issues proactively and continuously improve performance.

(2004, Ian S. Hayes, Clarity Consulting, Inc. http://www.clarity-consulting.com/MovingBeyondAd-hocOutsourcing.pdf)

2.5.2 Information Confidentiality

The medical profession has learned how to do heart transplants, simulate the functions of kidneys, and implant synthetic knee, hip, elbow, and wrist joints. So far, it is inconceivable to do a brain transplant. The brain is individual-specific, whereas other parts of a body have only generic characteristics. The brain stores a person's knowledge patterns and experiences, which make individuals what they are, whereas body parts are equivalent to interchangeable mechanical components.

The brain is also where a person retains a sense of individuality and privacy. Therefore, one of the critical issues in outsourcing is the safeguarding of uniquely confidential information. The outsourcing contract between Swiss Bank Corp. and Perot Systems solved this problem admirably. The bank retained all of the input and output processing within the bank, while Perot Systems handled only encrypted data, without ever having access to the encryption keys. Swiss Bank gave up nothing of importance, because it had reserved to itself all options and privileges. It had not yielded any of its essential managerial functions.

(P. Strassman (1998) ‘Outsourcing IT: Miracle cure or emetic?', Across the Board, May,http://www.strassmann.com/pubs/outsourcing.shtml, accessed 7 October 2004.)

2.5.3 Vendor selections

IT needs a framework for effectively selecting sourcing options based upon their alignment with business objectives. To choose the best sourcing option in a given situation, an IT organization needs some background information. It must be up-to-date with corporate strategies and objectives to ensure that its decisions will foster those goals. It must be aware of and work within any constraints that will limit its ability to pursue certain sourcing options. And, it must be familiar with the universe of potential options among which it can choose if it is to make the best possible matches.

(Ian S.Hayes, Clarity Consulting,Inc – Creating a selections framework to align sourcing options with business goals 2004 - http://www.clarity-consulting.com/SelectionFrameworkPartI.pdf)

To make the decision of selecting a vendor, you will have to be decisive, well-organized and systematic.

With reference to D.Brown & S.Wilson in the black book of outsourcing, the below run-down can be followed in the vendor selection:-

1. Convene the selection team

2. Gather vendor information, issue request for information(RFIs)

3. Set a realistic schedule

4. Develop a term sheet

5. Define and evaluate current objectives and operations

6. Define evaluation criteria and weights before issuing bid requests.

7. Prepare requests for proposal (RFPs)

8. Evaluate the bids

9. Select a vendor

(black book of outsourcing – Page 105)

2.5.4 Relationship Management

IT organizations can significantly expand the value of their outsourcing efforts by shifting their focus from short-term, one-off outsourcing projects to long-term relationships guided by Service Level Agreements.

Adversarial buyer/supplier relationships breed discontent, result in short-term relationships, add significant overhead to the negotiation process, and limit outsourcing engagements to ad-hoc projects with constrained benefits and cost savings.

Establishing mutually beneficial, long term relationships, gives providers incentive to build company-specific skills, eases knowledge transfer between both sides, increases the odds that deliverables will meet expectations and lets the parties exploit growing synergies.

(Ian S. Hayes. (2004) Moving beyond Ad -hoc Outsourcing From: http://www.clarity-consulting.com/MovingBeyondAd-hocOutsourcing.pdf [Accessed 10 October 2009])

2.5.5 Domestic or offshore partner

Globalization has swept the world bringing all of us together into global communities of interest where goods, services, processes, people and knowledge jump from shore to shore almost without restriction. This is not just a U.S phenomenon, but has been adopted widely throughout the

European Union (EU). And the restrictions that do exist are rapidly coming down.

Outsourcing is another trend that has and will continue to be unstoppable.

(Atul vashistha/ avinash vashista (2008) The offshore nation. United States of America: Tata McGraw -Hill)

The impact in the U.S. job market is “going to be immense,” he continues. He attributes that to the number of people in India, for instance, who are seeking and achieving scientific degrees vs. those in the U.S. “Many of these high-paying jobs in the U.S. are going to be outsourced and offshored to India, China and other places,” he forecasts.

As a result, White says, people that are skilled in high-tech in the U.S. will find it increasingly difficult to find jobs. White is already seeing market evidence of such people being unable to find employment in the high-tech industry. Instead, they “have to descale their requirements in order to gain employment,” he says.

While IT offshore outsourcing will result in the creation of some jobs at home, the impact will be minimal. “Many people currently serving in these high-tech jobs — programmers, in particular — are going to have to move into interface roles,” White says. These people will serve as liaisons between the IT organizations at home and the IT outsourcing service providers abroad.

(2005 – April 2005 Successful IT outsourcing: Dividing Labor for success – Magazine Business for IT - http://www.softwaremag.com/l.cfm?doc=2005-04/2005-04outsourcing)

2.5.6 Outsourcing Framework

After deciding to outsource, there is a whole process to follow to start benefiting from the outsourcing vendor's services. There are different types of vendors and they come in numerous types and sizes.

According to D.Brown & S.Wilson a company can follow a systematic process to engage into a relationship with the outsourcing vendor.

The process is show below:-

Phase 1: Aligning Client and Outsourcing vendor Expectations

This phase enables the buyer and vendor to determine jointly the company's business needs, summarize the variety of possible outsourcing problems and design a process for ensuring that both player and supplier develop a productive relationship based on mutual expectations.

Phase 2: Clarifying Outsourcing Governance

To step smoothly through this phase, these factors will help you to create a relationship management model: Expectations, Monitoring, Communication and reporting, scope change, agreement modification, exiting the relationship.

Phase 3: Establishing Pricing

Normally, outsourcing agreements are drafted either on a fixed price or variable-price basis.

Phase 4: Writing Service Level Agreements

SLA's are important since they identify the expected results and the measures by which both parties can assess performance.

Phase 5: Supplementing Outsourced Services

In approaching the augmentation of services, outsourcing vendors help their clients make decisions in various ways. By contracting with multiple vendors, the buyer can gain multiple advantages such as greater expertise, be less dependent on a single provider, maintain better geographic coverage and foster healthy competition amongst service providers.

Phase 6: Bundling Outsourcing services

Bundling happens when a company decides to include IT systems and operations with other business functions like HR or finance. This helps companies to focus on adding business value than just merely updating technology for cost savings.

(Black book of outsourcing)

2.6 Outsourcing in Mauritius

Over the past years, the ICT sector in Mauritius has witnessed major developments and has undergone rapid and sustained growth.

Mauritius is a leading global outsourcing destination ranked 25th on the A.T. Kearney Global Services Location index – 2009 and among the highest in Africa in the Digital Opportunity Index ranking (DOI) ranking. Mauritius has demonstrated an exceptional potential in the export of IT-BPO services exemplified by a contribution of 4% to GDP in just four years. Through a well developed digital network infrastructure, excellent telecommunication facilities and access to a scalable and stable power grid Mauritius is emerging as a regional hub for the provision of outsourcing services and telecoms switching.

(http://www.investmauritius.com/GlobalBusiness/programmes/International%20Outsourcing%20forum.pdf)

We (Mauritius) have also been active at the region's most important outsourcing forum, hosted in Mumbai by our partner, the National Association of Software and Services Companies (NASSCOM) where we presented the case for Mauritius as a global disaster recovery and business continuity planning destination, particularly within the green mandate of the Maurice Ile Durable project. (http://www.investmauritius.com/boipress/ViewPress.aspx?PressID=83)

An increasing number of companies have set up their business in Mauritius to conduct software development, multimedia, Business process outsourcing (BPO), Information Technology enabled services (ITES), disaster recovery activities to both the local and international market.

The number of ITES/BPO companies has increased from 1998 to 2009 as shown in 1.2 and the fall under the below mentioned categories:-

List of IT Outsourcing services provided by Local Companies:

* Business Process Outsourcing

* Shared Services

* Back Office

* Call centre

* Help Desk

* Software Development

* Web Design and Development

* Multimedia and Data Digitization

* Consultancy

* ICT Related Training

* Business Continuity and Disaster recovery

2.7 Summary of Literature Review

Information technology is a term used to define the use of electronic computers called hardware and computer programs also called software to store, convert, process, transmit and retrieve information securely. Today the term has been enlarged and IT professionals are called upon to perform a wide range of tasks from installing applications to designing complex computer networks and information databases and engineering computer hardware.

Outsourcing is often viewed as the contracting out of a business function or part of a function to an external service provider which offers the services that the company needs. In that sense the two organizations may sign a contract which includes exchange of services and payments governed by a service level agreement.

Outsourcing is of various types like business process outsourcing (BPO), IT outsourcing (ITO), knowledge process outsourcing, legal process outsourcing, accounts process outsourcing etc. IT outsourcing is becoming very popular amongst companies. Services under IT outsourcing includes data management, networking, software engineering, managed services, hardware maintenance etc.

The general advantages of IT outsourcing of firms are to obtain expertise which they do not have internally, to reduce overall IT operating costs, to pass on maintenance of applications and helpdesk operations, gain competitive advantage by using updated technologies, access intellectual property with wider experience and knowledge, access to talent, to focus on their core business and reduce internal workforce. However the private and public sector may outsource for different reasons.

IT outsourcing as any other business transformation projects involve some risks i.e. geographic risks, project risks and infrastructure and operational risks. Organizations need to measure the risk exposure of outsourcing before taking any decision to contract out their internal functions and find ways how to mitigate these risks. Some drawbacks can be quality risks, quality of service, less productivity, staff turnover, language skills, failure to deliver of transformation promises, loss of control over critical information & expertise and qualification of outsources.

There are several factors to take into consideration when outsourcing namely defining the service level agreements and metrics, information confidentiality, vendor selection, relationship management, deciding on using an offshore partner. Often companies are not sure whether outsourcing will work for them and they want to have the experience themselves. This means they are willing to take the risks but cautiously. In that case the firms turn towards selective outsourcing where they keep control over the core functions and tend to outsource specific tasks like payroll management or debt collection.

The IT/BPO global sourcing market size in 2008 was estimated between USD 89bn and 93bn with IT and BPO market shares averaging 40 and 60 percent respectively. The contribution of the IT/BPO sector to the Mauritian economy is expected to grow to some 8% in 2011 with the direct employment in the sector amounting to 25,000. The government of Mauritius is considering the legislation to make the country a move attractive to business process outsourcing. Mauritius today offers a wide range of outsourcing services both national and international level.

Chapter 4 – Research and Methodology

This report has been prepared using both qualitative and quantitative research techniques. I have started this study with a comprehensive introduction of the ITES sector in Mauritius. I have interviewed many IT staff from companies within the Logistics sector. Maximum information has been gathered during face-to-face meetings, by telephone or via email.

A comprehensive questionnaire has been designed to assess the actual situation of IT outsourcing within the logistics sector in Mauritius.

The whole population of 40 companies operating in the logistics sector as freight forwarding agents, Shipping agents and container transport & warehousing companies has been selected to be surveyed in this study.

The data collected has been analyzed and a report on the findings was prepared. Based on the findings the major advantages, weaknesses and opportunities has been identified and appropriate recommendations and an IT outsourcing framework has been proposed to the company.

4.1 Research Objectives

The main objectives behind this advisory research can be summarized as follow:

1. Investigate how Logistics Firms in Mauritius are outsourcing their IT services.

3. Design a study case of the logistics company assessing the possibilities and strategies to outsource its IT Services.

4. To create an outsourcing template Framework that will guide the Logistics Company through the outsourcing process of its IT functions

Questionnaire is based on:

• Logistics Companies which have already outsourced stating their experience on the benefits, drawbacks and risks & which services are being outsourced.

• Survey on the End -Users satisfaction on outsourcing IT service desk/Helpdesk.

4.2 Extensive literature review

Literature review of gurus in the field of IT Outsourcing has been carried out. Specialized magazines, reports, studies, surveys, press articles, books, websites, newsletters and documents available at the BOI website was consulted. Literature review on the management and business models pertaining to IT outsourcing have been widely carried out.

4.3 Survey method

A survey research can be defined as a “method of gathering data from respondents thought to be representative of some population, using an instrument composed of closed structure or open-ended items (questions).” (Garson, 2009)

As per William Trochin, “'Survey' can be anything form a short paper-and-pencil feedback form to an intensive one-on-one in-depth interview” (2006 - William M.K. Trochim - http://www.socialresearchmethods.net/kb/survey.php)

A detailed questionnaire has been prepared to record the main aspects of IT outsourcing in the logistics industry, based on the information gathered following the literature review and IT requirements of the company.

This will provide insights of the problem encountered by Maersk, in view of formulating the appropriate recommendations and the outsourcing framework. The tailor-made questionnaire has the objective of carrying out an assessment on the different requirements of the logistics companies and their experience on IT outsourcing.

“A sample is a limited number taken from a large group for testing and analysis, on the assumption that the sample can be taken as representative of the whole population” (3rd Edition 2003, Marketing research for managers By Sunny Crouch, Matthew Housden)

According to the “Bureau of statistics” there are some 4570 companies in the transport, communication Industry. However, in this population we are concerned only with companies in the Shipping, Freight & Forwarding, transport & warehousing sector which constitutes of 40 companies. I have surveyed the whole population to have a better overview and give more essence to this research work.

Table 1 below provides an indication of the activities undertaken by the 40 Logistics companies in Mauritius forming part of the sample.

The sample will primarily consist of IT staff, managers and project managers from the different logistics company. The targeted sample was of size 40 but only 28 companies responded to me survey. However since the response was 70%, it was considered to be enough to carry on with the report.

Activity

No of companies

Shipping Agents

9

Freight & forwarding agents

21

Warehousing

5

Transport/Trucking

5

Total

40

Table 3: Activities of the Logistics Companies

4.4 Data collection

Primary data - Primary data can be obtained through observations, interviews, focus groups, survey and questionnaires.

For my research I mainly conducted formal interviews, where I have already set a questionnaire and request the respondents to give their answer on the questionnaire. In many cases the persons had a tight schedule, and we had to conduct the interview on telephone. I have also sent the questions via email and received quite a good response.

Secondary Data - The secondary data that has been used includes both quantitative and qualitative data, and they can be used in both descriptive and explanatory research.

For the purpose of my research, I have used documentary secondary data that include written documents such as books, journals and magazine articles. I also used survey-based secondary data which is usually referred to data collected by questionnaires that have already been analysed for their original purpose.

4.5 Pilot testing

The questionnaire was pre-tested by some colleagues and friends who are familiar with IT services prior conducting the interviews.

This pre-testing exercise has been performed to ensure that:-

* Questions can be answered without much efforts

* Questions are relevant and valid

* Respondents understand the questions easily

* There is no resistance or hesitation to answer questions

* The questionnaire is not too time consuming to administer.

Following the pre-testing exercise, the following changes were brought to the questionnaire:-

* Certain questions have been made simpler

* The sequence and flow of the questions have been modified

* Complex questions were rephrased

* Grammatical errors were corrected

Chapter 5 – Analysis of Findings and results

5.1 Part A of the questionnaire consists of 6 questions about the company.

Question 3 – What is the approximate turnover of your company?

Question 4 - How far is your company using IT systems?

Question 5 - How many IT systems do you have in your organization? (Approximate)

Question 6 - How many servers do you have in your organization?

Bibliography

Brown, D., & Wilson, S. (2005). How to Manage the Changes, Challenges, and Opportunities. In D. Brown, & S. Wilson, The Black Book Of Outsourcing (p. xiii). Danvers: John Wiley & Sons, Inc.

Brown, D., & Wilson, S. (2005). How to Manage the Changes, Challenges, and Opportunities. In D. Brown, & S. Wilson, The Black Book of Outsourcing (p. xi). Denver: John Wiley & Sons, Inc.

Brown, D., & Wilson, S. (2005). The Black Book of outsourcing. In D. Brown, & S. Wilson, How to Manage the Changes, Challenges, and Opportunities (p. 18). Danvers: John Wiley & Sons, Inc.

Garson, D. D. (2009). Survey. Retrieved January Friday, 2010, from Http://faculty.chass.ncsu.edu/garson/PA765/survey.htm

Gates, B. (2005). Urges investing in R&D to keep competitive edge . Japan Business Federation (p. 1). Japan: Paul Kallender.

Hayes, I. S. (2004). Metrics For IT Outsourcing Service Level Agreements. Beverly, MA: Clarity Consulting Inc.

Innocenti, A., & Labory, S. (2004). Outsourcing and Information Management. A Comparative Analysis of France, Italy and Japan in both Small and Large firms. The European Journal of Comparative Economics , 1.

Lacity, M. C., Wilcocks, L. P., & Feeney, D. F. (1998). The Value of Selective Outsourcing . Sloan Management Review.

Strassmann, P. A. (1998). Evaluating the Business Alignment of Information Technologies. In P. A. Strassmann, The Squandered Computer (p. 240). Strassman Inc.

Vashista, A., & Vashista, A. (2006). The Offshore Nation. In A. Vashista, & A. Vashista, Strategies for Success in Global Outsourcing and Offshoring (p. 45). New York: Mc-Graw Hill.

Wright, R. L. (2005, April). Successful IT Outsourcing:Dividing Labor for Success. Business of IT , p. 1.

Wright, Robyn. (2005, April). Successful IT Outsourcing:Dividing Labor for Success. Business of IT , p. 1.
Appendix - References

(Outsourcing.com - http://www.outsourcing.com/content.asp?page=02i/other/_sungard/it_index.htm&nonav=true)

(atul vashistha/ avinash vashista – the offshore nation page 45)

(Douglas Brown & scott Wilson-black book of outsourcing – Page 18)

(Baker, 1998; Hirshon and Winters, 1996; Dugger, 1997).

(Outsourcing library technical services – what we think we know, and don't know - ames H. Sweetland, James H. Sweetland is Professor in the School of Information Studies at the University of Wisconsin, Milwaukee, USA)

(A. Innocenti & S. Labory (2004) ‘Outsourcing and Information Management. A Comparative Analysisof France, Italy and Japan in both Small and large firms', European Journal of Comparative Economics 1(1), http://eaces.liuc.it/18242979200401/182429792004010105.pdf, accessed 7October 2004.)

(Metrics for IT Outsourcing – IanS.Hayes - http://www.clarity-consulting.com/MetricsforIToutsourcing.pdf)

(Successful IT Outsourcing: Dividing Labor for Success by Robyn L. Wright - http://www.softwaremag.com/l.cfm?doc=2005-04/2005-04outsourcing)

(Douglas Brown & Scott Wilson - Black book– page xiii preface)

(U.S. Congress, Office of Technology Assessment, International Competition in Services, U.S Govt Printing office July 1987 – Page 178)

(P. Strassman (1998) ‘Outsourcing IT: Miracle cure or emetic?', Across the Board, May,http://www.strassmann.com/pubs/outsourcing.shtml, accessed 7 October 2004.)

(Metrics for IT Outsourcing – IanS.Hayes - http://www.clarity-consulting.com/MetricsforIToutsourcing.pdf)

(P. Strassman (1998) ‘Outsourcing IT: Miracle cure or emetic?', Across the Board, May,http://www.strassmann.com/pubs/outsourcing.shtml, accessed 7 October 2004.)

(J. Gregoire (2004) ‘The Vanishing IT Department', CIO Magazine, 1 June, www.cio.com/archive/060104/peer.html, accessed 7 October 2004.)

(P. Strassman (2004) ‘Outsourcing still for losers', Computerworld, 2 February, http://www.computerworld.com/managementtopics/outsourcing/story/0,10801,89533,00.html)

(B.Aubert,S. Dussault,M. Patry,S Rivard (1998)- “Managing the Risk of IT Outsourcing” http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.92.5306&rep=rep1&type=pdf)

(http://www.investmauritius.com/GlobalBusiness/programmes/International%20Outsourcing%20forum.pdf)

(http://www.investmauritius.com/boipress/ViewPress.aspx?PressID=83)

(Larry Harding - Painful lessons from IT outsourcing gone bad

http://www.infoworld.com/d/adventures-in-it/painful-lessons-it-outsourcing-gone-bad-032)

(MaryC. Lacity, LeslieP.Wilcocks, David F.Feeny - The Value of Selective Outsourcing - http://hickeyj.googlepages.com/p5.pdf)

(Ian S.Hayes, Clarity Consulting,Inc – Creating a selections framework to align sourcing options with business goals 2004 - http://www.clarity-consulting.com/SelectionFrameworkPartI.pdf)

(2004, Ian S. Hayes, Clarity Consulting, Inc. http://www.clarity-consulting.com/MovingBeyondAd-hocOutsourcing.pdf)

(2009 – Dr David Garson - http://faculty.chass.ncsu.edu/garson/PA765/survey.htm)


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