Outsourcing – New threat

Executive Summary

The growth and expansion of outsourcing in recent years is manifestation of a general shift in business philosophy. Despite this growth, a number of firms still grapple with successful outsourcing. This is because successful outsourcing demands strong background knowledge of competencies of an organization and future direction. The reasons for outsourcing are varied and depend on the type of services sought from another party. Principal merits of outsourcing include cost savings, flexibility, knowledge, accountability and focus.

The case study material “Strategic Outsourcing at Bharti Airtel Limited” by Martinez-Jerez and Narayanan offers an insightful analysis of the underlying reasons why companies outsource critical services (2007). The case of Bharti Airtel is a typical example of the importance of outsourcing, the challenges, major concerns and an analysis of how these concerns can be addressed. In addition, the case offers an insightful analysis on the management of IT expenditures and the need to transfer risks to vendors. The management must seek to adopt a lean and predictable model if they are to effectively manage their capital expenditures.

An analysis of the case study reveals that it presents underlying issues that firms involved in the procurement and management of capital assets have to grapple with to ensure lean and cost-effective systems. Key issues raised in the case material include the complexity of tendering process for network expansions. In an industry where capital equipment must be replaced continuously, the challenge rests on the huge amounts of investments sunk in the purchase of capital expenditures. The importance of strategic outsourcing and key issues of concern are highlighted.

If you were Bharti, what major concerns would you have about entering an outsourcing agreement with IBM? With Ericsson, Nokia, or Siemens?

Outsourcing is an important, but a complex decision to make. This is because it supports an organization in transferring risks to another, but there are a number of factors to consider before in making successful transition from an organization to a vendor. In the case study material, Bharti has a number of issues to consider before entering an outsourcing agreement with the four vendors.

The first and the most important factor Bharti has to consider is the ability of the four vendors to live up to the companies’ expectations.  This is because the capacity of Bharti to remain competitive and deliver services to its clients are anchored on the capacity of the selected vendors to provide Bharti with network capacity complete and comprehensive end-to-end management service for supplying, installing, and managing all of its hardware and software requirement in accordance with its projected growth. This does not only encompass the capacity to deliver the services, but also the ability to meet quality controls specified in the service. These include assessment of network quality such as number of completed and dropped calls.

The second concern is the ability of the vendors to change and meet the demands Bharti needs in the ever-changing and volatile industry. This is related to the capacity of the vendor to manage all software and hardware requirements as concerns basic IT and all relevant applications required to run the IT architecture. The major problem that led to need to outsource vendor services was the management of firms IT Capital Expenditures. This is because intensive capital equipments that were purchased within a couple of years were no longer able to cope up with the changes and the demands of the consumers. This implied the company invested in unpredictable expenditure, which eventually turned into waste after a couple of years. The vendor therefore, must have the capacity to offer a lean and predictable cost model. This is a viable way through which Bharti could become the lowest-cost producer of minutes.

The third concern Bharti would have about entering an outsourcing agreement with the vendors is the ability of the vendors to ensure non-disruption of services offered by Bharti through maintenance of all hardware and software. The telecommunications industry is a volatile sector that requires effective security and fraud management, business intelligence and human resource management. This implies that the vendor must undertake to ensure that all internal customer service and all negotiations with external software and hardware suppliers are captured and effectively addressed.

The fourth concern Bharti had to have about entering an outsourcing agreement with IBM is the readiness and support of executives, managers within the company ranks and employees. This is because one of the main concerns expressed by all the board members was the risk of excessive reliance upon the vendors. The underlying reason was that the executives were not ready for change. Bharti had to assess the management of change through an analysis of change drivers in an organization.

To avoid internal conflict, it was necessary to ensure that key drivers of change such as industry evolution, business cycles, competitive structures, market needs, technological changes, and rules and procedures were captured. Evolution normally comes up with new way of doing things as seen in the current case. It was the responsibility of Bharti to ensure that executive and managers understand that companies in a given industry must adopt changes which industry evolution has brought about. In this case, industry evolution is the force, which necessitates an organization to adopt change. This is because the capacity to enlist the support of all stakeholders is a critical success factor in change management.

What do you see as advantages and disadvantages of outsourcing agreement outlined by Gupta? How would you structure the agreement to address your concerns and capture any advantages you have identified?

Outsourcing agreement outlined by Gupta presents a number of advantages as well as disadvantages for the firm. The first advantage is that the vendors have access to the best technology in the world. They would deliver the technology that would address the shortcomings experienced by the firm in the past. Second, Bharti would transfer the risk to a party that has the capacity to manage the risk better. Third, the outsourcing agreement would foster greater and better working relationships between Bharti and the vendors. In addition, it would help Bharti mange the high cost of procuring and maintaining capital assets.

On the other hand, the agreement presents a number of disadvantages for the firm. First, one of the core competencies of Bharti is the operational experience. In outsourcing these services, they would lose the competency. Second, hardware and software applications not supported by IBM may not be available. Third, the company faces a serious human resource problem, especially by transferring frontline personnel in capital asset management.

The agreement would be drafted in a manner that takes cognizance of the concerns of all stakeholders. In addition, the agreement must capture the important aspects of business strategy.  This implies that agreement must be aligned to the overall strategy of the organization and ensure that it makes financial sense to the company and the shareholders.

References

Martinez-Jerez, F.A. and Narayanan, V.G. (2007). Strategic Outsourcing at Bharti Airtel Limited. Harvard Business School. 9-107-003