The Risks or Challenges of Offshore Outsourcing - Research Paper Example

?The Use of Offshore Outsourcing for Information System Project Has a Number of Associated Issues Which May Impact On the Success or Failure of the Project and Which Needs Careful Management Abstract This paper intends to discuss in detail about the approach of offshore outsourcing which is used in conducting projects related to information system. Moreover, the paper also evaluates the risks or challenges of offshore outsourcing along with identifying the factors that causes failure or success of outsourcing projects relating to information systems. Contextually, it has been apparently observed that there lay certain challenges such as security threats, intellectual property threats and unexpected cost associated with outsourcing among others more or less influence the outcome of projects related to outsourcing at large. Apart from these aspects, there are also certain other factors that have direct impact or directly led to success or failure of projects related to outsourcing. Hence, a comprehensive understanding regarding offshore outsourcing having its impact on the success or the failure of the projects has been illustrated in the paper. Keywords: Offshore Outsourcing, Information Technology, Vendor Management, Business activities, Outsource Partner, Information System. 1. Introduction In the modern day business scenario, where the competition level has become immense among the companies, there is always a need to align business with advanced technological advancements up to the optimum level. This aspect ensures that the organisations could be able to attain superior competitive position as compared to their major competitors in the global market. Among the various approaches companies adopt in modern day business, the aspect of offshore outsourcing can be considered as the most vital one (Beulen & et. al., 2010). 1.1. Background Offshore outsourcing is regarded as the process or the practice of appointing an external organization in order to execute certain fundamental functions of business. In simple terms, it can be explained as a particular approach that the companies undertake wherein they hire people or agencies from other countries to perform certain activities of their respective business. This type of approach cost companies quite less which further impose favourable impact on their business profitability. Apart from the aspect of cost and profitability, this sort of approach is also implemented by business units for executing certain activities that they are not equipped or capable of conducting those actions effectively. It can be viewed that customer call centres are the most common form of offshore outsourcing. In today’s business context, companies spend substantial amounts in outsourcing a few of the core activities of business (Herath & Kishore, 2009; Sparrow, 2005). Hence, the significance of offshore outsourcing can be depicted from this aspect. 1.2. Aim The principle aim of the paper will be to define and discuss the main issues associated with offshore outsourcing in information system. The paper will also provide a brief discussion regarding the effectiveness as along with the challenges associated with offshore outsourcing. Furthermore, considering all these aspects, a conclusion will be drawn which would depict success or failure of offshore outsourcing in modern day business context. 2. Main Issues in Offshore Outsourcing It is quite apparent that offshore outsourcing is one of the most widely implemented approaches by companies in the modern day business context. However, there are certain issues and challenges associated with offshore outsourcing that places itself to be vital with regard to information systems. These issues are deemed to have impacts on the overall performance of the organizations in one way or the other in their operational activities. Though technologies have become quite advanced, certain risks associated with them principally became a major point of attention for businesses all over (Baldia, n.d.). A few of the key issues associated with offshore outsourcing are highlighted hereunder. 2.1. Due Diligence and Vendor selection The criticality of vendor selection can never be ignored in the aspect of offshore outsourcing. Discrimination in the selection of vendors is one of the major issues in offshore outsourcing, as it might not be a good prospect for the overall business in the long run. Moreover, incorrect vendor selection might also result in inefficient performance of the activities for which an outsource partner is been considered (Baldia, n.d.). Hence, the aspect of vendor selection is considered as a prevailing issue in outsourcing. 2.2. Intellectual Property This is also one of the non-ignorable issues in outsourcing. It has been viewed that vital information with regard to the customers of the business is in serious threat while outsourcing particular activities with the help of an external expert. This sort of threat is mostly inevitable in Business Process Outsourcing (BPO) (Baldia, n.d.). 2.3. Trust & Security Concerns There are several information that might be quite important for business of an organisation and utmost confidentiality of the same is required. However, in the scenario of offshore outsourcing, companies need to share information with the vendors who might not take extra plunge to maintain data confidentiality. In-spite of the existence of stern privacy regulations of government of every nation, this issue tend to prevail (Khan & et. al., 2009). 2.4. Unexpected Costs The uncertainty in the cost of outsourcing is another big and noteworthy issue in offshore outsourcing. Failure of companies to estimate the exact cost of outsourcing further results in rise of the charges more than what have been mentioned in the initial contract. Vendors, in most of the cases tend bid low price to obtain the contract. However, during the actual operation, this cost tends to increase which left no option for the companies rather than paying the same (Khan & et. al., 2009). 2.5. Threat of Opportunism It has been noted that in the process of outsourcing, vendors or the outsourced partners have complete accesses over the information system of the companies that they provide service for. Hence, this access would allow the outsource vendors to be able to obtain all the data of the customers of the business, thereby creating opportunity for using the same for their own advantage. This further is a potential threat and might impact the overall operational activities of the business that are being outsourced (Khan & et. al., 2009). 3. Effectiveness of Offshore Outsourcing in IT 3.1. Importance of Offshore Outsourcing of Information Systems in Business Offshore outsourcing of information has been growing rapidly over the years especially owing to the fact that it is quite beneficial for business. Its popularity can be depicted from the aspect that it is deemed to be quite effective with regard to deal with the changing demand of the customers in the global business world. The increase in the IT outsourcing market can be seen from market growth predictions of International Data Corporation (IDC). According to the data provided by them, the IT outsourcing market is expected to increase by 7.7 percent every year (Gilbert, 2003). Another vital importance of implementing the approach of offshore outsourcing is owing to the favourable aspect of economic cost advantage that it provides to business units. Apart from this, the effectiveness of offshore outsourcing in information systems can be understood from the fact that it enables business units to execute particular activities which they could not conduct owing to certain critical reasons. These reasons comprise lack of internal expertise, incompetency to deal with changing technologies and deficiency in the capability to deal with the changing demands of business among others (Avison, n.d.). 3.2. Benefits of Offshore Outsourcing The approach of outsourcing is beneficial for business units because it provides maximum cost effectiveness in their operations. With the approach of offshore outsourcing, companies are able to provide high quality products to the customers. Moreover, the aspect of outsourcing also enables the companies to conduct their respective activities in a cost-effective manner (Avison, n.d.). Hence, it can be affirmed that combination of cost efficiency and quality further impose favourable impact on the overall performance of the companies at large. In addition to the benefits of cost efficiency and high qualities that outsourcing provides to business, it can be stated that the aspect of sustainability is also a vital aspect to be considered. It has been apparently viewed in this regard that there are certain activities which the companies are unable to conduct by themselves owing to certain in-competencies that they possesses. This further imposes greater threat towards the long-term sustainability of businesses in the global market. The approach of offshore outsourcing enables these companies to overcome their difficulties and enhance their sustainability (Avison, n.d.). The effectiveness of offshore outsourcing can also be understood from certain other key aspects. Notably, outsourcing certain activities of business will also allow the companies to share the risks of certain actions with an outsourced partner who is expertise in that particular domain. Apart from this, outsourcing also enhances the swiftness and the expertise of the operations conducted by companies (Miller, 2004). Hence, to sum up, it can be stated that all these positive factors that have been mentioned above together depict the effectiveness of offshore outsourcing in information systems. 4. Challenges in Offshore Outsourcing Offshore outsourcing is often viewed to be among the most promising aspects for business in the modern day scenario. It has been viewed that companies are quite willing to acquire the benefits provided by offshore outsourcing to the business up-to the optimum level. However, apart from optimizing the benefits of such approach, there are certain potential challenges that companies need to comply with (McCray, 2008; Knaus, 2007). These challenges have been presented hereunder. 4.1. Strategic Decision Challenges Strategies are amid the imperative components that develops any kind of business structure. This component lack strengths in the domain of offshore outsourcing. It has been noted that a business would achieve sustainable competitive position in the global market with the assistance of effective strategies that include making decisions regarding the procurement and the use of resources effectively. However, it is believed that with outsourcing, companies often lose total control over the activities that are being outsourced. With the aspect of outsourcing, companies lose most of their valuable core members, associated with the conduct of outsourced activities. These crucial aspects ultimately loosen the grip of the companies towards making effective strategic decisions by a certain degree (Herath & Kishore, 2009). 4.2. Vendor Selection Challenges There are numerous risks associated with the aspect of vendor selection in offshore outsourcing. The selection and bidding of process in vendor selection is quite a challenging task in vendor selection. Notably, in the process of selection of vendors, various suppliers present themselves to be potential choices for performing effective outsourcing activities for businesses. However, it is deemed that these suppliers or vendors initially showcase themselves to be the providers of high quality services, which further seemed to be different when they actually deliver their work. Apart from this, depicting the exact service and exact cost to be provided for the same is also a tough task to be accomplished in the vendor selection process of offshore outsourcing (Herath & Kishore, 2009; Hinkelman, 2008). 4.3. Vendor Management Challenges The challenges of offshore outsourcing are not limited only to the selection of vendors. Managing the selected vendors is also amid the major challenges prevailing in the business approach of outsourcing. It has been depicted that IT operations have always been a matter of high uncertainly owing to certain reasons like lack of precision in needs of business and introduction of new technology among others. This aspect further raises challenges in selecting the sort of contract to be maintained between business and vendors. With the presence of diverse kind of contracts with pros and cons of each, it is hard to settle on one particular contract. For example, in certain cases, if a contract between the two parties involved i.e. the business units and the vendors is signed for a lengthy time period and the stipulated activities are completed in a much lesser duration, then still the vendors would ask for a full payment (Benkel, 2011; Herath & Kishore , 2009; Lee, 2004). Hence, in this regard, management of vendors properly is indeed a tough task for business units. 4.4. Technology and Technical Challenges Technical competencies of both the parties involved in offshore outsourcing are mandatory, which portray a healthy interrelation between vendors and business or clients. When teams work together with less technical synchronization between them, an adverse impact on the relationship between the vendors and the clients is deemed to exist (Herath & Kishore , 2009; Fortune & Peters, 2007). 5. Success and Failure of offshore Outsourcing in IS Offshore outsourcing in information system is one of the most commonly seen approaches that the companies undertake in the modern day context. However, this approach might yield both positive as along with negative results depending on the factors that influence them. The factors that ensure positive or negative results in offshore outsourcing have been discussed hereunder. 5.1. Success Factors 5.1.1. Knowledge Integration It is one of the most vital factors that ensure success in offshore outsourcing projects. Successful blend of the knowledge of external outsourced partners and the skills along with the expertise of business further ensures success for the overall project (Backman & et. al., 2007). 5.1.2. Boundaries It is another factor which imposes direct impact on the success of offshore outsourcing projects. In the absence of any barrier in the boundaries between companies and the outsourced partners or agencies, a successful communication procedure can be developed, which will eventually result in causing greater success of offshore outsourcing projects (Backman & et. al., 2007). 5.1.3. Extent of the Use of Technology Effective implementation of the technologies for developing the communication procedure like telephones, e-mails and other media is regarded as the other vital factor which broadly influences the success of offshore projects. This further enables both the parties including the companies and the vendors to communicate effectively and make effective decisions (Backman & et. al., 2007). 5.2. Failure Factors 5.2.1. Short-Term Focus It has been viewed that numerous outsourcing project fail due to short-term focus on decision making. Top-level managers of companies intend to cut costs in an instant manner through outsourcing, which eventually results in the failure of the entire outsourcing projects (Johnston & Johnston, 2013). 5.2.2. Strategy Misalignment Misalignment of the strategies relating to outsourced activities is the other critical reason for the failure of outsourcing efforts. For example, if the strategy of a company is to offer low-cost products with quality services, then the outsourcing strategy should also reflect a similar approach or the entire project will be inclined to fail (Johnston & Johnston, 2013). 5.2.3. Poor Risk Planning There lay immense risks that prevail in IT/ IS outsourcing projects. In this regard, the role of risk planning becomes quite crucial. Hence, in most of the scenarios, failure to mitigate the risks with proper planning ultimately results in the failure of outsourcing projects (Johnston & Johnston, 2013). 6. Conclusion From the overall analysis of the paper, it can be comprehended that outsourcing is one of the prominent parts of business in the modern day scenario where market competition is high. It has become a core need of business units, wherein they ensure execution of certain business activities through an external partner, as they are not capable or fully equipped to conduct the same. However, such approaches involve immense risks and challenges that require to be mitigated through proper planning in order to ensure that favourable results are obtained. There are certain factors that lead towards greater success and failure in outsourcing. Hence, it can be concluded that the use of offshore outsourcing for information system project has a number of associated issues and challenges, which might impact the success or failure of the project. However, proper along with careful management can aid in dealing with the identified issues, leading towards the success of the project at large. References Avison, D., No Date. Outsourcing and Offshoring Information System Projects. Sage Publication, pp. 351-376. Benkel, W., 2011. Selecting the Right Pricing Models. Forrester pp.1-12. Beulen, E. & et. al., 2010. Managing IT Outsourcing, Second Edition. Taylor & Francis. Backman, P. & et. al., 2007. Key Factors for Successful Offshore Outsourcing Projects. School of Business Economics and Law, pp. 1-50. Baldia, S., No Date. Key Issues in Offshore Business Process Outsourcing. Home. [Online] Available at: http://www.offshoringtransparency.org/resources/KeyIssuesinOffshoreBPO.PDF [Accessed 26 October, 2013]. 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