Advantages and Importance of Outsourcing for Business - Essay Example

Running head: Outsourcing Outsourcing Outsourcing is a popular business term associated with business activities of the current decade because of the vast improvements in communication and technology. A person sitting in his home or office in India, working for an American company was not imaginable two three decades before. Most of the developed countries facing shortage of professionals especially IT professionals which forced them to outsource their IT functions to overseas countries. This paper analyses various aspects of outsourcing the IT function from an organization, risks associated with outsourcing the IT function, benefits associated with an outsourcing effort, costs and implications of outsourcing IT functions etc. Introduction “Outsourcing refers to a company that contracts with another company to provide services that might otherwise be performed by in-house employees” (Thompson) Labor cost is increasing day by day and moreover shortage of skilled and experienced professionals forced developed countries to look beyond their boundaries to explore the cheap labor markets of other countries like India, China etc which are blessed with immense manpower. In India like countries IT professionals are searching for better placements whereas America like countries searching for IT professionals. IT has conquered most of the business activities and even other areas of life as well. The influence of computers and internet is such that a slight delay or problem occurred in the computer networks can affect many areas of human life. Theoretically, it is possible to buy, any business function to run a company. Globalization has opened the doors widely for the business community to explore the resources of other countries. It is not necessary to bring a professional from India to America in order to execute some IT projects at present. Internet technologies have developed a lot so that an IT work can be executed in America by sitting at some other corners of the world. Outsourcing Determining factors that may lead to a decision to proceed with outsourcing High labor cost and shortage of skilled professionals are the major reasons which force the IT organizations to think in terms of outsourcing their jobs. The manager must analyze the requirements of the project in order to determine whether the in house expertise is sufficient enough to execute the project successfully. Moreover he should analyze the cost factor also with respect to the in house and outsource operations before taking decision whether to execute the project internally or externally. Deadline of the project is another factor which should be considered by the project manager. The manager should evaluate the reliability of outsourcing services against the in house operation in keeping the deadline before taking final decision. Another factor is the quality of the services required for the project and also the capacity of the outsourcing companies to provide it. Factors might lead the manager NOT to consider outsourcing When the manager is not sure about the quality and reliability of services offered by the outsourcing companies, he should not take the risk of allotting a project which requires highest standards of quality to outsourcing companies. Security is another issue which may prohibit a manager from allotting a project outside. When privacy and security is highly required for a project, a manger may never allot such projects to outside sources even if cheap labor and reliability were assured. In some cases, outsourcing may destroy the reliability of an organization. Some clients are so particular about their projects. They have given their projects to trusted companies in order to utilize their expertise. On the other hand if these clients came to know that these trusted companies are seeking the services from external sources to finish their project, the business relationship between them will be spoiled. In such cases also the project manager may not adopt the option of outsourcing for those particular clients. Risks associated with outsourcing the IT function “When an organizations IT functions are outsourced to a third party, the number of users with access to the system increases; in turn, this increases the likelihood of the system being breached. Furthermore, the organization loses control over its system security administration, which is the process through which the information system is protected against unauthorized access”(Wright, 2004) Security is a primary issue considered by many IT organizations because of the increased threat from intruders and hackers. Outsourcing IT projects to overseas companies may result in allowing foreign companies to access their secret missions, projects, security issues, etc. No IT organization can ensure proper safety and security to their company data and systems if they engage in outsourcing business. “Upon entering the outsourcing relationship, the organization turns over all control of its information systems to the outsourcing firm. As a result, the organizations IT functions cannot be executed, nor can changes in technology be made, without the cooperation and participation of the outsourcing firm” (Wright, 2004) The dependence of an IT organization with other companies may create complex issues when the organization think about an expansion or restructuring of the complete procedures in the company. They may not be able to do it independently because of their data shared by other companies. They need complete co-operation from other companies to whom they have outsourcing business relationship in order to execute their mission properly. “The relationship between an organization and its outsourcing firm is not considered to be fiduciary. Therefore, the outsourcing firm has no special obligation, legally, to the organization in terms of liabilities”(Wright, 2004) Unlike other business deals, most of the IT outsourcing deals were taking place without backing of any legal support. Since most of the outsourcing deals occurred between two firms functioning in two different countries, it is almost impossible for them to engage in a legal contract between them. Benefits associated with an outsourcing effort “Many of the companies that provide outsourcing services are able to do the work for considerably less money, as they dont have to provide benefits to their workers and have fewer overhead expenses to worry about” (Thompson) Reduction in overhead expenses is the main reason behind IT organizations going after outsourcing services. No IT professionals in America will be ready to work for an average salary below $ 5000 whereas similar services can be obtained from India like countries at an average cost of even below $ 2000 with the help of outsourcing. Another advantage of outsourcing is that the companies can focus on other activities once they have outsourced their jobs to other countries. If the company tries to complete the project in house, then lot of skilled professionals and management services may often require to complete the project. On the other hand, if they outsource their projects these services can be utilized in other areas of their functioning. “Outsourcing also allows companies to focus on other business issues while having the details taken care of by outside experts. This means that a large amount of resources and attention, which might fall on the shoulders of management professionals, can be used for more important, broader issues within the company” (Thompson, 2009) Cost factor in outsourcing agreements and dollar impacts “Some long-term infrastructure outsourcing contracts that were signed three or four years ago can even be costing organisations more money because the infrastructure costs today are less expensive than they used to be” (Gartner Says Cost Remains Primary Factor When Organisations Enter into Outsourcing Relationships, 2009) More countries and companies are competing in the outsourcing industry at present and hence the outsourcing companies forced to reduce their rates at present. This trend may continue and the companies which making outsourcing contracts with other organizations must put terms in their agreements to alter the agreement periodically in order to accommodate the changing needs and trends of outsourcing industry. Dollar value is decreasing because of the current economic crisis America is undergoing. Any depreciation in dollar value may severely affect outsourcing businesses. Implications to organizational structure in using an outsourced IT department Professor Mohanbir Sawhney of Northwestern Universitys Kellogg School of Management, a self-proclaimed "big believer in total disaggregation," says: "One of our tasks in business schools is to train people to manage the virtual, globally distributed corporation” (BusinessWeek, 2006) Outsourcing is becoming an essential segment of business activities at present and the trend may continue in future also. Organizations need to change their structure in order to cater the needs of the outsourcing oriented business world. The do’s and don’ts of outsourcing business need to be evaluated properly by the project managers and for that they must have proper training. Organizational structures need to be revised to accommodate the needs of outsourcing industry. For example, instead of technical skills, management skills are required for the professionals in order to execute the outsourcing business. Conclusions Outsourcing business has revolutionized the business world. Many advantages and disadvantages are associated with outsourcing business. Reduced overhead expenses exploitation of cheap labour market is the major advantage of outsourcing whereas lack of security and legal support is the major disadvantages of outsourcing. Organizations need to restructure their organizational structure in order to cater the needs of the outsourcing business in future. References 1. BusinessWeek, JANUARY 30, 2006. The Future Of Outsourcing: How its transforming whole industries and changing the way we work. Retrieved 30 September 2009, http://www.businessweek.com/magazine/content/06_05/b3969401.htm 2. Gartner Says Cost Remains Primary Factor When Organisations Enter into Outsourcing Relationships, 2009, Retrieved 30 September 2009, http://www.gartner.com/it/page.jsp?id=552510 3. Thompson T, 2009, What is Outsourcing?, Retrieved 30 September 2009, http://www.wisegeek.com/what-is-outsourcing.htm 4. Wright Catherine, 2004, Top Three Potential Risks With Outsourcing Information Systems, Retrieved 30 September 2009, http://www.itgi.org/Template.cfm?Section=Home&CONTENTID=22050&TEMPLATE=/ContentManagement/ContentDisplay.cfm Read More