Background of the Case
Companies find themselves in a dilemma whenever they wish to outsource some of their services. They have to determine whether the move will be a benefit or counterproductive to them. The case study involves a company, namely Schaeffer Corporation, which has to decide on whether it should outsource information technology (IT) services. Schaeffer Corporation is a manufacturing company that has diverse product lines developed by its Colbert, Kinzer, and Reitzel divisions. Fredrick Scaeffer founded the Vilonia-based company in 1877. It has expanded its operations in North America, South America, and in ten European countries.
Although Schaeffer has consistently made profits in the past and that the management has been satisfied with its profits and slow growth, the new blood of board members envisions higher growth. This growth is calculated to be delivered through the Reitzel division of Schaeffer Corporation, owing to its widespread operations, dynamic market, sales, and profitability. For Schaeffer Corporation, the division is projected to generate 10% growth per annum in revenue and 15% growth in profits for the following five years. Since this division is seen as the growth engine of the corporation, its management plans to achieve this goal through expansion into new geographical markets outside the US, acquisition of new companies, and diversification of its product lines.
However, for this growth to be achieved, the human resource manager feels that there is the need for the corporation to outsource IT services since the current resource cannot match the anticipated growth. Although IT services have been centralized from divisional to corporate level and that they are efficient enough in the current standards, they cannot manage the high-anticipated growth of the corporation. The controversy lies on whether or not to outsource IT services as recommended by the human resource manager or to outsource IT services only for the Reitzel division.
Although the human resource manager’s (Mr. Moreno) proposal was found to have merit by the corporate IT vice president, the larger management maintained a skeptic appeal to the report. Since the corporation has had a history of conservativeness, a taskforce that included Moreno was appointed to look into whether or not the corporation should outsource IT services. Since the taskforce had little knowledge on outsourcing, it engaged the services of a consultant who assigned it the duty to evaluate its IT position before outsourcing.
Ramachandran and Gopal (2010) affirm that research on the existing systems guides IT experts in offering solutions. After the evaluation and scrutiny by the consultant, the consultant made recommendations on the firm from which the company could outsource. Two firms, namely ABC and DEF Corporations, delivered the proposals. After the evaluation, ABC won the preference. However, after going through the proposal, several managers began to develop and to voice contradictory opinions for and against outsourcing.
Outsourcing Schaeffer
Although Schaeffer had an efficient and centralized IT infrastructure, the process of outsourcing IT services was new to the corporation that had remained conservative over the years. As such, the corporation decided to approach the issue by appointing a taskforce that included Mr. Moreno who had proposed IT outsourcing. Having little knowledge on IT infrastructure and outsourcing, the taskforce decided to engage the services of a consultant to save money.
As Benaroch, Dai, and Kauffman (2010) argue, since IT is a technical and expensive area to maintain, a firm may opt to outsource the service. As a result, Gartner Consulting Group was engaged. The approach that the consultant came up with involved engaging the client in self-evaluation through filling of appraisal templates that would enable the company to understand its strengths in IT and come up with specifics of the IT services to outsource. After evaluation, the taskforce prepared a request for proposal (RFP) that was floated to potential IT infrastructure vendors.
After floating the requests for proposals, the taskforce realized that due to the scope of Reitzel division in the international markets, only two IT vendors, ABC and DEF would serve the purpose. After engaging the two companies in discussion and in writing of proposals, the taskforce narrowed down to ABC. Although the projected cost for IT outsourcing from ABC went over the projected cost of IT with $ 20 million, ABC offered to negotiate and work with the task force to fit the cost within the $200 million as projected since the extra cost would have been met with outright resistance from the conservative management of Schaeffer Corporation.
It is evident that the consultant engaged by the taskforce in sourcing for the IT infrastructure vendor played an important role. For instance, the consultant enabled Schaeffer Corporation to understand its IT strengths and to identify the exact services that the company needed to outsource. Since consultants are trained and experienced, they are able to fast tract IT systems (Benaroch et al., 2010). The consultants also helped the task company to include the relevant details concerning the services it wanted to outsource. Some of them would have been simply omitted to the extent of costing the company more money. The consultants also advised on the IT vendors to give preference, owing to geographical location of their markets. Finally, Gartner consulting had prepared the company in appreciating that outsourcing for IT infrastructure would not save the company money since its systems were already efficient.
Benefits
Schaffer hoped to achieve various benefits from outsourcing its IT infrastructure. To begin with, the proposer of the outsourcing idea believed that that the corporation would save money by outsourcing. Benaroch et al. (2010) affirm that outsourcing of IT services saves operational cost, for instance, the cost of maintaining IT employees. However, the proposal by ABC infrastructure vendor indicated that no cost could be saved. However, the cost went higher with $20 million before leveling. In addition, the company hoped to achieve high growth goals in profits and development at all levels that could only be achieved through superior information technology services. In addition, the company’s IT resources were over stretched. The new expansion endeavors would stretch it beyond limits, thus restraining its ability to achieve the projected growth. Han and Mithas (2013) observe that IT outsourcers with highly trained and capable human resource and superb hardware would assist the corporation to adjust in achieving new communication heights.
Moreover, Charles Gibbs, the IT vice president for Reitzel, affirms that the corporation would have other benefits, including reduced outages, which have always cost the company money through the disruption of important businesses. This case would only happen when a competitive vendor such as ABC manages the IT. The corporation also perceives that its helpdesk and desktop service provision will improve after outsourcing. Finally, the corporation aims at reaching the global market with efficient IT infrastructure.
Disadvantages
Although the taskforce on IT infrastructure recommended the outsourcing of all IT services at Schaeffer Corporation after making the proposal, the recommendation was met with resistance from some managers who cited various disadvantages. First, Vivian Johnson, the vice president of It at Kinzer, claimed that outsourcing IT infrastructure would amount to giving out a crucial resource to be managed by an outsider. As a critical factor, Young and Gurbaxani (2012) argued that it would be disadvantageous for the organization to have its information movement controlled and overseen by an outsider.
The other disadvantage that Vivian pointed out is that the current workforce that seems conducive for Schaeffer to work with will over time move to other companies, thus allowing new faces to come over. Therefore, the company will be disadvantaged to negotiate new terms with the new people. It will have lost its bargaining power. The third disadvantage that the manager raised is that various outsourcing relationships have collapsed to the annoyance of the client company. Han and Mithas (2013) also affirm that in the event that the outsourcing relationship between outsourcer and client collapses, then the company will suffer trying to bring back its IT specialist who will have moved to other companies.
The cost of bringing back the current IT specialists to the company will be high for the Schaeffer Corporation, thus making it fail in achieving its projected growth. The fourth disadvantage pointed out by this manager is that outsourcing of IT infrastructure would result in the suspension of the IT specialists in the company. Suspension of loyal employees who have worked for a company over the years affects the morale of all the other employees (Cao, Mohan, Ramesh, & Sarkar, 2013). Employees will begin to feel insecure working for the company.
Turnover rate may increase. An increase in voice and lack of commitment will eventually affect the performance of the corporation negatively. Such adverse effects that cannot be realized at the face value may end up destroying what the company has worked to build over the years. For instance, besides being a non-unionist, the company has never had a strike. However, if the IT employees realize that the proposed outsourcing is a threat to their job security, they may begin to increase their voice through strikes and go-slows.
Carol Hanna, the vice president for finance at the Colbert division of Schaeffer Corporation, points out other disadvantages. To begin with, Hannah argues that the proposed IT infrastructure outsourcing is too risky and expensive. Young and Gurbaxani (2012) assert that outsourcing services may carry hidden costs that may later raise the total cost, hence working negatively for the client. Hanna asserts that whenever such hidden costs emerge in the second or third year of the agreement, the client’s hands are tied since the projected financial cost rises. The cost of managing the relationship between the outsourcer and the client and the cost of administration are also rarely factored in the proposals (Han & Mithas, 2013).
These unanticipated costs are likely to affect the profitability of the corporation. The other disadvantage is that Reitzel division will enjoy the benefits of the outsourcing services at the expense of the other two divisions. For instance, the cost of outsourcing will be met by the corporation, which pulls resources from all divisions, only for the benefits to go to one division. Hanna also points out to the disadvantage of unavailability of ABC technicians since some of them will be required to locate far away in remote places. Li (2014) observes that remote location of IT experts means that whenever IT problems arise in the corporation, the employees will experience delays in the rectification of problems. Unavailability of IT technicians and specialists when they are needed most will end up affecting the organization and its service delivery.
Therefore, it would be better to train the current IT personnel who are already available who other employees can negotiate with to have their IT problems fixed on time. Finally, Hanna asserts that it will be to the disadvantage of the employees to break the current relationship bond that exists between them and the IT specialists. Learning how to relate with the new IT specialist from the outsourcer will also take time and energy. During this time, the company will have slow delivery of services. It may even suffer losses.
As evident in the analysis above, so many issues were pointed out after the team’s proposal had been established. The drawbacks can be attributed to the conservative nature of the corporation over the years. Fear, uncertainty, and doubts have reigned over the management of the corporation for years. The company does not want to try new things. It is comfortable making profits with low growth. Li (2014) asserts that the fear of making losses and doubt of growth make corporations remain redundant. In addition, the fact that the corporation’s IT infrastructure was approved as efficient by the consultant made most of the vice presidents comfortable with what they already had in place. However, according to Cao et al. (2013), the high projected growth and profits required the management to take risk and have superb IT infrastructure to manage and monitor its international administration, market, and sales.
Additional Options-Outsourcing Reitzel Division
Apart from the two main opinions of outsourcing or not outsourcing IT infrastructure from ABC, there exists another option for Schaeffer Corporation, namely outsourcing Reitzel division only. Some managers proposed that the corporation should outsource the Reizel IT services, including the division’s data center, its network, and the divisional phone system, leaving the rest of the corporation uninterrupted. Those who were for this school of thought believed in the need to maintain the current bunch of IT specialists undisrupted. Interfering with Reitzel, which is the targeted division for improvement, would prevent the foreseen negative impacts of suspending the current IT personnel.
Outsourcing the Reitz IT infrastructure only would assure the corporation that in case the proposed outsourcing failed, it would affect a small section of the corporation and that the company would have its IT specialists intact. Such company personnel would build the programs back to guarantee continuity of service delivery in the division. In addition, outsourcing for the division that is earmarked for growth would cut on cost. Having to outsource for a change of the whole corporation’s IT infrastructure is an expensive affair (Young & Gurbaxani, 2012). However, Hanna, the finance vice president at Calbert, asserts that the divisions that are not beneficiaries of outsourcing should not bear the cost.
However, the IT vice president counters the suggestion that Schaeffer Corporation should outsource only for Reitz division. Gibbs argues that outsourcing IT infrastructure services for only Reitzel while leaving the other division with its in-house IT would be very expensive for the corporation. The company would lose the economies of scale and hence the bargaining power with the vendor. The current deal in the ABC proposal is awarded and cut down after the vendor factored in the economies of scale. Therefore, in the event that the corporation withdraws the other divisions from the deal, fresh negotiations will have to be undertaken (Cao et al., 2013). In the new negotiations, the client will be awarded more expensive deal due to low economies of scale.
The Option that Schaeffer should select
Schaeffer should select the option of outsourcing for its entire IT infrastructure as the taskforce recommended due to several factors. First, Schaeffer’s new management already has high projected growth that the company must achieve within the set period. Although this move is a first and bold step towards growth in the seemingly redundant corporation, extraordinary steps have to be undertaken. For example, the corporation must increase its sales and profits by 14% and 15% respectively. This move will mean spreading into new geographical markets, acquiring new markets, and increasing the volume of sales. The current IT infrastructure cannot handle this load. Hence, there is a need to fast track the corporation’s IT. Corporations need to take calculated risk while avoiding IT redundancy for it to remain competitive in the coming years (Ramachandran & Gopal, 2010). On the other hand, various disadvantages of outsourcing raised by some managers are rooted on the fear of taking risk, which is a vice in business, as counteracted by Gibbs’ arguments.
Controversy for Disadvantages
There is evident controversy for disadvantages that could have been avoided by the taskforce. For instance, the vice presidents seem to be out rightly opposing each other’s argument. Controversial issues such as employee suspension and assimilation by ABC were already covered between the corporation and ABC. The employees were involved. The argument that the company will suffer losses in case the deal goes sour is also controversial (Tambe & Hitt, 2010). Outsourced services are made by legal agreements between parties. The contracts have to be obligatory to both (Cao et al., 2013).
The argument that the outsourcer will shortchange the client in the first year is equally controversial since service delivery is subject to terms of agreement. The client also monitors the value for his or her money. Besides, the argument that the cost of outsourcing will be borne by other divisions, which are not part of its beneficiaries is also controversial. The three divisions of Schaeffer Corporation report to the headquarters where their financial excesses are monitored from the top. The IT infrastructure is also centralized and controlled from a central place for all departments. Hence, IT is a corporation affair, rather than divisional issue at Schaeffer.
Controversies can be avoided through the involvement of all the managers in the process of developing the outsourcing proposal (Tambe & Hitt, 2010). Even before engaging the consultant, the taskforce could have engaged all the vice presidents to deliberate on the issue at early stages. The IT vice president could also have educated the top management on various issues that concern its outsourcing at early stages of the issue. According to Ramachandran and Gopal (2010), proper guidance by IT specialists is crucial for effective understanding of systems by client administration. With such efforts few controversies and oppositions could have been registered.
Reference List
Benaroch, M., Dai, Q., & Kauffman, J. (2010). Should We Go Our Own Way? Backsourcing Flexibility in IT Services Contracts. Journal of Management Information Systems, 26(4), 317-358.
Cao, L., Mohan, K., Ramesh, B., & Sarkar, S. (2013). Evolution of Governance: Achieving Ambidexterity in IT Outsourcing. Journal of Management Information Systems, 30(3), 115-140.
Han, K., & Mithas, S. (2013). Information Technology Outsourcing and Non-It Operating Costs: An Empirical Investigation. MIS Quarterly, 37(1), 315-331.
Li, X. (2014). Relational Contracts, Growth Options, and Heterogeneous Beliefs: A Game-Theoretic Perspective on Information Technology Outsourcing. Journal of Management Information Systems, 31(2), 319-350.
Ramachandran, V., & Gopal, A. (2010). Managers’ Judgments of Performance in IT Services Outsourcing. Journal of Management Information Systems, 26(4), 181-218.
Tambe, B., & Hitt, M. (2010). How Offshoring Affects IT Workers. Communications of the ACM, 53(10), 62-70.
Young, C., & Gurbaxani, V. (2012). Information Technology Outsourcing, Knowledge Transfer, and Firm Productivity: An Empirical Analysis. MIS Quarterly, 36(4), 1043-1063.