Factors Influencing The Decision To Outsource Versus Keeping In-house Are Essay-worthy.

Importance of operational performance in outsourcing decisions

Question:

Discuss factors that will influence the decision on outsourcing or to keep it in house by using the performance objectives and Risks involved in the process of decision making and the recommendations that will help in mitigating the risks?

Tasks which are strategically unimportant but have important operational performance are to be outsourced. For e.g., an auto manufacturer may outsource the delivery services to a dealer.  How delivery affects customer is not a matter of strategic importance but it smoothens operations hugely.  It is to be checked whether the operational performance come to a standstill if it’s to be outsourced. Besides lower value services like back office and human resources, the oil companies also outsource higher value serves like the entire gamut of technology or the IT Vertical completely to gain efficiency and improvements in productivity and also cost cutting through operational excellence.

Figure 1: Outsourcing Decision Matrix

Source: (Dey, LaGuardia and Srinivasan, 2011)

The doors are open for oil majors to take benefit of cost minimization like outsourcing of verticals like IT and back office operations are seen as proven sustainable policies. Globally according to Forbes Global 2000, about 36 % of oil firms have resorted to outsourcing policies (Dey, LaGuardia and Srinivasan, 2011). Sophisticated cost minimization policies, like application portfolio rationalization and applying cloud infrastructure, are to drive further more cost reduction. About 75% of times, higher value is generated from outsourcing of IT verticals in Forbes Global 2000 study. This particular figure helps in knowing the overall operational performance against the strategic importance which will help in the decision making process.

 As a part of the global IT Outsourcing wave, Royal Dutch Shell has entered a$ 4 billion multi supplier outsourcing deal with EDS and AT&T that tends to catapult Shell to the next higher level in customer service. It is considered that the deal will cover 150000 users in over 100 nations that will cause EDS managing Shell’s computing services. EDS, that is over 45 years ago, will act as a custodian of IT services of all other Outsourcing companies. Emails and Internet phone services will witness a sea change in terms of achieving robustness and integration as Shell embodies rise in efficiency and improvements in productivity (Dowle et al., 2015). In the IT infrastructure team of Shell there is seen massive restructuring as 600 workers will stay in house and remaining 3000 jobs will be outsourced to the IT consulting majors. In order to thrive in the world of competition and volatile crude oil prices, Shell aims to increase its hydrocarbon reserves while keeping marketing and distribution channels of products and services streamlined and efficient.

Shell’s Endeavour to outsource from IT companies emphasizes the oil major’s desire to innovate by leveraging on technology and turn out to be a winner by implementing end to end IT solutions from oil discovery to managing human capital(Stevenson, 2012). Thus IT services and products will traverse the entire spectrum of company’s verticals crisis crossing the various functions successfully. This will result into streamlining of the processes and better productivity, lower costs and higher bottom lines. The company’s IT Infrastructure Outsourcing deal was considered to the most complicated and most innovative program launched by the company ever. As a result, end to end services have been streamlined and standardized and innovations have lowered costs and made the company sharper and leaner in the highly competitive environment.

Outsourcing policies in the oil industry

Shell in 2012 has renewed its IT Outsourcing deal with Deutsche Telekom’s T-Systems announced for another five years towards worldwide hosting and storage services. T-Systems will provide Shell with data infrastructure and computer services across the world (Grant, 2012). Shell has implemented SAP and cloud computing successfully, boosting efficiency and lowering costs. Shell has signed a $ 300 million deal with Logica for 10 years that will take over Shell’s in-house IT delivery team across 35 countries in Europe and Asia. This is a move towards cost cutting and better efficiency.

• The first factor that needs proper consideration is the political factor because government intervention can be noticed in regular intervals which may cause problem by imposing various legislation, rules, tax policy restrictions that will force the business to implement in the business activities. Political stability which is recognized in Malaysia as it practices high level of Parliamentary Democracy on the basis of monarch in constitution. Another political factor is the tariffs, policy on tax as well as trade control(Sanchezâ€ÂRodrigues, 2010). It can be noticed that Malaysia has introduced innovative plan on investment strategy in the year 2010 which was established in order to promote natural gas as well as oil exploration. This policy was made by the Shell so that they only needed to pay lesser tax to the government which will definitely be helpful in reducing the overall cost of this company. The last factor which was recognized in the political term is the government policies on this company. It was noticed that Malaysia was providing subsidies to most of the companies which was involved in the petroleum as well as energy industry. This wills the company to check on their operating cost which was necessary to sustain in the market.
   
• The next factor will be the economic factor which includes the rate of interest, inflation rate, unemployment, which will have a direct impact on the performance within an organization (Hill and Hill, 2012). One of the economical factors will be the growth rate of any country. This will help in increasing the investment pattern and spending habits of customers. Therefore, it was noticed that the revenue of Shell was noticed to have an increase in the growth rate. Inflation rate is another economical factor which states that if the inflation rate is kept low, then company can easily make long term plans as because they believe that the money engaged is not wasted rather it can be helpful in the purchasing every year.
   
• Social factor is another issue that needs proper attention which includes the cultural as well as demographic issues related to values and attitudes which changes with the change in trend and fashion. This factor will change as per the customer needs as well expectations which will be according to the size of the market potential.
   
• Another factor that can lead to change will be the technological factor which includes research and development activities, automation which will give rise to incentives on the basis of technological changes. It will be responsible for taking decisions on outsourcing whether there is any barrier to entry or not, and the level of efficiency in the production area.
   
• Last but not the least, there is the ecological factors which includes building relationship with human beings. It has been seen that Shell products can have an adverse effect as far as environment is concerned as because its business activities are to deal with oil and gas (Schönsleben, 2012). Petroleum is the major cause of acid rain, which is responsible to cause various environmental problems like, dead coral reefs, lakes in acidized condition and dead coral reefs. Another destruction issue will be if the petroleum will be burnt, then a large of carbon dioxide gas will come out which will cause heat in the atmosphere which will have effect on the greenhouse.

Risk should be mitigated as far as possible which will help identifying the various goals which was pre planned in the contingency model. It is advisable that the risk need to be reduced in way of forecasting by supply as well as demand which has to be connected directly with the supplier (Jones and Robinson, 2012). Risk has to be properly managed and it has been classified in three broad categories that have been explained with proper justification:

• The management should focus on the strategy in order to minimize the risk with the help of capacity as well as managing with the availability of concerned resources as far as possible.
   
• Another process in which risk can be reduced will be having proper security which can provide information, privacy in order to compliance in the most effective manner.
   
• Process which will involve in the risk management which will be helpful to have a continuous flow of information from the supplier to its customers which helps in building healthy relationship between them (Myerson, 2012)..

It can be understood from the above points that outsourcing is all about maintain relationship by various risks, areas of concern, which further includes perfect knowledge of the business activities, in source relationship as well as control with the management as a whole which will lead to maintaining confidentiality which are even beneficial to maintain a healthy relationship with the offshore vendors (Sternberg, 2011). It has been noticed that the IT infrastructure has put more emphasis on the structure of the organization, joint process in fields as well as shouldering the responsibilities to indicate in the control level in the most efficient manner.

Other recommendations which should be taken into consideration will be the maintaining the relationship with the outsourcer in order to co operates with them which will definitely helpful in mitigating risk in the framework of this particular company.

Another vital issue that can be noticed will be the lack in innovation which may have an adverse effect; rather it should make effort in carrying certain responsibilities by which the insourcer can innovate which will be helpful in carrying out the business activities. If the products are outsourced in the most efficient manner, then a healthy relationship can be built between the company and the outsourcing company and the risk can therefore be mitigated to a large extent as the responsibilities will be divided which will help in the smooth functioning of the Shell Company in order to carry out the business activities.

Conclusion

 Outsourcing embodies a multiplier effect in profits and productivity gains by reduction of risks. Mitigation of risks by adhering to privacy rules and continuous dissemination and uninterrupted flow of information assumes centre stage in a successful outsourcing deal. A leaner organization is in the making after cost cutting is undertaken and outsourcing of low strategic, high operating performance tasks has been dealt with.  While marketing and distribution channels could also be outsourced just in the case of an auto manufacturer, higher value verticals like IT too may be outsourced to achieve significant ramp ups in productivity, cost cutting and efficiency. The case of Shell is a win-win deal with its outsourcers with huge improvement in profitability and ROCE. Technology outsourcing in Shell is hailed as an ecosystem. The holistic outsourcing deal of Shell with EDS and T Systems is a stride towards achieving bigger returns on equity. Social, economic and political factors are also relevant and intertwined in measuring the success of an outsourcing deal. Imposition of taxes and tariffs as in Malaysia is also crucial step by the government and is seen as a political economic development. In crux, Shell’s outsourcing success story is a profound delving in organizational strategy in the backdrop of outsourcing policy.

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