Outsourcing at Office Supply Inc. Case

Topics: Cost, Costs, Outsourcing Pages: 5 (1610 words) Published: April 16, 2011
Office Supply Incorporated (OSI) is a company in crisis, with challenges in its cost structure and poor IT performance. Outsourcing to Technology Infrastructure Solutions (TIS) is an opportunity to both reduce costs and complexity for the firm, but first must consider whether outsourcing is a good strategic fit for OSI. Outsourcing is known as the practice of turning over responsibility of some or all of organizations information systems to a foreign firm in order to stay competitive. Outsourcing is not new to the business world, as it dominated the manufacturing sector the past couple of decades. There are various advantages and disadvantages. Advantages include lower costs, better quality, and downsizing to focus on the core competencies, highly motivated workforce, and Information System performance problems. Disadvantages include loss of jobs and its effects, hidden costs that are often not calculated security and confidentiality issues, cultural barriers, and lack of control over the supplier. Companies need to effectively research for to be successful in an outsourcing relationship because outsourcing failures are very costly and are difficult to reverse. Outsourcing is a now a popular strategy for many organizations as the worldwide market for computing services are projected to grow yearly. In the future, new outsourcing destinations such as Eastern Europe are expected to pop up. It is essential to carefully weigh both the advantages and disadvantages before heading into an outsourcing relationship with another party. Currently, OSI’s IT spends about 4% of sales and has been steadily increasing over the past year. Gross margin is declining due to the competitive pressure, particularly from the local players. Even there are so many companies would like to offer OSI to help them out with their IT infrastructures. Benjamin Wagner, the company’s chief financial officer, still needs to analysis the outsourcing very carefully because there is no reverse with a wrong decision. Therefore, Benjamin Wagner is asking TIS to provide a detailed proposal and presentation to help him to make the corporate decision. The two main aims for OSI to look for outsourcing are to deliver improved IT service, and to drive down the cost of operations. QUESTION

1. (a) What are the outsourcing cost savings for OSI?
By outsourcing its IT operations, OSI could diminish traditional capital investment in infrastructure and technology by diverting these costs to operating expenses. In addition, the company could realize annual savings from fewer costs in three primary categories: compensation (salary, benefits, and overtime pay); hardware purchase and maintenance; and other miscellaneous expenses such as software, network, facilities, disaster recovery, and corporate overhead. The reasons that compensation costs at TIS are significantly lower than at OSI shows as below: The specialized training of TIS engineers made it possible for fewer people to do the same amount of work. Also, Tis was located in Denver, which meant a lower cost of living and hence, lower salaries than the Chicago-based OSI. Moreover, TIS could assign personnel to a variety of projects, making the best use of their time. This means not only saving the salaries but also the related costs such as overtime. Now OSI has 213 employees to do the activities however TIS could be accomplished the same tasks by about 130 people. For hardware savings, first, TIS could help reduce the number of OSI servers through the more efficient management of their storage. Second, because of the its relationship with suppliers and by negotiating purchases in bulk, TIS could procure servers from the manufacturers at a lower price than OSI could. Final, it could often eliminate charges incurred by installation services because of its internal capabilities to handle these activities. Servers run by TIS would need to be refreshed only once every four years, compared to those...
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