Advantages and Disadvantages of Information Systems Outsourcing: Risks and Benefits - Research Paper Example

Abstract With the passage of time, when the size of a corporation or range of business grows as compared to its resources (human or technological) then outsourcing turns out to be an ultimate choice for them. This paper presents a detailed analysis of the idea “outsourcing”. This paper will discuss the outsourcing working paradigm and its use for the information systems. This research provides discussion on impacts of the outsourcing the information systems on organization’s performance. This research will also discuss various advantages and disadvantages of information systems outsourcing. Outsourcing: An overview The corporations can develop and maintain information systems internally or in-house by utilizing their own resources (technology and staff) or outsource it, which means they hire an outside firm for developing and maintaining their information systems for them. Additionally, outsourcing allows corporations to pay more attention on their inside business activities alongside allowing other firm having additional expertise and resources to carry out some portion of their business information system management activities. However, several companies outsource only the information system development component of their IT activities. On the other hand, others outsource more or every part of their IT activities. The reason of doing this is to survive and remain competitive in this age of constantly transforming information technology (Shelly, Cashman, & Vermaat, 2005, p. 638; Dibbern, Goles, Hirschheim, & Jayatilaka, 2004; Goles & Chin, 2005). However, all this depend on a corporation’s requirements, as well as outside firms can fulfill as much or as little of the IT requirements as indispensable or desired. IN addition, outside firms offer a variety of services including information system development and maintenance, web design and development, customer service, web hosting, billing, sales, marketing, and officially allowed support, for instance, an internet solutions provider is a firm, which offers web hosting services such as inventory, management of shopping carts, and credit card processing (Shelly, Cashman, & Vermaat, 2005, p. 638; Koh, Ang, & Yeo, 2007). According to (Laudon & Laudon, 1999), if an organization does not make use of its internal resources to deal with or manage information systems, it can hire an outside company that specializes in offering these facilities or services to perform the tasks. “The process of turning over a corporation’s information systems, telecommunications networks, or application development to outside companies is acknowledged as outsourcing” (Laudon & Laudon, 1999; Hongxun, Honglu, Xiang, & Jun, 2006). A widespread process for decreasing the software development time is to subcontract an action. The subcontractor may have access to modern and up-to-date technology or knowledge that will augment speed of the accomplishment of the action. For instance, signing a contract for a backhoe can complete in two hours what it can take a group of labors two days to do. In the same way, by appointing a consulting firm that is expert in ADSI programming, an organization may be capable to cut in half the time it would take for fewer knowledgeable, in-house programmers to carry out the task. Subcontracting also frees up resources that can be assigned to a most important action and will preferably effect in less project duration (Gray & Larson, 2006, p. 284). Various corporations sign up an agreement with an external consulting company that specializes in information systems development to conquest few or the entire of its development processes. For instance, American Express took services of IBM for approximately 4 billion dollar over 7 years to run its web based system, data storage, network servers, and help-desk related activities. In addition, the contract also moved more than 2,000 American express staff members to IBM’s Global Services division. Also, in another deal regarding outsourcing, AT &T has decided to pay ‘Accenture’, a computer consulting firm, approximately 2.6 billion dollar to offer supervision on enhancing performance and reducing costs for AT&T’s long-distance division. However, the reasons for which outsourcing is used include, demining costs, accomplishing modern and up-to-date technology, improving technological performance, and decreasing the number of employees and personnel problems. Below given Table outlines the circumstances in which outsourcing is a good idea: (Stair & Reynolds, 2003, p. 522): Reason Example When a corporation is confident it can reduce costs PacifiCare outsourced its IS operations to Keane, Inc. and IBM Corporation. PecifiCare expects the outsourcing will save its more than 400 million dollar over ten years. When there is limited opportunity for the firm to distinguish itself competitive through a particular information system operation or application. Kodak outsourced its IS operations, including mainframe processing, telecommunications, and personal computer support, because there was limited opportunity to distinguish the company through these IS operations. Kodak kept application development and support in house because it thought that these activities had competitive value. When continuous information system service is not necessary Catalog shopping systems or Airline reservations are “mission critical” and should not be trusted outside the corporation When outsourcing does not strip the corporation of technical expertise necessary for future information system improvement Firms must ensure that there is staffs remain technically up-to-date and have the expertise to develop future applications. When the corporation’s present information system operations are incomplete, unproductive, or technically lower A corporation can make use of outsourcing to facilitate it to adopt the change from a centralized processing environment to a distributed client/server environment. When an organization is downsizing. The decision to outsource systems development is often a response to downsizing, which reduces the equipment and system, number of employees or managers’, and even operations and departments. Outsourcing facilitates organizations to trim down the IS department and ease complicated economic circumstances by minimizing payroll and additional expenditures First Fidelity, a major bank, made use of outsourcing as fraction of a program to decrease the number of employees by 1,600 and slash expenditures by $85 million. At this point of time, the trend of high level IT outsourcing is more than 20 years old. In addition, the corporations, which have adopted this fashion for at least several years are continuously growing. Since, the researches and IT-related periodicals contain many stories about their practices. Additionally, the outsourcing is also well-liked at international level, as it is explained by (Zviran, Ahituv, & Armoni, 2001; Turban, Leidner, McLean, & Wetherbe, 2005, p. 615). However, according to various researches about outsourcing, the cost savings of outsourcing are not huge (possibly approximately 10 percent) and that not all the corporations experience cost savings. Thus, this leaves the question of whether outsourcing IT can enhance performance of a corporation by facilitating it to focus more strongly on inside processes (Turban, Leidner, McLean, & Wetherbe, 2005, pp. 615-616; Babar, Verner, & Nguyen, 2007). Advantages and Disadvantages The companies should outsource or not, this concern is still very confusing (Hirschheim & Lacity, 2000). Since, there are lots of limitations of outsourcing (Cramm, 2001). However, the basic reason for the confusion is that a number of advantages of outsourcing have enduring payoffs or are intangible. Additionally, there various risks are also associated with outsourcing. For instance, elusion takes place when an outside firm intentionally underperforms at the same time as claiming full fee (e.g., asking to pay more than work, offering outstanding personnel in the beginning and afterward changing them with less experienced personnel (Turban, Leidner, McLean, & Wetherbe, 2005, p. 615). Poaching takes place when an outside firm designs or builds an information system for a company and then sell it to other company. Additionally, the opportunistic repricing takes place when a client enters into a long-term agreement with an outside firm and the outside firm varies monetary terms during the project or at end or takes extra charges for unexpected improvements and agreement extensions (Turban, Leidner, McLean, & Wetherbe, 2005, p. 615; Leavy, 2004; Gonzalez, Gasco, & Llopis, 2010). Furthermore, a company that is outsourcing its information system will loose some control over the information system that it needs. Since, an information system is a technology that differs its operations, services, and products, thus, a corporation by outsourcing runs the risk of putting the fate of its competitiveness into the hands of a third party (Pressman, 2001). Another potential risk of outsourcing is unproductive effort to determine all the expenses. Since, some expenses are unknown. (Barthelemy, 2001), outlined the following hidden expenses: 1. Searching for an outside firm for outsourcing 2. Transforming from in-house IT to an outside firm 3. Expense of controlling the work 4. Transforming from outsourcing firm into in-house activity However, these expenses could be controlled to some extent, but not completely (Turban, Leidner, McLean, & Wetherbe, 2005). Despite the risks involved in outsourcing, still there are numerous benefits of outsourcing, organizations can use outsourcing for various purposes and advantages: (Turban, Leidner, McLean, & Wetherbe, 2005; Leavy, 2004; Koh, Ang, & Yeo, 2007) Financial Saving a corporation from massive capital investment, thus assigning resources for other organizational purposes Better use of cost and cash flow Gaining outlay advantages and assistance from economies of scale and from sharing software, hardware, computer housing, and employees Reducing need for costly workplace Technical Outsourcing offers corporations the capabilities to attain technological enhancements more rapidly and simply Better choice to select software because of a broad variety of hardware Better and easily access to technical skills Management Allocation of information system development processes (design, development, and acquisition ) and operational task to contractor Putting attention on running and maintaining major business activities Minimizing the need to hire and train skilled IT personnel Human Resources Opportunities for personnel to learn from the experience of outside firms as well as improved career development Opportunity to offer on professional skills, obtainable from a toll of skills, when necessary Quality Greater and improved performance accountability Absolutely classified service levels Quality certification Flexibility rapid rejoinder to business needs and demands Capability to manage IT peaks and valleys more efficiently Recommendations The corporations should consider the following aspects when they decide for outsourcing: (Turban, Leidner, McLean, & Wetherbe, 2005, p. 616) Understand the project: The Corporation must understand the project, for instance its requirements, the basis of estimated financial advantages, and the techniques for its implementation. Thus, an organization should outsource simply when there are constraints on time or staff availability. Divide and conquer: Divide a huge project into little and controllable pieces, since it will significantly decrease programmatic risk and offer the corporation with an exit strategy if some piece of the project fails. Align incentives: Develop agreements according to nature of work and activities that can be determined exactly can help in accomplishing required goals or improving organization’s performance. Write short-period contracts: The outsourcing agreement should be short-term because the competitive setting transform so quickly. Control subcontracting: The Corporation should be allowed to delegate some of the services to other firm. Since, the agreement should allow the corporation some power over the situations, encompassing selection of vendors. Do selective outsourcing: This strategy is used by various organizations who desire not to outsource the greater part of their IT, on the other hand, to outsource certain sections for instance, system integration or network security. It gives them control over their IT department. Conclusion Outsourcing is emerging as a well-liked trend in the IT world. Organizations are more and more accepting this fashion to gain competitive advantage over their competitors. Thus, they outsource some of their IT needs to outside firms and put their concentration on other important organizational issues and departments. This paper has presented a detailed overview of outsourcing. This paper has discussed several examples of large size organization who have already implemented outsourcing and taking benefits from this implementation. This paper has also discussed various risks and benefits of outsourcing. In the last I have provided some recommendations, which can help organizations to overcome risks of outsourcing. I hope this paper will offer a deep analysis of Outsourcing. References Babar, M. A., Verner, J. M., & Nguyen, P. T. (2007). Establishing and maintaining trust in software outsourcing relationships: An empirical investigation. Journal of Systems and Software, Volume 80, Issue 9, pp. 1438-1449. Barthelemy, J. (2001). The Hidden Costs of IT Outsourcing. MIT Sloan management review Volume 42, Issue 3, pp. 60-69. Cramm, S. (2001). The Dark Side of Outsourcing, Farming out the best work will hollow out your organization. CIO Magzine . Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: a survey and analysis of the literature. SIGMIS Database, Volume 35, Issue 4, pp. 6-102. Goles, T., & Chin, W. W. (2005). Information systems outsourcing relationship factors: detailed conceptualization and initial evidence . 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