Hostile is outsourcing: The story of Manufact Essay

This case study is concerned with issues of Hostile IS Outsourcing. It describes the situation which developed in May 1996 as problems with communication and careful planning within the organisation, resulted in a key department being outsourced. This had many implications which had a negative â€Å"knock-on† effect throughout the company. I am going to highlight these and look at issues which may minimise the risks in taking such important decisions. The ManuFact Company is a mid-sized (SME) European company in the kitchen hardware industry. (The company consists of 3500 employees of which 39 of them work in the IS department) It has a total o of 3500 employees, mainly in production and distribution and an IT department with 39 people whose budget is $4 million and a largely mainframe based portfolio. A key person in this company is Smith who was the IS director for ManuFact until March 1997, who reorganized the IS capability from a marginally successful semi-independent subsidiary to an internal department. He received good feedback about his ability to keep IT costs down and maintain a satisfactory level. What we have to keep in mind at this point is that Smith was excellent at his job, trusted within the company and was recognized and valued in the organisation. The other key person in this case is Lawler who in May 1996 became Smith’s boss. Lawler had a background as chief council for ManuFact and was a member of the board. He was part of a three-person top management committee with responsibility for administration, personnel, and legal issues as well IS departments. However we have to note that Lawler had â€Å"little† IT experience. Therefore we can make a judgement that for key decisions within this IS department, the right thing for Lawler to do would be to consult a person with the right understanding and specialist knowledge for decision making purposes. Later on we will see that this was not as such and the whole structure of the IS department was affected, due to the lack of communication with the right people and high risk decision made. Within this case study we see that Lawler was interested in â€Å"downsizing† and â€Å"facilities management†. What do these terms mean? Downsizing is a reduction in the staffing requirements of businesses which can follow after privatisation for a variety of reasons such as competitive pressures or the need to increase the profitability of the business by cutting costs1. Facilities management is the Management and operation of a part of a client’s IT facilities under a contract extending over several years2. The definition of Outsourcing is an arrangement whereby a 3rd party provider assumes responsibility for performing Information Systems functions a pre-defined price and according to pre-determines performance criteria. It can also be defined as the purchase of a good or service that was previously provided internally. With IT outsourcing an outside vendor provides IT services traditionally provided internal MIS department3. In the case Lawler requests Smith to research companies about outsourcing, of which three main companies are contacted, one being ISCorp. After initial consultation with the company Smith advises Lawler that there is a potential to save $275,000 but realistically they would break-even due to transition costs. Hence Smith warns that this solution would not be feasible. So assume that this is an accurate judgement by Smith as he knows best about the department due to his experience working within the IS department. However Lawler is approached directly by ISCorp and is informed that there is potential to save $6million to which he feels obliged to accept the offer. He therefore falls into a â€Å"big trap† and believes the biased portrayal of the vendor, by not appreciating the views of Smith and the careful analysis he conducted. From the information we have we can assume that Lawler has not planned the contract correctly to his benefit. A reason for this could be that he had insufficient IS experience. Lawler could have considered selective outsourcing which is when company decided to outsource, despite possible disadvantages, it must always decide whether to pursue it fully or selectively. Full outsourcing means, that all its IS functions from desktop services to software development are outsourced4. A company would outsource everything if it did not view IS as a strategic advantage that needs to be developed internally. This may be the case with ManuFact, and Lawler may have made this decision on that basis, however we do not know that. Had Lawler known about selective outsourcing he may have considered that. Selective outsourcing is where a company chooses which IS capabilities to retain in house and which could be given to an outsider. Areas which could fall into this category could be Web site hosting, business process application development, help desk support, networking, communications and data centre operations5. Reasons to outsource selectively could also be that a particular area or a segment can’t be improved and would only be perform better if completed externally. It provides greater flexibility and better service due to the competitive market. Lawler should have looked at some outsourcing models such as the classic outsourcing model. This dictates that an enterprise should outsource only those functions that do not give it competitive advantage. This would result in all the ManuFact IS employees being made redundant and offered new jobs within ISCorp. The ManuFact IS staff felt de-motivated and not wanted as later on in the case they all leave except two. As a consequence expertise knowledge was lost from within the company. Now ISCorp were worst off as they had to find new staff to replace existing members which meant they were not only less experienced, but also were not familiar with the existing systems resulting in higher costs for both training and recruitment. No new development took place for nine months. ISCorp had the cheek to demand an extra $1.5 million to cover work not specified in the contract .This indicates that the contract was not as ManuFact sought after as careful analysis of the problem was not thoroughly thought out. Therefore there were â€Å"loopholes† in the contract which ISCorp took advantage. On ManuFact’s part, lawyers should have been present when agreement of this contract took place to ensure ManuFact got exactly what was required. Another problem with regards to the ambiguity of the contract was that the amount of systems development hours specified by ISCorp was only half of what the IS department was currently putting in; but each hour was billed considerably higher. Therefore the current IS department would have been less expensive than ISCorp’s had they calculated with the same number of hours. However Smith was not successful in outlining this point with Lawler. ISCorp benefited from this and ManuFact lost out. Nine months on the systems were running fine, but new systems development still had not started. This could have an effect in other areas of the company or it could be that it has had a â€Å"knock-on† effect through the company already. (E.g. Company X produces Pokemons in the assembly line. The packer is waiting for the producer, so he can load the stock in the warehouse. If the producers are delayed then this has a knock-on effect as the packer is delayed, therefore the delivery is behind schedule and the consumer won’t get his Pokemon) Complaints had already been received from line organisation about ISCorp’s lack of customer service and also there were criticisms about the aging technology. As the contract did not contain any provisions for upgrading technology, ManuFact were effectively locked with the same technology infrastructure for the next five years. Recently Smith had heard that some of the subsidiaries were trying to break out of the contract so they can move on to newer and better technology. This would be difficult but if it was possible, it would be very costly for ManuFact as assumptions are made that ISCorp are well guarded for such an occurrence. On the side of ManuFact, if in the contract there was a clause that that would enable them to â€Å"backsource† or â€Å"in-Source† as it sometimes called, ManuFact could bring it’s IS team back internally. However they themselves may not want to consider this option due to previous experienced staff having gone elsewhere. Due to their previous problem, ManuFact are afraid of losing their staff members again which would mean they lose 18 months of skill, time and know-how which is currently in the â€Å"hands† of ISCorp; whom ManuFact are reliant on. In this particular case I feel that the disadvantages outweighed the advantages and my reasons are given above. ManuFact fell in many pitfalls such as focusing their negotiation solely on price. As the contract was not clear cut, it looks like many key areas such as planning were not looked at before deciding. As the savings looked very attractive Lawler didn’t carefully evaluate and appreciate his own company’s and staffs capabilities, not to mention thorough evaluation of the outsourcer’s capabilities. By checking the credibility of the vendors claims, ManuFact may not have got itself into the position it has because it would have meant ISCorp justifying themselves on many points and it could have â€Å"clicked† to Lawler and probably made him think twice. The main pitfall was that Lawler did not make the decision to consult the right people The recommendations I would like to give to ManuFact are to look into the contract and find any areas which have not been fulfilled and seek compensation if possible. If they want to completely backsource try to lure ISCorp staff to stay and work them. They could offer them incentives such as better pay but at least it would retain the specialist staffs that have trained on its systems for nine months. If this is not possible try and re-negotiate the contract ensuring that there are contract managers and lawyers present so ManuFact get the best or at the minimum, exactly what they want from the contract. Given the complexities of this case I would make sure that whatever decisions are made the staff currently working on the systems, STAY. To conclude I would like to say that Before deciding to outsource the top level management of a company really need to weigh up its pro’s and con’s. It needs to foresee where the company is going and see what measures it should take to achieve them. They should consider the possibility of selective, full or not to outsource at all if need be. Full or selective outsourcing allows an organisation alternative top-performing IS services in-house. Cost savings or filling gaps in the organisation’s IT skills are powerful drivers for outsourcing. The numerous risks involved in outsourcing arrangements must also be carefully assessed by IS and general manager alike. The Company ought to enforce a buy-out clause, if a company decides to outsource make sure the right specialist people such as lawyers are present to make sure things go according to plan, and finally: If a company decides to outsource ALWAYS check the fine print. Bibliography Person, K.E, and Saunders, C.S.,2004, Managing and Using Information Systems: A Strategic Approach Oates, D 1999, Outsourcing and the Virtual Organization: The Incredible Shrinking Company Willcocks, L.P and Lacity, M.C., 1999 Strategic Sourcing of Information Systems: Perspectives and Practised. Yaseen Adam Strategic Management and Information Systems