Why Organizations Outsource IT Functions - Research Paper Example

Outsourcing IT Function Institutional Affiliation Outsourcing IT Function Information Technology (IT) outsourcing refers to the process of purchasing IT services from outside the organization. The process involves obtaining all or part of the Information Technology function from external sources. Many organizations outsource different IT functions for various departments. The outsourced functions can range from maintenance, support, and infrastructure and software development. This research paper explores the various aspects of outsourcing IT function. Why Organizations Outsource IT Function There are several reasons why companies may opt to outsource IT services. Firstly, outsourcing controls operating costs such as management oversight, health insurance, retirement plans and employment taxes costs that the company would incur if were to employ IT experts and other workers for IT department. Secondly, outsourcing enables the company to focus its competencies of on the core business activities; apparently, information technology is not a core activity for most organizations. An organization may also outsource due to lack to of competent human resources that can manage its information technology needs. The need to outsource may also be triggered by the organization’s need to free internal human resources for other purposes for which they are experts instead of engaging them in IT functions where their competencies may be low. An organization may also outsource information technology services in order to gain exceptional capabilities from IT specialists. Finally, the company will choose to outsource in order to retain capital funds for capital investment projects. On the other hand, the organization will consider not outsourcing information technology services due to factors such as internal availability of human resources that are skilled to manage IT services. Further, if the company has surplus funds such that all viable investment projects have been adequately financed, the excess funds may be directed to IT development. Risks of Outsourcing Outsourcing poses a number of risks that firms should consider when deciding whether outsourcing the IT function is the best decision. Outsourcing creates dependence of the organization on the Information technology services provider. The outsourcing organization might experience adjusting problems when the outsourcing contract ends. In addition, the organization may not have the capacity to develop its own IT infrastructure as soon as the outsourcing contract ends and the results of this inability may be adverse to its operating activities. By outsourcing, the firm loses control over several aspects related to the IT function. For example, the firm loses the location and the physical access to the IT system. The company also faces the risk of loss of confidentiality over its data and disaster recovery. Apparently, the external IT services provider may not be as effective as a full-time worker who is under control of the same management as the other workers. Some information technology functions are not easy to outsource. Information technology affects the whole organization, from the easy tasks employees carry out on a daily basis to the complex automated aspects. Therefore, Outsourcing poses potential risk to all organization’s functions if due assessment is not done before outsourcing. The company chosen as the IT services provider should be highly qualified since IT they affect almost every part of the organization Outsourcing IT function may adversely affect the morale of the employees. This is mostly true where a company may decide to lay off some of its workers and replace them with an external IT function vendor. Other employees will perceive a risk in their job security too, and their morale and productivity will fall. Finally, an outsourcing agreement in substance constitutes a legal contract with legal obligations. Most outsourced companies require the outsourcing company to sign a year contract, which limits flexibility of the outsourcing company. The vendor might not perform their duties as per the outsourcing companys expectations, but it might not be easy to terminate the outsourcing contract before the due time. This means that outsourcing agreement locks in the outsourcing company. Advantages of Outsourcing IT Function Cost savings is the major reason companies choose to outsource. Outsourcing IT services accrues to the outsourcing company financial benefits such as saving on purchasing and leasing of hardware and software, software licenses costs and potential legal compliance costs. In addition, since the company obtains IT services from an external vendor who specializes in the IT function, the firm saves on inefficiency costs that would arise if the function were provided by incompetent internal human resources. Secondly, outsourcing enables the outsourcing company to eliminate disruptions, and it can concentrate on its main competencies. This is particularly attractive for young companies. Outsourcing liberates the entrepreneur from the arduous and time wasting activities such as processing payments for IT department employees. The entrepreneur can focus on areas such as marketing that are most important for the firms long-term prosperity. Thirdly, outsourcing enables quick establishment of projects. To start a new IT project may require a lot of time in hiring and training staff, evaluating software or hardware requirements and procuring all the required resources. IT providers have the experience, resources, and knowledge necessary to initiate a new project quickly. By use of a hosted application system, new software undertaking can be performed more quickly and with reduced capital outlay. For example, a line of business application might be tested in a hosted system with reduced up-front expenditure and minimal exposure to the demerits of unreliable solution. Therefore, if the application fits and solves the business requirement and needs, the application is brought in-house or used in the entire organization after it has been proven viable. Fourthly, outsourcing enables the outsourcing company to have access to the latest and finest technology. Hardware and software are prone to becoming obsolete. One staff person cannot keep up to date with everything. Outsourcing gives the outsourcing company the benefit of having several IT professionals, and since IT is their core competency, they can offer sound advice to the company concerning the latest and the best technology. Lastly, using outsourced IT enhances employees job security perception and reduces their workload. The employees might already be working more than their job description because “someone has to do it.” They feel more secure in their job when they are allocated tasks that correspond to their work description. Outsourcing IT function and letting the employees do what they were employed to do creates a better relationship between the company and the employees. Origin of Costs in Outsourcing Agreement Costs in an outsourcing agreement mainly originate from the primary functions for which the company enters into an outsourcing contract with the vendor. These costs include the costs of being provided with software, hardware, and the IT department employees’ salaries. These are the services that that are the primary reason for outsourcing the IT function. The other costs come from secondary activities. The vendor companies may provide secondary services during the process of outsourcing agreement. These secondary activities may involve billing of client on the technical advice provided. There are also hidden costs in an outsourcing agreement. These costs include the expenses incurred to identify and evaluate the right IT vendor, choose a finalist, negotiate and create a contract. These costs are incurred before spending a dollar on the actual work. Further, determination and search of contracting costs from an average, since most of these costs are fixed, is also a cost inherent in an outsourcing agreement. Implications of Outsourcing to Organizational Structure and personnel Issues Organizational structure changes result from use of outsourced IT department. These changes include downsizing, acquisitions, and mergers. The changes may accompany layoffs as some posts become redundant. In addition, the outsourcing company may require altering its communication structure in order to accommodate the new outsourced IT department. Personnel problems may arise due to changes in staff skill sets that an organization faces when it opts to outsource the IT function. The company could also be required to alter the current personnel policies and business processes. Reference Orlikowski, W. J., & Baroudi, J. J. (2012). Studying information technology in organizations: Research approaches and assumptions. Information systems research, 5(2), 11-34. Read More