Outsourcing and Offshoring in the IT Organizations

Subject: Management
Pages: 8
Words: 2281
Reading time:
10 min
Study level: PhD

Introduction

Information technology is an important factor in the modern world given the advance in technology. It helps firms innovate and produce high quality products that meet customer needs and demands. Due to the changing business environment, firms have found it necessary to reduce operating costs while exploiting the comparative advantages of human IT skills offered by other countries (Manaschi, 1998). Thus, companies have opted to outsource critical IT skills from other firms from other nations that are endowed with the expertise. In spite of the benefit of cost reduction and improved operations, IT outsourcing poses security and generic risk issues to the firm (McKendrick, 2010). If these issues are well managed, the outsourcing firm is likely to benefit through increased innovativeness and high product quality that could positively improve customer satisfaction hence increasing customer loyalty. This study examines outsourcing as applied in IT organizations.

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Brief Review of the Literature

Outsourcing is the act in which a company or an organization pays another firm to produce goods or offer services on their behalf (Blokdjik, 2008). In many cases, the company could have produced the goods or offered the service itself but sometimes it involves higher costs. Offshoring on the other hand is a business process that companies use when they decide to relocates its operations to lower cost locations, mainly overseas (Trojahn, 2009).

The requirement and expectations of customers in different markets are becoming more demanding. Businesses are therefore required to take appropriate action in order to satisfy the demands of a certain market or customer needs. Value addition to products has for a long time been used as a means to create a competitive advantage by many businesses, however these strategies are not enough in themselves, thus outsourcing was embraced. Outsourcing and off shoring has been around for many decades and companies seek these services due to a number of reasons. No matter what the reason, the rate at which companies are outsourcing and off shoring their services are steadily increasing. This has led to the globalization of services boosting trade and commerce all around the world (McKendrick, 2010).

The level of trade has grown remarkably over the last few decades because of the advancements that are being experienced in the field of information, communications and technology (ICT) (Jovanovic, 2011). These advancements have also increased the number of tradable services in the field of IT and ICT, which have made the outsourcing and off shoring of services to be much easier. The ease in the tradability of these services coupled with the increased independence of the location has contributed to the off shoring of services by many companies in the west (Kapila, 2009). Companies are now outsourcing services such as support, customer care, research and consultancy. The main reason behind this is that outsourcing for services is much cheaper and the result is desirable (Tenner, 2011).The development in IT and ICT has motivated organizations to outsource their products and services all over the world. India is the country, which provides most of these services (Blokdjik, 2008).

India is a prime location for IT outsourcing and off shoring. It has a strong labor force that is comprised of personnel who are skilled and talented. Their high number increases the competition for employment. This has made the country to have a workforce that is composed of relatively cheap labor force. India also has a high number of competent personnel in almost all the fields of the economy. These individuals are highly educated, professional, have many experiences, knowledge and skills, which are required to execute their respective tasks effectively and efficiently. This group can also speak and write fluent English an aspect, which makes them to stand at a competitive edge over rival countries such as China, Singapore, and Malaysia (McKendrick, 2010).

With the revolution in IT and ICT, location is not of a high concern as it used to be. The advancement in technology has made the transmission of inputs and outputs to be much easier. These processes can now be conducted digitally and transmitted via electronic means. Companies have therefore off-shored much of their services especially white-collar jobs to improve their sustainability and efficiency. The customer care for the giant computer manufacturer Dell, for example is located in India (Kurtz, 2010). When local residents call the customer care, they are being served with an operative who is located in India (Tenner, 2011).

Despite the benefits accrued from outsourcing and offshoring, there has been a lot of debate on the effectiveness and sustainability of this new trend. It is evident that outsourcing and off shoring benefits both the origin and destination country. The destination country enjoys increased rates of employments and free trade. The origin country on the other hand enjoys the availability of goods and services. The mutual relationship between these two countries is beneficial since both of their Gross Domestic Product (GDP) will increase in the short run and in the long run (Jae-Nam, 2008).

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Outsourcing and offshoring has been referenced with success, effectiveness and efficiency. As a result, many companies have adapted these mechanisms. However, some analysts claim that such companies may lose the control of their overseas organizations, an occurrence which maybe very risky (Plunkett, 2006). IT outsourcing has also resulted in an increasing threat of homogeneous organization that have equivalent core competencies which results into loss of business core competencies through exploitation of best practices in IT competitive advantage. IT market competitiveness has provided opportunities for equivalence of service level, which result into loss of brand identity, and brand community and decreased market share.

These criticisms of outsourcing and off shoring raise many questions as to the effectiveness and efficiency of outsourcing. Outsourcing and off shoring has increased trade to a new level, enhanced globalization, and improved the operations of organizations all around the world. These outcomes have only been experienced in the short run. The sustainability of outsourcing and off shoring remains a big mystery. This is because there are a number of drawbacks that are coupled with outsourcing and off shoring of IT services. These drawbacks affect the free market by changing the balance of trade. A study should therefore be conducted to investigate the viability and sustainability of IT outsourcing and off shoring (Lacity, Willcocks & Feeny, 2004).

Drivers of Outsourcing

According to Jae-Nam (2008), every organization in a given industry aims at various goals. However, major objectives include maximizing profit or revenues earned from sales. In order to achieve this objective, the management focuses on reduction of all costs incurred by the firm. A study conducted by Oshri (2011) established that firms outsource IT services to other firms in different countries and regions in order to minimize operating costs. Since costs are important factors in profit determination, the organization use various strategies to minimize costs one of them being outsourcing among others such as large-scale production.

The theory of factor endowments that was put forward by Heckscher and Ohlin postulates that countries have different factors of production that enable them to poses the comparative advantage over other nations (Manaschi, 1998). This theory could be used to explain the pressure for companies to outsource IT services from other countries. Countries that have enough skilled IT expertise have a comparative to countries that do not have the expertise. Therefore, organizations operating in such deficient countries tend to outsource the services from well-endowed nations in order to improve their competitive advantage. Therefore, outsourcing is a form of international trade occurring because IT skill differentials between countries. Tenner (2011) supports this theory as applied in outsourcing by noting that organizations that outsource IT expertise obtain best skills for the right cost and at the right time. Organizations have identified IT talent limits within their employees and talents from outside the region best fill the gaps. Lastly, Plunkett (2009) notes that outsourcing IT expertise enables an IT firm to be nimble in the quest to fulfill business unit requests especially operations that are likely to run behind schedule.

Generic Risks in IT outsourcing

Adeleye et al. (2004) notes that every organization gets an outsourcing and off shoring collaborate that it deserves. Therefore, firms that experience inefficiency in IT management end up getting incompetent outsourcing partners. On the contrary, organizations that do efficient management of their IT departments always obtain competent IT outsourcing partners. In addition, other firms that do not conduct enough research in determination of outsourcing partners are worse off because they may end up overhauling their better IT expertise for worse outsourced expertise. In addition to these risks, there are many others, for instance, outsourcing requires best management skills. Organizations that lack good management skills may not reap maximum benefits from outsourcing.

According to Varadarajan (2009), some companies have difficulties in managing their IT departments. Such organizations may face challenges of maintaining outsourcing. Other corporations that do not undertake market testing for IT outsourcing run the risk of missing the benefits of IT outsourcing.

Yang et al. (2007) argue that most companies focus on cost reduction as the main driver of outsourcing. However, overreliance on this factor is not necessary since most of the benefits of IT outsourcing are not transparent. The supply of un-updated technology is another risk common with firms that are engaged in long term IT outsourcing contracts. This may result in an unfruitful relationship between the two companies. It is evident that IT skill outsourcing can reduce operating costs of a firm. However, this can only be realized if the company can manage its IT management costs.

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Security Concerns

Security concerns have been raised concerning outsourcing and off shoring of IT expertise from other countries. According to Tenner (2011), outsourcing firms run risks of information security hence there is need for auditing and restricting system users for the organizations. Not all foreign software coders could be trusted by outsourcing firms. It is important that outsourcing firms conduct proper background investigations of foreign software coders. Given that only few firms conduct such investigations, outsourcing corporations are not safe since their confidential information could be compromised (Mani, Barua & Whinston, 2010).

Customer Reactions

The reactions of customers regarding company products vary depending on the overall effects of outsourcing. To begin on the negative side, outsourcing can unavoidable to the innovative nature of the firm. As noted by Gibb & Buchanan (2006), companies usually have high expectations of outsourcing including innovativeness at lowest costs hence unrealistic expectations. However, innovation requires that the firm provide the necessary resources, flexibility and in-house competency (Couto, et al. 2007). Due to these inadequacies, the firm may be disappointed hence disappointing the clients in terms of quality of produced goods. The customers may react by finding alternative products. On the contrary, the benefits of outsourcing could result in increased innovativeness, low costs, high product quality and customer satisfaction and loyalty (Garner, 2004).

Reduced Differentiation

According to Mitra & Ranjan (2010), it is difficult for firms to decide on what to outsource and what not to outsource. A rule of thumb is the basis of many outsourcing contracts in IT. This rule postulates that firms should outsource non-strategic IT functions while strategic IT functions should be left to the internal IT team of the firm. Firms initially outsourced all IT functions from one vendor leading to lack of variety and low quality services hence reduced differentiation in the products offered by the company. However, this trend has changed over time with organizations distributing the outsourced IT functions to different corporations. For instance, British Petroleum was successful in outsourcing its IT expertise and functions from different firms from different regions. Following outsourcing of IT functions, the firm was able to benefit in many ways some of which are discussed in the next section.

Unachievable improvements: – Bhalla et al. (2008) note that firms that outsource strategic IT functions are in a position of bringing about necessary organization cultural change needed for creation of competitive advantage.

Improved Business processes: Outsourcing enables firms to improve their operations. For instance, outsourcing encourages business managed budget development and controlled project expenditure. Thus, firms are encouraged to outsource latest It technologies that can enable them properly budget and manage undertaken projects.

Cost management controls: According to Doh (2005), outsourcing and off shoring helps firms to minimize on expenditures while increasing company savings. In a survey conducted by Lall & Narula (2004), it was noted that outsourcing and off shoring is able to reduce costs incurred by an organization up to 20% of the annual budget. Although many organizations dispute outsourcing costs, it is unknown the highest; levels that IT costs could have risen for corporations in the industry.

Conclusion

Outsourcing is the ability of firms to seek human capital from other nations. Many firms operating in different fields have been reported outsourcing different skilled human capital from different countries. One of the most significant skills sought after are IT skills that are outsourced by IT firms. The outsourcing of IT personnel is driven by many factors including need to minimize costs while maximizing profits, need for innovation, inadequate skills in IT locally among other reasons. IT outsourcing is good for IT firms because it enables the firms to obtain rare skills that cannot be obtained locally, ability to minimize operating costs and improved business processes among other benefits. In spite of the benefits, outsourcing poses some generic risks to the firm. The outsourcing firm is likely to obtain incompetent IT personnel or obtain IT technology that has not been tested. In addition, untrustworthy vendors that may also compromise the security of confidential information of the firm may exploit the firm. It is therefore important that the outsourcing firm conduct enough investigation regarding IT technology vendors before outsourcing.

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References

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