E - COMMERCE

1. What is IT Outsourcing?
• Outsourcing of IT processes - this may range from infrastructure, to software development, maintenance and support.
• Outsourcing - also a subcontracting a process, such as product design or manufacturing, to a third-party company

The concept of taking internal company functions and paying an outside firm to handle them. Outsourcing is done to save money, improve quality, or free company resources for other activities. Outsourcing was first done in the data-processing industry and has spread to areas, including telemessaging and call centers. Outsourcing is the wave of the future.

•The definition of outsourcing, basically started in the late 80's, is certainly correct. frequently, the exact operations (people, equipment, etc.) were sold to an outside party to run. So in data processing for example, the entire computer department became owned/employed by say IBM who ran it at a fixed cost, or all accounting functions were taken over by an outside firm for a specified fee. It was thought the original company didn't have to deal with employee issues, benefits, etc. I would dispute it is the wave of the future. Like many ideas the promise frequently didn't live up to the reality. Many companies are bringing back in house the outsourced functions after finding: Others don't operate any cheaper, and are frequently more expensive. The loss of direct control over who handles their affairs, the caring of those people about the company, and effect on other stakeholders, wasn't worth it and was even a detriment. (For example, many of the customer service centers outsourced to India are being brought back as customers are unsatisfied, opportunities to benefit the company in accounting processes weren't pursued - things like a new report was only done at a high direct cost, etc.)

2. Advantage and Disadvantage

Advantage
The benefits of Outsourcing are:
-Less capital expenditure - For example, by outsourcing information technology requirements, a company does not have to buy expensive hardware and software.
-Less management headache - For example, by outsourcing business process such as accounting, a company no longer has to hire and manage accounting personnel.
-Focus on core competencies - Outsourcing non-core related processes will allow a business to focus more on it's core competencies and strengths, giving it a competitive advantage.

Disadvantage
-Before deciding on outsourcing your company's business process, keep in mind the disadvantages of outsourcing:
-Less managerial control - It may be harder to manage the outsourcing service provider as compared to managing your own employees.
-Outsourcing company goes out of business - If your outsourcing service provide goes bankrupt or out of business, your company will have to quickly transition to a new service provider or take the process back in-house.
-May be more expensive - Sometimes it is cheaper to keep a process in-house as compared to outsourcing.
-Security and confidentiality issues - If your company is outsourcing business processes such as payroll, confidential information such as salary will be known to the outsourcing service provider.

3. Implication

•When the Dow Jones stock index recorded its largest single-day loss in late September 2008, many investors panicked. But billionaire investor Warren Buffet took a different stance – declaring the time was right to buy United States stocks. Buffet saw opportunity amidst chaos. That’s a lesson the electronics supply chain would do well to consider in current economic times, industry executives argue.

“When business starts to go bad, people panic. As a result, they tend to abandon their long-term strategic course, scrambling for short-term relief,” said Greg Frazier, executive vice president, supply chain business development worldwide, Avnet Electronics Marketing, Phoenix. For example, Frazier has recently fielded a flurry of calls from small and mid-size OEMs asking about outsourcing – customers that had previously decided that outsourcing was not the right fit for their company. And though under the right circumstances outsourcing can certainly provide an OEM with significant opportunities for savings, it is no panacea. “When they hear major OEMs like Sony announce plans to close 10 percent of its plants worldwide and shift more manufacturing to outsourcing, they question their (manufacturing) decisions,” Frazier noted.

Supply chain integrators like Avnet work closely with OEM customers to evaluate the pros and cons of outsourcing, said Frazier, who cautions companies to be particularly vigilant in their evaluation of suitability and financial stability of potential contract manufacturing partners. A recent report from electronics research firm iSuppli Corp. found that the global electronics contract manufacturing sector has begun to feel the impact of the slowdown.

Growth in 2008 for the contract manufacturing sector is estimated to be almost half of the 16.1 percent recorded in 2007. “As the end markets erode die to recession, the trickledown effect will cause less significant revenue growth for electronics supply chain participants, including electronic manufacturing service providers (EMS) and original design manufacturers (ODM),” said Adam Pick, principal analyst, EMS/ODM, for iSuppli, El Segundo, Calif.

OEMs must also carefully consider the regions in which they plan to outsource. “Everyone’s automatic assumption is that Asia is the go-to region. But when you factor in energy costs, which have only recently begun to come down again, and rising labor rates, local alternatives like Mexico can be very attractive,” said Frazier.

When selecting an EMS partner, it's also important to remember that one size does not fit all, said Craig LaBarge, chief executive officer and president of LaBarge, Inc., a St. Louis-based EMS provider. “Depending upon the nature of their business, OEMs will have different expectations for their outsourcing partners. Our core competencies are very different than those of a provider that's set up to produce large volumes of a consumer-oriented product, for example.”

LaBarge's niche is producing low volume, high-rate-of-change, high-complexity electronic assemblies, which may be used in applications ranging from military and aerospace to industrial and medical.

While the current economic environment presents an excellent opportunity for OEMs to further utilize outsourcing as a way to reduce their manufacturing and design costs, there are challenges and difficulties that come with this kind of change. “In our experience, the most successful situations are those where the customer understands that outsourcing is as much a cultural change as a strategic one for their organization,” LaBarge noted.

The bottom line is that even in the best of economic times, the decision to outsource should be made based on a careful cost/benefit analysis. “This is not a quick, short-term solution,” said Frazier. “Every OEM must consider their options based on their individual circumstances and goals, and not make a knee-jerk reaction based on what others are doing.”