Impact of IT Outsourcing and Off-shoring on Companies - Research Paper Example

Impact of IT Outsourcing and Off-shoring on Companies Introduction Emergence of web 2.0 paradigm opened windows forInformation Technology (IT) business outsourcing and off-shoring (Garner 22). Outsourcing has developed mainly due to changes in the market and industry conditions. There has been a common boost in outsourcing of information processes within business cycles. The needs and expectations of customers in different markets are becoming more specific and highly demanding on businesses. This increase is a result of the need to constantly generate value and develop competitive advantage. This has led to a general appreciation of outsourcing as a cost cutting mechanism and strategy to ensure professionalism in delivery of products and services (Jae-Nam 573). Gibb and Buchanan (133) claim that IT outsourcing involves organization outsourcing of computer based tasks or internet based tasks to an external company or consultant. Companies commonly outsource IT tasks like programming and software development. Yeaple (606) advanced the argument that IT outsourcing is a subset of business process outsourcing (BPO) that involves outsourcing of organizational tasks that need less technical skills. An organization outsources for a variety of reasons for instance lack of adequate technical and human resources, lack of enough resources to support implementation of a functional IT department or need to reduce costs and maximize on marginal revenue Research Questions Many organizations in the modern business environment have adopted the use of IT business outsourcing and off-shoring. Advances in any technology come with intended purposes but other side effects are attached to their usage. IT business outsourcing and off-shoring may not be left out since its adoption could be associated with gains as well as losses. The public has its opinion regarding the adoption and use of IT business outsourcing and off-shoring. Another aspect could be the impacts to the public due to its emergence. Therefore, questions such as the ones presented below will be answered in this study. 1 The use of outsourcing and off-shoring facilities enables firms to improve their financial performance. 2 What are IT outsourcing and off-shoring business processes improvement advantages that could lead to reduced operating costs? 3 What are the risks or disadvantages associated with the use of IT outsourcing and off-shoring? How do they limit the assimilation use? Brief Review of the Literature Information technology is an important factor in the modern world given the advance in technology. It helps firms innovate and produce high quality products that meet customer needs and demands. Due to changing business environment, firms have found it necessary to reduce operating costs while exploiting the comparative advantages of human IT skills offered by other countries (Manaschi 87). Therefore, companies have opted to outsource critical IT skills from other firms from other nations that are endowed with the expertise. In spite of the benefit of cost reduction and improved operations, IT outsourcing poses security and generic risk issues to the firm (McKendrick 130). If these issues are well managed, the outsourcing firm is likely to benefit through increased innovativeness and high product quality that could positively improve customer satisfaction hence increasing customer loyalty. This study examines outsourcing and explores outsourcing as applied in IT organizations. Outsourcing is the act in which a company or an organization pays another firm to produce goods or offer services on their behalf (Blokdjik 98). In many cases, the company could have produced the goods or offered the service themselves but sometimes it involves higher costs. Off-shoring on the other hand is a business process that companies use when they decide to relocate their operations to lower cost locations, mainly overseas. The requirements and expectations of customers in different markets are becoming more demanding. Businesses are therefore required to take appropriate actions in order to satisfy the demands of a certain market. Value addition to products has for a long time been used as a means of creating a competitive advantage by many businesses, however these strategies are not enough in themselves, thus outsourcing was embraced. Outsourcing and off-shoring has been around for many decades and companies seek these services due to a number of reasons. No matter what the reason, the rate at which companies are outsourcing and off-shoring their services are steadily increasing. This has led to the globalization of services, consequently boosting trade and commerce all over the world (Kelly 35). The level of trade has grown remarkably over the last few decades because of the advancements that are being experienced in the field of information, communications and technology (ICT). These advancements have also increased the number of tradable services in the field of IT and ICT, which have made the outsourcing and off-shoring of services to be that much easier. The ease in the tradability of these services coupled with the increased independence of the location has contributed to the off-shoring of services by many companies in the west. Companies are now outsourcing services such as support, customer care, research and consultancy. The main reason behind this is that outsourcing for services is much cheaper and the result is desirable. The development in IT and ICT has motivated organizations to outsource their products and services all over the world. India is the country, which provides most of these services. India is a prime location for IT outsourcing and off-shoring (Blokdjik 102).It has a strong labor force that is comprised of personnel who are skilled and talented. Their high population increases the competition for employment. This has made the country to have a workforce that is comprised of relatively cheap labor force. India also has a high number of competent personnel in almost all the fields of the economy. These individuals are highly educated, professional, have many experiences, knowledge and skills, which are required to execute their respective tasks effectively and efficiently. This group can also speak and write fluent English, an aspect that makes them stand at a competitive edge over rival countries such as China (McKendrick 132). With the revolution in IT and ICT, location is not of a high concern as it used to be. The advancement in technology has made the transmission of inputs and outputs to be much easier. These processes can now be conducted digitally and transmitted via electronic means. Companies have therefore off-shored much of their services especially white-collar jobs to improve their sustainability and efficiency. The customer care for the giant computer manufacturer Dell, for example is located in India (McIntyre 109). When local residents call the customer care, they are being served with an operator who is located in China. Despite the benefits accrued from outsourcing and off-shoring, there has been a lot of debate on the effectiveness and sustainability of this new trend. It is evident that outsourcing and off-shoring benefits both the origin and destination country. The destination country enjoys increased rates of employments and free trade. The origin country on the other hand enjoys the availability of goods and services. The mutual relationship between these two countries is beneficial since both of their Gross Domestic Product (GDP) will increase in the short run and in the long run (Jae-Nam 573). Outsourcing and off-shoring has been referenced with success, effectiveness and efficiency. As a result, many companies have adapted these mechanisms. However, some analysts claim that such companies may lose the control of their overseas organizations, an occurrence which maybe very risky (Plunkett 76). IT market competitiveness has provided opportunities for equivalence of service level, which result into loss of brand identity, and brand community and decreased market share. These criticisms of outsourcing and off-shoring raise many questions as to the effectiveness and efficiency of outsourcing. Outsourcing and off-shoring has increased trade to a new level, enhanced globalization, and improved the operations of organizations all around the world. These outcomes have only been experienced in the short run. The sustainability of outsourcing and off-shoring remains a big mystery. This is because there are a number of drawbacks that are coupled with outsourcing and off-shoring of IT services. These drawbacks affect the free market by changing the balance of trade. A study should therefore be conducted to investigate the viability and sustainability of IT outsourcing and off-shoring. Research Methodology This study examines the drivers, impacts and usefulness of IT outsourcing to an organization business processes and operating costs. The suitable research method that is employed in the study is a quantitative research method. Quantitative research method is closely related to numerical and statistical data. The method involves collection of quantifiable data that can be subjected to statistical treatment. The collected data is analyzed using mathematical tools such as regression analysis. Quantitative research method can be descriptive, experimental or causal depending on the nature of the study. This quantitative study on the impacts of outsourcing on firms would be descriptive in nature because it will examine the existing situation in IT outsourcing and off-shoring. Moreover, the study examines all attributes of outsourcing and off-shoring based on observation and the exploration of the correlation between its application in firms and the outcome experienced in terms of improved business processes, costs and performance (Setster 15). There are three aspects of this study that include reasons for emergence of IT business outsourcing, risks associated with its use and the public opinion about its use would be explored. The method is suitable for this study because it will enable the researcher to obtain first hand data that will increase the reliability and validity of the study hence making the study valid for any user (Setster 19). Findings Drivers of Outsourcing According to Jae-Nam (576), every organization in a given industry aims at various goals. However, major objectives include maximizing profit or revenues earned from sales. In order to achieve this objective, the management focuses on reduction of all costs incurred by the firm. A study conducted by Oshri (151) established that firms outsource IT services to other firms in different countries and regions in order to minimize operating costs. Since costs are important factors in profit determination, the organization use various strategies to minimize costs, one of them being outsourcing among others such as large-scale production. Just as Theodore argues, “A COUNTRY THAT FINANCES RATHER THAN ADJUSTS TO ITS CURRENT ACCOUNT DEFICITS MUST BORROW FROM EXTERNAL CREDIT SOURCES AND/OR DECREASE ITS FOREIGN EXCHANGE RESERVES” (339). This forces firms to outsource. The theory of factor endowments that was put forward by Heckscher and Ohlin postulates that countries have different factors of production that enable them to poses the comparative advantage over other nations (Manaschi 94). This theory could be used to explain the pressure for companies to outsource IT services from other countries. Countries that have enough skilled IT expertise have a comparative to countries that do not have the expertise. Therefore, organizations operating in such deficient countries tend to outsource the services from well-endowed nations in order to improve their competitive advantage. Therefore, outsourcing is a form of international trade occurring because IT skill differentials between countries. Chossudovsky (112) supports this theory as applied in outsourcing by noting that organizations that outsource IT expertise obtain best skills for the right cost and at the right time. Organizations have identified IT talent limits within their employees and talents from outside the region best fill the gaps. Lastly, Chossudovsky (119) notes that outsourcing IT expertise enables an IT firm to be nimble in the quest to fulfill business unit requests especially operations that are likely to run behind schedule. Generic Risks in IT Outsourcing and Off-shoring McIntyre (102) notes that every organization gets an outsourcing and off-shoring collaborate that it deserves. Therefore, firms that experience inefficiency in IT management end up getting incompetent outsourcing partners. On the contrary, organizations that do efficient management of their IT departments always obtain competent IT outsourcing partners. In addition, other firms that do not conduct enough research in determination of outsourcing partners are worse off because they may end up overhauling their better IT expertise for worse outsourced expertise. In addition to these risks, there are many others, for instance, outsourcing requires best management skills. Organizations that lack good management skills may not reap maximum benefits from outsourcing. According to Chossudovsky (132), some companies have difficulties in managing their IT departments. Such organizations may face challenges of maintaining outsourcing. Other corporations that do not undertake market testing for IT outsourcing have the risk of missing the benefits of IT outsourcing. Overreliance on this factor is not necessary since most of the benefits of IT outsourcing are not transparent. The supply of un-updated technology is another risk common with firms that are engaged in long term IT outsourcing contracts. This may result in unfruitful relationship between the two companies. It is evident that IT skill outsourcing can reduce operating costs of a firm. However, this can only be realized if the company can manage its IT management costs. Security Concerns Security concerns have been raised concerning outsourcing and off-shoring of IT expertise from other countries. According to Brown (272), outsourcing firms run risks of information security hence there is need for auditing and restricting system users for the organizations. They outsource due to what brown calls “LIKE THE BANKRUPT CONSUMER WHO STAYS AFLOAT BY MAKING THE MINIMUM PAYMENT ON HIS CREDIT CARD, THE U.S. GOVERNMENT HAS AVOIDED BANKRUPTCY BY JUST PAYING THE INTEREST ON ITS MONSTER DEBT” (Brown 272). Not all foreign software coders could be trusted by outsourcing firms. It is important that outsourcing firms conduct proper background investigations of foreign software coders. Given that only few firms conduct such investigations, outsourcing corporations are not safe since their confidential information could be compromised. Conclusion Outsourcing is the ability of firms to seek human capital from other nations. Many firms operating in different fields have been reported outsourcing different skilled human capital from different countries. One of the most significant skills sought is IT, outsourced by IT firms. The outsourcing of IT personnel is driven by many factors including need to minimize costs while maximizing on the profits, need for innovation, inadequate skills in IT locally among other reasons. IT outsourcing is good for IT firms because it enables the firms obtain rare skills that cannot be obtained locally, ability to minimize operating costs and improved business processes among other benefits. In spite of the benefits, outsourcing poses some generic risks to the firm. Works Cited Blokdjik, Gerard. Outsourcing 100 success secrets - 100 most asked questions: the missing it, business process, call center, HR-outsourcing to India, China and more guide. San Francisco, CA: Emereo Pty Limited. 2008. Print. Brown, Ellen. 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Yeaple, Stephen. “Off-shoring, foreign direct investment and the structure of US trade.” Journal of the European Economic Association, 4.2-3 (2006): 602-611. Read More