Application Outsourcing Overview

Today, outsourcing has become a strategy for forward thinking top executives. It is no longer just a means for reducing costs, but a tool for adding value to business. It enables organizations to concentrate on their core business, carry out business re-engineering and provide information that is valid, timely and adequate to assist decision making at the top management level and quality and cost control at the middle and lower levels.

It is predicted that by the Year 2007 the worldwide IT outsourcing market will grow to over $700 billion. The range of IT activities being outsourced is expanding fast. It is clear that IT outsourcing is not simply a fashionable, passing trend of the '90s. It is an increasingly viable option being taken by more and more public and private organizations.

Organizations have switched emphasis to concentrate on their core activities in order to increase market penetration and become more competitive. It is now widely recognized that to compete effectively, it is essential for business to concentrate on what they do best and where they can add value.

To begin with, outsourcing requires an understanding of the concept of core competencies. Core competencies are the capabilities of an organization that truly distinguish it from its competitors. They are unique capabilities upon which the success of the company, both today and in the future depends. Core competencies are what give an organization its clear leadership position as seen by its customers.

All remaining activities are non-core, and executives are now asking if their company is best in world at performing these activities. If not, they explore how outsourcing these activities might enable the company to deliver greater value to its customers at lower costs.

You may be a good outsourcing candidate if you ask yourself:

• Are my resources being utilized effectively?
• Do the department's objectives support the corporate direction?
• Can my IT department enhance our corporate financial goals?
• Are the current resources capable of supporting new technology?
• Is there a quicker, more effective method to handle these issues?
• Should we consider an offshore solution?
• Are 40% savings for real; what are the after-shock effects?
• Will employees have a basis for litigation? What are their options?
• If I make the wrong decision, what are the consequences?

Outsourcing used to be a tactic to improve operations and financial performance of troubled organizations. Today's outsourcing has evolved to be a preferred method of doing business by companies for numerous positive reasons. As outsourcing fulfills a need that transcends virtually all businesses, outsourcing has also caught the eye of the investment community. Any business that helps other businesses perform better are well positioned to prosper in the long run.

Some of today's common reasons to outsource would be to:

• Reduce and/or control operating costs
• Improve company focus
• Access to additional resources
• Free up resources for other purposes
• Accelerate reengineering efforts
• Accelerate migration to new technology
• Share risks
• Redeployment of internal resources
• Enable quicker response to business drivers
• Transform capital expenses and fixed assets to more flexible monthly business expenses

Top Five Tactical Reasons for Outsourcing

• One-time applications
  Applications that need to be developed or modified for a specified time require high manpower resources at one point of time. For this the organizations need to ramp up/ ramp down in a relatively short notice. This in-turn is expensive. For this outsourcing are the best solutions. For e.g. Y2k, Euro, porting from one-platform to another etc.
• Reduce or Control Operating Costs
  The single most important tactical reason for outsourcing is to reduce or control operating costs. Access to an outside provider's lower cost structure is one of the most compelling short-term benefits of outsourcing. In a recent outsourcing Institute survey, companies reported that on average they saw a 25% reduction in costs through outsourcing.
• Make Capital Funds Available
  Outsourcing reduces the need to invest capital funds in non-core business functions. This makes capital funds more available for core areas. Outsourcing can also improve certain financial measurements by eliminating the need to show return on equity from capital investments in non-core areas.
• Generate a Cash Infusion
  Outsourcing can involve the transfer of assets from the customer to the provider. Equipment, facilities, vehicles and licenses used in current operations all have a value and are, in effect, sold to the provider as part of the transaction, resulting in a cash infusion.
• Secure Resources not available internally
  Companies outsource because they do not have access to the required resources within the organization. For example, if an organization is expanding its operations, especially into a new geography, outsourcing is a viable and important alternative to building the needed capability from the ground up.