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Pros and cons of outsourcing - Essay Example

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Outsourcing IT has been the subject of considerable debate, not only at the level of how best it can be done, but also in terms of its implications for organizational forms and management. There are different views on outsourcing and its benefits for business but all researchers prove that success depends upon ability of the company to introduce outsourcing into organizational settings…
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Pros and cons of outsourcing
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Download file to see previous pages Total outsourcing means the decision to transfer IS assets, leases, staff, and management responsibility far delivery of IS services from an internal IS function to a single third party vendor which represents more than 80 per cent of the IS budget. Millar (1994 cited Greaver 1999) defines four basic types of outsourcing arrangements: General outsourcing encompasses three alternatives: (1) selective outsourcing where one particular area of IS activity is chosen to be turned over to a third party, such as data centre operations; (2) value-added outsourcing where an area of IS activity is turned over to a third party who is thought to be able to provide a level of support or service which adds value to the activity that could not be cost-effectively provided by the internal IS group; (3) co-operative outsourcing where some targeted IS activities are jointly performed by a third party provider and the internal IS department. Researchers discovered that many companies investigated outsourcing as a consequence of IS managers' failure to demonstrate the value of IS to various stakeholders within the organization. Many different stakeholders (senior managers, business unit managers, IS managers, IS staff, and end users) possessed different preferences, expectations, perceptions, and agendas for IS.
Form post-modernization point of view, the enthusiasm for IS outsourcing in the trade press is not unique-any new management trend promises to be the panacea to organizational problems. Through radical change, be it business process re-engineering, total quality management, virtual corporations, etc, practitioners are offered yet another utopia. Such positive press tempts many senior executives to jump on the latest bandwagon, and subsequent research shows that many organizations improve radically (Burnett, 1998).
Financial Benefits of Outsourcing
Many senior managers cite financial reasons for outsourcing. In particular, senior managers view outsourcing as a way to cut costs, improve cost control, and restructure the IS budget. Many companies expect that outsourcing would save them money. They perceive that vendors enjoy economies of scale that enable then to provide IS services at a lower cost than internal IS departments. In particular, senior managers believe that a vendor's unit costs are less expensive due to mass production efficiencies and labor specialization (Greaver 1999).
Another financial rationale for outsourcing is gaining control over IS costs. As any IS manager will attest, IS costs are directly related to IS user demands. In most organizations, however, IS costs are controlled through general allocation systems which motivate users to demand and consume resources excessively. General allocation systems are analogous to splitting a restaurant tab--each dinner companion is motivated to order an expensive dinner because the cost will be shared by the other parties. Participants saw outsourcing as a way to control costs because vendors implement cost controls that more directly tie usage to costs. In addition, users no longer call their favorite analysts to request frivolous changes, but instead must submit requests through a formal cost control process. This results in the curtailing of excessive user demands and thus reduces overall IS costs. ...Download file to see next pagesRead More
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