Reasons Why Organizations Outsource IT - Assignment Example

Option Reasons Why Organizations Outsource IT Introduction Outsourcing refers to contracting of the outsideparties to provide and manage services. This involves purchasing of the services from an external provider. The practice of outsourcing of Information Technology (IT) by businesses started in 1950s and has tremendously improved. The early arrangements in outsourcing depended saving of the operational costs. However, currently, the outsourcing depends mostly on the need to improve the strategic business performance. The increasing need for IT functions is still being outsourced, especially telecommunication management, application programming, systems operations and systems integration. Earlier on, firms used to outsource IT functions on a limited basis. Currently, most companies outsource their IT functions for the entire department. This has been used in delivering the IT functionality. Whilst there exist a considerable body of knowledge regarding IT outsourcing, the research on reasons why businesses outsource their IT functions is still limited. Therefore, this paper source to determine the reasons why organizations outsource the IT functions (Peslak 2012, p. 14). Principles of outsourcing The process of outsourcing is underpinned by basic premise of whether an organization must pay or make the service. The decision to purchase a service enlists two fundamental objectives of outsourcing. These include, first, transfer of ownership of a business process to a third party, and second, to enable concentration of major competences by vendee. Based on the transfer of ownership, outsourcing significantly affects organizations productivity, cash flow, profitability, transaction costs and growth. There has been a rising outsourcing incidences worldwide to improve the strategy of the organization in lightening the workloads, saving time and trimming the costs. Studies indicate that outsourcing can turn a business with high fixed cost to one with only variable costs. This is critical for businesses with activities involving extensive variance throughout the year or the one experiencing pressures to reduce the overhead costs. The core business competencies help in maintaining a competitive edge as well as increasing customer benefits and growth of business. The major functions of a business evolve through information sharing and collective learning. Such competences may not be enhanced by using huge investments; rather, they must focus on strategies and resources targeting the dominating corporate decisions (Peslak 2012, p. 15). The exact determination of core competencies contests the conventional wisdom. Therefore, outsourcing can be considered as a basic restructuring and realignment of the organizations based on core competencies as and the external long-term relationships. Contrary, some studies indicate that outsourcing can be considered as an old-fashioned contract between the supplier and the buyer containing details of the required services by a contractor containing defined penalties for any failure. For purposes of the current paper, a broader perspective is supported, despite the fundamental principle of outsourcing involving the transfer of ownership so as to enhance concentration on the core competencies (Busi & Ronan 2008, p. 185). Reasons for Outsourcing IT by Organizations Many organizations contemplate outsourcing the IT functions for varying reasons. While there exist consistency of reasoning, research show that there are essentially four categories describing the move by organizations to outsource IT. The categories include financial, political, technical and business reasons (Busi & Ronan 2008, p. 186). Financial Reasons Organizations can outsource IT to reduce the operating costs, restructuring the IT budgets, improving the cost control and infusion of the cash. Most organizations outsource their IT because of strategic and economic reasons. Economically, IT outsourcing is necessary when the tasks outsourced can be handled by an external source at a reduced cost. Strategically, outsourcing becomes critical when an organization has the capacity and capability constraints which do not allow them service a market. Lack of enough personnel of requisite skill and quantity, or adequate physical capacity of delivering its services or products within the stipulated time, them there is compulsion of postponing the work or even outsourcing in order to get the task accomplished within a set time frame while ensuring appropriate quality. Reduced operating costs The primary rationale for outsourcing has been cost reduction, as outlined in Transaction Cost Economic Theory. According to the theory, the transaction involves the exchange of goods and that allocation of the economic activity in a firm depends on the move by the firm towards balancing the internal costs against transaction costs for goods and services offered. An organization may decide to purchase services from another firm if the costs involved are lesser than in-house provision of the services. Conversely, failure of the external markets implies that the firm must strive towards producing the service internally (Babin & Brian 2011, p. 47). The major costs addressed by outsourcing include coordination and production costs. The production costs entail costs in actual production of goods and services and may differ between firms. The coordination costs involve those costs in control and monitoring of the workers when services are provided internally or gotten from vendor markets. Such costs results from the need of defining, negotiating and enforcing contracts as well as monitoring activities within the organization. The vendor markets are known to offer low production costs resulting from economies of scale and specialization. Nevertheless, most markets involve high transaction costs as vendors opt to behave opportunistically, hence need monitoring of the activities. On the other hand, hierarchies may involve high production costs as a result of the inability to achieved required economies of scale (Babin & Brian 2011, p. 49). In the reduction of the operating costs, most companies believe that the external vendor may be in a position same service level at relatively lower cost than the internal IT department. In addition, the outsourcing institute has supported the view and argues that companies failing to embrace outsourcing incur high costs in research and development. Furthermore, the discussion has been extended by noting that the reduced costs derived from the implementation of the outsourced IT systems is necessary for providing a more sufficient and updated technology. The rationale cited is that the vender has improved economies of scale and tighter control of the over fringe benefits. This also enhances an improved access to labour pools and focused in management of IT. Nevertheless, the savings achieved through outsourcing the IT remains controversial, particularly since the vendor maintains an identical infrastructure in personnel and equipment on top of the profits obtained from the outsourced arrangement. However, the outsourcing of IT is considered by the management as a means through which an organization can reduce the IT costs (Babin & Brian 2011, p. 49). Improvement of Cost Control The outsourcing vendors operate with considerable leaner overhead structures than most of their customers. The combination of this and appropriate baseline approach towards the fees payable motivates the user organizations in improving the overall cost control. The improvement of cost control may also be achieved through leveraging organization and access to the low-cost labour pools from the available outsourcers for the non-base services (Busi & Ronan 2008, p. 189). Restructuring of IT Budgets Normally, the IT budgets appear more predictable under outsourced arrangement due to effective conversion of fixed costs into components of variable costs. This replaces the fixed overhead base costs of the IT infrastructure. Furthermore, budgets may be restructured as outsourcing replaces the outlays that are capital intensive containing the periodic overhead payments. Infusion of cash Most organizations will often outsource the IT in order to liquidate the assets by agreeing with the vendor who takes control of the IT infrastructure of an organization and subsequently leases it to the users as a component of baseline fee. Such a conversion of the assets in IT to cash is critical for companies which require the reduction in capital funding for its core areas (Ghimire 2005, p. 2). Business Reasons The outsourcing IT requires return to the key competences as well as sharing the risks related to management. Return to the core competences Organizations may outsource their IT functions in order to simplify their business agenda as well as to enable them focus on the key interests of the business and establish a management structure that is leaner concentrating on outcomes of retained business competences. Outsourcing allows the management to deploy the resources in order to gain competitive advantage for the core activities as well as enhance the retention of the strategic business aspects (Ghimire 2005, p. 3). Sharing and Management of risks Outsourcing may spread the business risks associated the minor business activities. In the relationship outsourcing, the provider of the services weighs the alternatives and spreads the underlying risks among the clients. Technical Reasons The major technical reasons for outsourcing IT entail improvement of the technical services, increasing accessibility to modern technologies and enhancing talent development among the existing staff by focusing on the key activities. Improvement of technical service The improved technical quality of delivery of IT acts as a motivating factor in outsourcing. The improvement of the technological advances may render the IT functions of an organization redundant creating need for contemporary technical expertise and related equipment. As a result, outsourcing may be applied in re-tooling of IT infrastructure without extensive investments in capital. The outsourcing reduces time required in marketing the IT services. The delivery of improved business functions requires the use of dedicated resources. Therefore, outsourcing may be critical in the provision of new technological solutions and freeing up the existing resources in order to concentrate of the required services (Ghimire 2005, p. 6). Accessibility to the Technical Talent The recruitment and retention of the staff with the necessary expertise in IT is necessary to maintain and nurture the IT expertise in an organization. Outsourcing enhances the accessibility to the resources that are unavailable to the internal systems of the organization. This also enhances the improvement of skilled personnel. The outsourcing process enables access to the capabilities and expertise, and this is especially critical the operations and facilitates the entry into new market segments and opportunities. Improving Accessibility to New Technologies New technology remains an equally important issue as far as IT is concerned. Outsourcing allows for increased accessibility to the world class capabilities that are accessible through a vendor. The organization can become complacent with use of the leading-edge management practices in IT and seek for vendors of IT outsourcing to supplement their capabilities and in-house skills with affordable capabilities and technologies. The development of new technologies remains an expensive undertaking, especially when required to duplicate in many organizations. Therefore, outsourcing will provide a specialized and globalized access to the world class technologies in capabilities required in their service to customers (Peslak 2012, p. 16). Filling the Gap in Resources Outsourcing may be required to fill the gaps existing in IT resources, either as a result of increased workloads beyond the current capacity of an organization or as a result of the disparity in existing and required resources. Theoretically, an organization may be considered to comprise of productive resources, and different organizations may tend to compete based on how effective to control the resources. Instead of competing from a market or product position, a set of resources can be used in creating different products for different markets. The major advantage is that the organization may be the only one existing having the required resources in creation and delivery of the products and services. However, the sustainability of advantage depends on the immobility of the resources making it difficult for other organizations to imitate, develop or acquire. Lack of significant obstacle or cost disadvantage in the development of the resources, then it can be considered to provide only a short term ability to compete until when imitated by another organization (Peslak 2012, p. 17). Enhancing Focus on Core Activities by Internal IT Staff Consequence of an organization to outsource IT is to enhance the focus of the IT staff of the core activities of the business. Outsourcing of the selective IT systems requires the IT department to focus on the creation of technological solutions that handle the immediate requirements of the business. Moreover, this enhances creation of a win-win opportunity to the team and vendor and ensures that the activities carried out in internal IT environment allow the company access immediate value while the new IT system undergoes external development. The best providers of outsourced IT act as partners with the organization requiring the service, and the two works together towards meeting the business goals. This may involve scheduling for meetings and working collaboratively to ensure agility and flexibility of the business. The high performing business must respond quickly to the changing market trends as well as improve the operational excellence and promote growth. This can be enhanced through use of outsourcing partners in delivering efficient, scalable and flexible IT outsourcing (Babin & Brian 2011, p. 50). Political Reasons An organization under intense competitive pressure or intensive cost may outsource IT as a move towards delegating time-consuming and complex issues in IT. In such situations, outsourcing enhances the optimization of the management time, resources and energy so as to elevate the efficiency of the overall IT within the organization. Such an approach enhances elimination of the business segments whose management is challenging and shifting the focus of the company and resources towards handling the customer related issues. The IT infrastructure supporting the organization is managed appropriately by a vendor (Babin & Brian 2011, p. 51). Environmental reasons An organization may decide to outsource the IT functions as a result of environmental factors. Economic and Industry Trends The industrial and economic trends play a major role in determining the need to outsource. While such factors may appear non-specific to the company concerned, they may appear critical to the industry and its economic significance during the period when outsourcing feasibility study is underway. Also, decision to outsource IT is driven by the business philosophy of the management and the media coverage in combination with the current pressure from the vendor. In addition, availability of the knowledgeable vendors willing to offer outsourced IT services alongside contractual and financial attractiveness of arrangements play a major role in influencing outsourcing decision (Peslak 2012, p. 18). Intensive Vendor Pressure The outsourcing trends attract many computer vendors and promote the value added services meant to reach the customer within an environment of declining sales and hardware margins. The vendors operating in highly performing sales and with strong sales teams actively promote outsourcing to the executive management through provision of a wide range of reasons to consider outsourcing IT. An organization may be concerned after other competing organizations outsource their work. This may make an organization feel that the competitors may take the lead (Peslak 2012, p. 20). Conclusion Outsourcing is efficient in reducing the capital expenditures and allows the IT related costs shift from capital expenditure to operating expense, hence positioning the IT finically as an essential cost of carrying out business along other major components of sales. The outsourced services reduce the operational costs by scaling the IT operations. Outsourcing is, therefore, an appropriate tool to enhance flexibility since the IT professionals can be in a position to focus on the responsibilities of high value. Also, outsourcing is critical in enhancing the ability to compete by encouraging organizations to respond quickly to the emerging opportunities in the markets. The providers of outsourcing services offer fast IT support and provisioning to upgrade and implement the applications in a quick way. The other reason for adoption of outsourcing is the need for adapting to the global business environment through separation, consolidation, transformation and integration of time sensitive IT. IT outsourcing can improve the quality of the services offered since, in most cases, the providers are best-of-breed. A business may, therefore, leverage the provider to ensure that the application availability and IT infrastructure, support and performance synchronize with the objectives of the business. Therefore, a reliable provider will be careful to handle the IT challenges during acquisitions and mergers to minimize risks and maximize value. References List Babin, R., & Brian, N. (2011). How Green Is My Outsourcer? Measuring Sustainability in Global IT Outsourcing. Strategic Outsourcing: An International Journal 4(1), pp. 47-66. Busi, M., & Ronan, M. (2008). Setting the Outsourcing Research Agenda: The Top-10 Most Urgent Outsourcing Areas. Strategic Outsourcing: An International Journal 1(3), pp. 185-97. Ghimire, B. (2005). IT Job Outsourcing. Ubiquity 2(7), pp. 2-5. Peslak, A. (2012). Outsourcing and Offshore Outsourcing of Information Technology in Major Corporations. Management Research Review 35(1), pp. 14-31. Read More