First Telecom: Insourcing vs. Outsourcing

Abstract

Subject area

This case attempts to study one of the key problems faced by a multinational organisation in the globalised environment that exists today: whether to outsource or insource. Outsourcing deals with getting into a contract with an outside vendor/supplier (local to the region in question) to deliver services to the parent company as per the agreed deliverables. On the other hand, insourcing deals with setting up operations in the destination country and hiring local staff on behalf of the company to do the same tasks.

Historically, outsourcing has been considered a better choice because of several benefits such as the ease of setting up operations, a predictable costing model and reduced capital investment. However, it comes with its own set of disadvantages as well, including a high attrition rate and a sub-standard level of quality in the deliverables. Apart from the quantifiable parameters, there are several qualitative parameters as well, which encompasses the employees' passion/commitment towards the company, sense of achievement and performance management process.

This case considers an existing situation in First Telecom (henceforth, referred as FT), where they have outsourced one part of their operations to multiple providers in India and are now facing huge issues with the quality of the deliverables; as a result, FT are now looking to explore if an insourced solution would be more cost-effective and productive. It evaluates the two models against various parameters and makes a recommendation on the preferred model.

Study level/applicability

This case can be used as a teaching tool in the following courses: MBA/postgraduate programme in strategic decision-making; MBA/postgraduate programme in management in management accounting and management control systems; and executive training programme for middle- and senior-level employees to look at the various factors involved (in addition to cost) that should be taken into account while comparing outsourcing versus insourcing.

Case overview

FT is a communication service provider and has presence in more than 170 countries around the world. The company is considered among the top three telecom companies around the globe and offers solutions to multinational customers in the areas of networks, IP telephony, security services and other managed services.

The company has more than 100,000 employees around the globe. In addition to the regular (on rolls) employees, the company also outsources a lot of its operations in various countries to local service providers. The services that this company outsources include software/tools development, solution pricing and in-life service management. Historically, the company has believed that outsourcing is a better alternative because of the ease of setting up operations and lower cost.

However, because of the recent changes in the global market, there is a huge pressure within the company to reconsider all the functions and find ways to contain costs to help the company's bottom line.

There have been numerous complaints about the quality of output from one of the outsourced functions, namely, the “Pricing Team”, which is being presently outsourced to two service providers in India. The lack of accuracy has cost the company a key opportunity valued at more than USD5 million and the COO is furious at this loss. He has tasked the head of business improvement to do a full review of the function and look at the possible alternatives the company can explore to avoid these issues in future.

FT now wants to do a cost-comparison analysis of the existing set-up with a new insourced set-up considering all costs that would come into play. This would help FT to decide the future course of action to ensure reduced costs and enhanced operational efficiency from the process.

Expected learning outcomes

Understanding of cost-comparison parameters involved as an effective tool for strategy development and achieving organisational objectives; understanding of SWOT analysis (organisation level and decision level) and its applicability in the organisation context; understanding the Porter's five competitive forces model to illustrate the effect of environment on an organisation; and understanding of outsourcing and insourcing models and the pros and cons of each model, which is a key management decision in most multinational organisations.

Supplementary materials

Historical reports of the concerned unit in terms of the costs incurred, rate of attrition and operational efficiency achieved. Cost Accounting: A Managerial Emphasis, 14th ed., Charles T. Horngren, Srikant M. Datar and Madhav Rajan, Publisher: Prentice-Hall, 2012.Practical implications Based on the option (outsourcing versus insourcing) found to be better, appropriate actions would need to be taken in terms of either renewing the contracts with the outsourcing partners or preparing to terminate the existing contracts and hiring of talent from the market to replace the outsourced staff.

Social implications

For nearly two decades, India as a country has grown considerably and one of the key contributors in that growth has been “Business Process Outsourcing” from all across the world to India. While the outsourcing wave has provided the initial push to the economy of India, it would not be able to help sustain the momentum primarily because of two reasons: the first is the growth of other countries, such as Hungary, the Philippines and China, as alternatives for outsourcing (and equally may be more cost-effective at times); and the second reason is the shift in various companies towards an insourcing model for critical functions.

Therefore, as a country, India needs to move ahead and, instead of only focusing on providing resources to do the tasks outsourced by global companies, focus should now shift to promoting innovation and creativity among the workforce. A lot of companies nowadays are realising the importance of product innovation and are investing huge amounts in R&D to come up with breakthrough technologies that can help them create a sustainable development model. However, this should in no way be considered an end of the outsourcing era. Although there needs to be an effort towards improving the interlock process, outsourcing is here to stay because of the benefits it brings.

Citation

Singhania, M. and Gupta, P. (2014), "First Telecom: Insourcing vs. Outsourcing", , Vol. 4 No. 5. https://doi.org/10.1108/EEMCS-10-2013-0203