Decisions on whether to outsource services such as payroll accounting and systems development are much like make-or-buy decisions.

Essay by Diane RidgwayUniversity, Master'sB, August 2004

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Queen Victoria is reported to have said (1) "Change, why do we need change?, things are quite bad enough as they are"

Hardly anyone would disagree that the rapid advancement of technology has affected many industries in recent years, and any process that is not identified as a core to the company's actual business can be outsourced to external providers. In any outsourcing situation, it is prudent to ask if it makes sense from a business point of view and where is the quantified added value for the company. Outsourcing can really only work in the long run if added value can be generated for both sides.

From a strategic point of view, the advantage of outsourcing is the ability for the company to concentrate on the core business and the risks arising from changing requirements of the purchaser are picked up by the service provider. The possible cost savings through bundling know-how and competence should not be underestimated either, nor should the change from fixed to variable cost pools and the associated impact on cost awareness in the IT environment.

Another factor to be borne in mind is the added value generated by external resources in the form of knowledge or their access to knowledge pools.

What cost factors should influence the decision on whether to outsource the payroll functions.

Historically in the health care environment, pharmaceutical companies were one of the first market sectors to set the precedent where outsourcing is concerned. Outsourcing in the Pharma industry signalled a mind shift towards IT practices. Companies like AstraZeneca and ICI led the way in the 90s with the outsourcing of major IT projects. AstraZeneca boosted their outsourcing strategy in 2001 in a $1.7 billion deal with IBM. When it comes to selecting a partner, in addition to the...