Reference no: EM13973127

Pagoda.com- Introduction

Pagoda.com is an Internet service provider (ISP) that caters to individual consumers and small businesses who require a high level of service and are willing to pay a premium for it. Specifically, Pagoda.com offers state-of-the-art email applications and Web-building software, as well as plenty of storage space and fast access via its high-speed servers. The marketing vice president, Jerry Hunter, puts It this way: "There are a lot of companies out there promising the cheapest Internet access. But what do you get for your money? Slow- or no-access a mailbox full of spam, and an endless stream of system crashes. And I won't even mention the lack of support if you have a technical question! For a few dollars more a month, we give our customers the environment they need to be productive-without having to think about whether or not they can retrieve their email, or whether their Web site has crashed. It's no surprise, then, that we have the highest customer satisfaction and retention rates in the industry"

The Online Help Desk

One of Pagoda's services is its online help desk. The online help desk works as follows: Customers who are experiencing technical problems, or who simply have questions about their account, enter a one-on-one chat room, where they can interact directly with an expert. Problems are usually resolved within 10 minutes, and customers have listed it as one of the top three reasons they stick with Pagoda.com. Presently, Pagoda has enough capacity to handle up to 900,000 requests per year, although management doesn't expect the number of requests to change much from the current level of 800,000 per year.

A firm located in New Delhi, India, has approached Pagoda about outsourcing the online help desk. The offer is attractive. The New Delhi firm's own personnel would handle the help desk function. These personnel all speak English fluently and have college degrees or appropriate technical backgrounds. And because they are located in India, labor costs would be a fraction of what they are in the United States. The savings would be passed on, in part, to Pagoda. And since the help desk chat room exists on the Internet, Pagoda's customers should be unaware of the switch.

Pagoda management has put together the following figures, outlining the yearly costs associated with the current system and the Indian proposal:

Current Online Help Desk-

Personnel costs:

40 full-time-equivalent (111) technical experts @ 540.000 per year (salary and benefits); 3 supervisors @ $70,000 each per year (salary and benefits)

Equipment costs:

4 servers @ $2,000 per year
20 PCs @ $1,000 per year

Variable costs:

$1.50 per request (office supplies, fax paper, etc.)

New Delhi Proposal-

Fixed cost: $1,500,000 per contract year (to cover administrative and IT costs)
Charge: $0.50 per request

Questions

1. Calculate the total cost of outsourcing the online help desk versus staying with the current solution. Which option is cheaper?

2. What other factors, other than costs, should Pagoda consider? How would you weigh these factors? Given the above, how might you use a weighted-point evaluation system to evaluate the two options?

3. Should Pagoda.com outsource its online help desk? Why or why not? Be sure to consider Tables 7.6 and 7.7 when framing your answer.

4. A statement of work typically specifies performance measurements that the buying firm can use to determine whether the service provider is meeting the terms of the contract. What performance measurements would you recommend be put in place? What should happen if the service provider fails to meet these requirements?

Table 7.6 - Advantages and disadvantages of Insourcing and Outsourcing

Insourcing
ADVANTAGES	DISADVANTAFGES
High degree of control	Reduced strategic flexibility
Ability to oversee the entire process	Reduced strategic flexibility
Economies of scale and/or scope	Potential suppliers may offer superior products and services
Outsourcing
ADVANTAGES	DISADVANTAFGES
High strategic flexibility	Possibility of choosing a bad supplier
Low investment risk	Loss of control over the process and core technologies
Improved cash flow	Communication/coordination challenges
Access to state-of-the-art products and services	Increased risk of supply chain disruption, corporate social responsibility (CSR) risks

Table 7.7- Factors That Affect the Decision to Insource or Outsource

	FAVORS INSOURCING	FAVORS OUTSOURCING
Environmental uncertainty	Low	High
Competition in the supplier market	Low	High
Ability to monitor suppliers performance	Low	High
Relationship of product/service to buying firm's core competencies	High	Low