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 the fastest access available. The marketing vice president, Jerry Hunter, puts it this way: $$There are a lot of companies out there promising the cheapest Internet access. But what do you get for your money? Slow$-$ or no$-$access and an endless stream of system crashes. And I won$$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. 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 $($FTE$)$ technical experts @ $$40,000$ per year $($salary and benefits$)$; $3$ supervisors @ $$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\mathrm{.}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:

$3.$ Should Pagoda.com outsource its online help desk? Why or why not? Be sure to consider Table $7\mathrm{.}7$ and $7\mathrm{.}8$ 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 $7\mathrm{.}8$

Factors That Affect the Decision to Insource or Outsource

FAVORS

FAVORS

OUTSOURCING

INSOURCING

Environmental uncertTable $7\mathrm{.}7$

Advantages and Disadvantages of Insourcing and Outsourcing

Insourcing

ADVANTAGES

DISADVANTAGES

High degree of contr