Outsourcing in the IT Industry Today - Research Paper Example

Outsourcing in the IT Industry Outline 0 Summary There are several reasons why outsourcing or contracting out work is more favored rather than enhancing in-house talent. This paper is a general synopsis of outsourcing. The paper surveys when managers should consider outsourcing, the benefits and risks associated with outsourcing. Introduction Outsourcing is becoming a popular concept in the IT industry; due to the fact that the IT market is undergoing tremendous changes. New technologies are developed every day prompting a company to undertake the cost of investing in new technologies. 2.0 Discussion 2.1 Motivation to outsource There are various factors that motivate the managers to outsource for a service. These are classified as cost, strategy and politics. 2.2 Factors to consider when outsourcing A manager should consider various factors before outsourcing for a function in an organization. This includes the cost of outsourcing, the contract period, impact of outsourcing on the quality of product, internal and external environment that influences the IT firm. 2.3 Benefits of outsourcing There are various benefits attributed to outsourcing. These include cost saving, reduction in the capital expenditure, enable the company to concentrate on the core competencies of the company and improve the quality of the products. This enables the company sustain itself even in a market characterized by stiff competition. 2.4 Disadvantages of outsourcing Although outsourcing has various benefits to the company it may results in indirect cost, loss of employment, unfavorable contract time and legal problem in the contractual agreement. It may also lead to a decrease in quality of products as the outsourced company may not be committed to their contract. 3.0 Conclusion Outsourcing is a crucial element in the operations of an IT company today. Although, it is important it may lead to loss of control as well as create hidden costs for the company. It is thus important for managers to analyze the benefits and risks associated with outsourcing for a service. 4.0 Recommendations There is a need for managers to analyze the current position of the company before outsourcing for a service. It is also crucial for the government to regulate the outsourcing processing. Table of figures Figure 1 shows the services outsourced by companies in the IT industry. Figure 2 indicates the reasons for outsourcing in an IT company. Figure 3 demonstrates the preferred length of outsourcing contract period that companies can outsource a service. 1.0 Summary The growth in the IT industry has been recorded due to the expected benefits associated with outsourcing. This report will seek to elaborate on outsourcing in the IT industry. It will also discuss the factors that motivate a manager to consider outsourcing for a service from a third party. There are several reasons why outsourcing or contracting out work is more favored rather than enhancing in-house talent. This paper is a general synopsis of outsourcing. It surveys when to outsource and what advantages and disadvantages a manager may encounter when determining whether to outsource. However, there is room for improvement in the outsourcing industry. The IT firms should utilize the available information in ensuring that they outsource from reliable companies. With the current growth in the industry, the government should implement various policies to regulate the outsourcing process. 2.0 Introduction Over the years, outsourcing in the Information and Technology (IT) industry has undergone tremendous transformation. It is no longer reserved for a few companies in the industry. The increased need to outsource has been attributed to the globalization of the IT industry. All organizations are seeking strategies to help minimize costs while remaining competitive in the market. The decision to outsource is thus a challenge facing the managers today. In the IT industry, there are innovations made to increase efficiency. The need to outsource has risen following the fear that an organization may invest in a technology that might soon become obsolete. Outsourcing in the IT industry is a strategic tool that is applied by the managers to ensure that cost effectiveness, as well as competitiveness in the market (Saba, 2008). 3.0 Discussion Outsourcing involves the transfer of one or more of the organization’s services to an external service provider. Unlike co-sourcing, the organization does not undertake any activities in providing the service. The decision to outsource a service in the IT companies depends on the assessment of several factors. This is driven by the organization’s struggle to provide a high level of customer services, reduction of the overall operation costs while retaining and finding quality IT staff. Managers who decide to outsource opt to focus on their core business abilities while outsourcing their IT challenges to a trusted external source. Although outsourcing is beneficial, there are some risks involved. The outsourcing market in the USA has undergone rapid growth. A research carried out by ICD in 1998 revealed that the amount of money spent on outsourcing was increasing over the years. In 1996, about $86 billion was spent on outsourcing services from a third party. This is expected to rise to about $136.6 billion by 2001(Antonucci & Tucker, 1998). This shows that as the industry continues to grow majority of the companies are willing to invest in outsourcing. There are various services that different companies are willing to acquire from an external force. In the UK, about 70% of the companies outsource hardware and maintenance services, 18% outsource for data centre and mainframe management and 12% obtain network and PC management services. However, it is projected that in the future majority of the companies will outsource for desktops, application and data-centres (Antonucci & Tucker, 1998). Figure 1: Services Outsourced 3.1 Motivation to outsourcing The three key factors that motivate a manager to outsource IT services include politics, cost and strategy. Costs and strategy are mainly applied in the private sector while politics are applicable in the public organizations. The desire to save cost by the IT managers is one of the driving forces attributed to outsourcing. This occurs when the outsourcer company offers the services at a conducive price than the cost the organization would incur if it were to provide the service in-house. Specialization and economies of scale enable the outsourcer company to offer the services at a low price. The manager’s desire to save on indirect cost may also drive the organization to outsource for a particular service. A company with few employees requires less support system and infrastructure (Petrecca, 2008). IT companies may outsource so as to achieve efficient cost control while others aim at shifting their fixed cost to variable cost. However, although outsourcing has been attributed to cost control, there are instances when they result in increased costs. This is because the process of outsourcing results in additional indirect and social cost. Indirect costs include contract generation and supervision, transaction costs and other capital costs incurred in establishing the relationship with the outsourcer (Saba, 2008). The social costs are difficult to quantify but result in significant losses for the firm. These include lack of morale, decreased productivity and lack of commitment to the contract. Secondly, a manager may decide to outsource as a strategic tool to improve the productivity of the company. This includes the desire for the organization to achieve rapid growth, flexibility, restructuring and focusing on the core function of the organization. In the IT industry, globalization has increased competition in the market. The company is thus forced to utilize its resources effectively and efficiently. This means redirecting the scarce resources to implementing the core functions of the organization. Focusing on the core functions of the organization enables the company to specialize while outsourcing for a support system to enable them to ensure quality services to their clients (Saba, 2008). The organization’s desire to be flexible plays a vital role in deciding on whether to outsource a service. In the current IT market, the customer’s needs are changing with development of new technology. Outsourcing these services thus enables the IT firm in meeting the needs of the clients. Therefore, a manager may opt to outsource so as to share the risk with the outsourcer. Although a valid resource to outsource, manager must be careful to ensure that they do not lose control of the organization. The IT firms should not outsource for services that handle sensitive information for the firm. This includes finance information system, operating system and other services that are confidential to the company. Although a public and private organization may provide a similar product, they are motivated by different factors. A public IT firm is greatly influenced by the political environment while the private form is driven by profits. Political factors that may drive a public firm to outsource include the current local and international trends, public opinion and the agenda of the elected officials (Petrecca, 2008). A public IT firm may outsource so as to comply with the existing laws. It may also want to achieve accountability and improve the public opinion on the efficiency of the firm. Although the reasons for a public company to outsource may be different, the benefits and expectations are similar. Outsourcing in the IT industry is bound to continue growing due to the increased competition in the market and the scarcity of resources. Lewis reports that a majority of the IT firms embrace outsourcing so as to reduce their operation costs. The study also revealed that although the companies are seeking to access expertise skills they are less concerned with the advancement of technology and risk reduction. IT industries are seeking to carry on using the same technology but employee the economies of scale to reduce cost. Figure 2: Reasons for outsourcing (on a scale of 1-5) 3.2 Factors to consider when outsourcing There are several factors that the manager must consider before outsourcing a service. One of the factors to consider is the cost of outsourcing. It is assumed that one of the main driving forces to outsourcing is the company’s desire to outsource. This means that the total cost of outsources for a service should be less than the cost of undertaking the service in-house.The cost savings expected from outsourcing are sometimes exaggerated. It is thus imperative for the manager to consider the cost of purchasing the application, as opposed to outsourcing. Where the costs for outsourcing are lower than expected cost of purchasing the function, the manager should opt to outsource the service (Antonucci & Tucker, 1998). . The manager should consider the contract period with the outsourcing company. Long term contracting of essential assets may lead to exploitation of the company by the outsourcing firm. Short term contracts, on the other hand, may not meet the goals of the company. The researches by PMP revealed that most companies are willing to engage an outsourcing company for 2-5 years. According to the sample 47% of the companies prefer a contract between 2-5 years. About 11% of the companies were willing to undertake contracts beyond 7 years, and only 2% would take up an outsourcing contract for more than 10 years. Figure 3: preferred length of IT outsourcing Contract It is crucial for the manager to consider the core competencies of the organization. Core competence refers to the resources that the company uses to maintain their competitive advantage. Core competencies are then used by the firm to achieve their core functions. Core competencies are those functions that enable the firm to operate better than their competitors. It is important for the manager to identify the firm’s core capabilities. This ensures that the firm does not lose control of the functions that offer them a competitive advantage (Antonucci & Tucker, 1998). The manager should also consider the impact of outsourcing on the quality of their products. The quality of the firm’s services determines it reputation and demand for its products. If the company is known for high quality goods, the manager might be concerned that outsourcing may affect the quality of the products. However, if the firm’s quality is not in high regard, outsourcing of the services is seen as a potential improvement. Another factor to consider is the flexibility of the organization. A manager should consider the impact of outsourcing on the company’s flexibility. Flexibility includes demand, operational and resource flexibility. Long term contracts in a limited market are associated with loss of flexibility. However, public organizations which are bureaucratic outsourcing, may help improve their flexibility. Flexibility is crucial in enabling the organization to meet the changing demands of the client (Petrecca, 2008). The number of employees to be affected by outsourcing a function is likely to influence the decision to outsource. Displacement of the employee is a sensitive issue which is dictated by the objectives of the organization. In case the firm desires to displace many employees, outsourcing of a function that utilizes a large number of the personnel will be appropriate. However, where the company plans to displace few employees, outsourcing such a function will not be appropriate. The number of employees to be displaced is determined by the current situation of the company. In a company where the production costs are high due to large salaries, the company may consider outsourcing the function in order to reduce the cost. It is important for the manager to consider the internal as well as the external environment surrounding the IT market before outsourcing for a service. The internal political environment may significantly influence the manager’s decision to outsource. Therefore, the manager must consider the opinion of the stakeholder before making the decision to outsource. Another factor that the manager should consider is the legal factors that govern the outsourcing process. In the case where there are many legal challenges, the manager ought to consider whether the function is beneficial to the organization. The political and economic environment plays a crucial role in influencing the manager’s decision to outsource. The current political environment greatly influences the operations of the public organizations. 3.3 Benefits of outsourcing Today, the outsourcing market has experienced tremendous growth. This is because a majority of the companies are willing to outsource. In addition, the number of companies offering outsourcing services has greatly increased. This means that the risks involved with outsourcing are reduced as companies have clearer objectives and more experience. When a company outsources, it is able to concentrate in its core competencies. These are activities that help the company to compete in the IT market (Antonucci & Tucker, 1998). . Outsourcing of technology allows the firm to have access to new technology, expertise and resources. The technology market develops rapidly thus, investing in a technology may be costly for a firm. Hiring and training of in-house staff to implement the technology may also be costly for the firm. Outsourcing helps the company reduce the cost as well as the risk involved in adopting new technology. Outsourcing enables the company to increase their productivity by employing efficient and effective production methods. Outsourcing can lead to improvement in the quality and amount of goods produces. This results in customer satisfaction and increased profits for the IT firm. It also provides flexibility that helps in improving customer satisfaction (Antonucci & Tucker, 1998). As a result of the current globalization of the IT market, a company must focus on providing quality in order to attract as well as retain the customers. Outsourcing helps the company produce quality services at low rates. It also helps the company focus on ensuring that they are a better market position in terms of competition. Outsourcing has also been associated with tax exemption. This reduces the tax burden of the company enabling them to reduce their operation cost. In 1990, a bank in the UK considered to outsource from an external provider. This bank offers banking serves at more than 1700 locations. Their internal association offers leasing services, mortgages, retail brokerage and financing at different location in the UK. The bank was motivated by the competition in the finance industry attributed to the rapid growth in the banking market. Another reason for the motivation was attributed to the fact that the customer’s needs were dynamic with majority of the clients opting for easy and flexible services (Antonucci & Tucker, 1998). The decision to outsource was undertaken after thorough research in the outsourcing market. The benefits of the contract were to be realized in the long term as they were not measurable in monetary terms. In about 3 years, the bank reported several benefits accruing from the contract. The bank reported to benefit from the transfer to risk and burdensome task to a third party. They also reported a reduction in their overall cost attributing to shifting their fixed cost to variable cost. 3.4 Disadvantages of outsourcing Although there are factors in favor of IT outsourcings, a company should consider several disadvantages to this strategy. A company needs to analyze several risks before embarking on this venture. If risks are not considered fully, the disadvantages may outweigh the advantages. Outsourcing may lead to loss of jobs. This leads to escalating rates of unemployment. A significant disadvantage is that there is loss of managerial control. It is difficult and challenging to manage IT service providers from outside. In contrast, management of one’s own employee working in the same building is an easy task (Rachael, 2012). Another disadvantage with IT outsourcing is hidden costs. These are usually cumbersome to prepare for and calculate. The hidden costs may include legal costs. For example, a legal cost is required to put a contract between 2 companies. There is also time spent in contract coordination. IT outsourcing may pose a threat to confidentiality. This may lead to security threats within the company. Often, the company has secrets it may want to keep away from their competitors or the general public. A breach of this may occur with IT outsourcing leading to loss of confidentiality. Therefore, a company must be careful in choosing a good provider. Unfavorable contract lengths are often evident in outsourcing. This means that the company must come to a compromise in terms of duration of the contract. This may not be favorable for the companies plan. There may also emerge problems during contract renewal. Another pitfall is that there may be contractual misunderstandings between the companies (Rachael, 2012). 4.0 Conclusion Outsourcing in the IT industry is crucial in improving the quality of services and ensuring customer satisfaction. This is because customer outsourcing enables the company to focus on improving their core competencies. However, although it is useful, it may result in the company control loss. It may also result in additional hidden costs as well as a decline in the quality of products. A manager should critically analyze the internal as well as external factors influencing the firm’s ability to outsource. The cost of outsourcing ought to be less than that incurred in purchasing the application. 5.0 Recommendation It is paramount for the outsourcing company to critically analyze their current position before outsourcing for a function. This includes identifying and understanding the challenges facing the company. This will enable the company to identify an outsourcing company that will help them achieve their goals. It will also ensure that the company enjoys the full benefits of outsourcing. The government should also implement policies in order to regulate the outsourcing process. Currently, IT companies can outsource services from a local or international firm. In order to protect the local firm, the government should implement various policies that govern the process. Appendices Figure 1. Services outsourced Figure 2. Reasons for outsourcing Reference List Antonucci, Y. L., & Tucker, J. J. (1998). IT outsourcing, current trends, benefits, and risks. Information Strategy. The Executive’s Journal, 14(2), 16–26. Retrieved March 25, 2012, from http://v-scheiner.brunel.ac.uk/bitstream/2438/4225/1/outsourcing.pdf Advantages and disadvantages of outsourcing. (2006, January 21). In WriteWork.com.  Retrieved 13:11, March 25, 2012, from http://www.writework.com/essay/advantages-and-disadvantages-outsourcing Division of labour. (2012). In Encyclopædia Britannica. Retrieved from http://www.britannica.com/EBchecked/topic/326831/division-of-labour Klaassen, A. (2008). Diller fashions IAC ad network. Advertising Age, 79 (25), 6. 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