Question. 17.

 . What are the critical success factors for outsourcing according to the Bain & Company
research discussed during this course’s lectures? Please show how to relate the following information to
one of these critical success factors: a company’s processing work would need an in-sourced datacenter
with annual fixed costs of $150,000 and variable costs of $100,000 for running the company’s work for a
year, and outsourcing company’s datacenter that could process 100 times the company’s processing
work had annual fixed costs of $800,000 and annual variable costs of $100,000 for running each
company’s work.

The critical success factors for outsourcing include: reduction in operational cost, practicing

operational discipline, encouraging best practice, innovation of specialized firms, avoiding

capital investments, and release best people, capital, time to focus on core competencies. The

critical success factors for outsourcing according to the Bain & Company research are: Not

outsourcing core competence, to only outsource when there’s economy of scale that will yield a

financial benefit, gain from access to scarce skills, risk of undue dependency on the vendor,

contract with a qualified vendors, gain from focusing best people on core competence and

contract with clear economic and service requirements.

Now, relating the information provided to critical success factors: Fixed costs grow with capacity

but fall when you go offshore. Variable costs are fixed until you go offshore.

Average cost = Total Costs per units

Total Cost per Capacity in Units of work falls

Total cost = fixed cost of $250,000 + variable cost of 1 unit x $100,000 = $250,000

Total cost = fixed cost of $500,000 + variable cost of 50 x $100,000 = $5,500,000

Total cost = fixed cost of $800,000 + variable cost of 100 x $100,000 = $10,800,000

The total cost has gone up by $250,000 / $10,800,000 = 43 times (While the units of work have

gone up 100 times)

Therefore, average cost (total cost capacity in units) falls from $250,000 / 1 = $250,000 to

$8,320,000 / 100 = $83,200 per unit of work.

This is economy of scale and represents a success factor because the firm can realize a saving

while the supplier is profitable.