This article talks about how companies, such as General Motors, are outsourcing jobs to multiple IT-service companies rather than just one. They are also shortening the length of the contracts they are making with the companies. By doing this they are increasing competition among the IT-service companies which is helping to lower their expenses. The IT-service companies are able to offer lower prices because with the shorter contracts they are able to perform services remotely using their own employees and equipment rather than those provided by the contractor. One example that is given is how Allstate hired one company to write a code for its software and hired another to analyze it for errors.
While multiple outsourcing and shorter contracts may be good for the companies making the contracts, I feel as though it is also making it more confusing for investors. When looking at financial data provided by the company, investors may be confused as to why there is an ever increasing number of companies that work is being outsourced to. All of the extra information that will be included on financial statements will make it more confusing to follow the activities of the company. The article talked about the benefits of multiple outsourcing for both the contractor and company accepting the contract, but it overlooked possible concerns of the investors. This is a very important issue that I felt should have been addressed within the article. There has been much talk about Sarbanes-Oxley because financial data has not been transparent enough for investors and I feel such a policy would hinder the transparency provided by the law. By overlooking this piece of information the article seemed to take on a one-sided view of multiple outsourcing.
The one negative issue that the article did address is the increased tension between companies that are competing for contracts. This plays a big role in the relations among IT-service companies and between IT-service companies and contracting companies. Some of the IT-service companies may become irritated at having shorter contracts and only being assigned a small part of the overall product. With the shorter contracts they have less security in future profits because they are not guaranteed to have work for as long as they used to. Multiple contracting does however bring about the possible growth of specialized IT-service companies.
Companies must take into consideration both the positives and negatives of multiple contracting and analyze individually whether it will help to earn them more profits or if it will harm their business relations and end up hurting them. Also, the IT-service companies may need to decide if they want to become more specialized at a certain task in order to provide higher quality service more efficiently.
5 comments:
Worthen, Ben. "Business Technology: Competitive Approach Taken to Outsourcing." The Wall Street Journal 20 May 2008 B6. 9 Sep 2008 http://proquest.umi.com.proxyau.wrlc.org/pqdweb?did=1481363831&sid=1&Fmt=3&clientId=31806&RQT=309&VName=PQD.
Worthen, Ben. "Business Technology: Competitive Approach Taken to Outsourcing." The Wall Street Journal 20 May 2008 B6. 9 Sep 2008 .
Hey Douglas, you bring up an important point whether we should have multiple contracts in outsourcing. From my point of view, outsourcing could be huge advantage for company if they handle it with caution. It is essential to find out what service should be outsourced and what should not be outsourced. Whether it is IT related or not, it is essential that we always keep our proprietary functions of the company as internal. That means we only outsource non-essential functions of the firm. For that, we need to have the most profitable bid to sell our contract. Since we are outsourcing only the non-essential functions, I do not see any reason to avoid multiple and short term contracts. It has the potential to bring more competitive deals from different vendors. So we can achieve the main goal of outsourcing; keep the cost to a minimum.
Hi.You have done a quite good job in analyzing the two-side of GM's action in fields of IT. As everyone konws, IT tech is playing a more and more important role in the operation of today's companies, especially for GM, so big and global a company. It is reasonable for GM to consider offering diverse and short contracts to its IT employers to try to get a lower price. But what I'd like to address more with the article is that GM may overlook some aspects of its action. Firstly, there's no guarantee that shorter contract will make its cost go down. Sometimes, IT companies will offer a long-term contracts with a cheaper price than short ones. Because long-term contracts mean that these companies will get a long-term relatively stable income and can decrease their risks in the future. Secondly, as you said in the article, the new approach will increase tension between companies that are competing for contracts. In my mind, it will also increase the tension between GM and its IT providers for less trust and sense of safety between them. It sounds not good for GM's image in the industry.
These are only my own opinions. If there are any improper points, you can just pass them away.
I really wouldn't be too concerned with investors being confused. So long as the company is increasing EPS, they will be fine with the decision, even if it does seem like there are a few extra companies on the balance sheet. I would be more worried about the length of these contracts for the smaller companies that are accepting them.
Usually when a company lands a contract from a large corporation such as GM, it helps their stock price. However with investors realizing that these contracts are done on a short term basis, shares will not see their proper increase in value and it will be harder for these smaller companies to growth.
On a similar note, it would seem to me that this would be a hard system to keep up. What if one company comes up with a distinct IT advantage and all of the sudden they are the cheapest. With these short term contracts, the competing companies would not have much time to respond before their contracts run up and their cash flows slow. With long term contracts, if you have a competitor who grabs an advantage, at least you have time to regroup with your established cash flows.
I feel as though this would open the market up for an oligopoly of shorts, where one or a few companies who get an advantage could very quickly push their competitors out.
Post a Comment