Outsourcing Information System Functions - Case Study Example

Information Systems Outsourcing The outsourcing of information systems and information technology enabled services in United s, Europe and Asia has experienced strong growth over the last several years due to an increasing need to focus on core competencies, heightened ERP and web implementation initiatives, consolidation across industries, insufficient operational expertise and a tight labor pool. This paper will discuss the nature of outsourcing, the types of IS/IT functions that might be outsourced and the advantages and disadvantages of IT/IS outsourcing to the outsourcing organization. With the help of a real life example of the use of IT/IS outsourcing (i.e. an outsourcing contract) this paper will critically analyze the advantage and disadvantage of IT/IS outsourcing and various factors associated with it. Introduction Outsourcing may be defined as the transfer of operational responsibility of either business processes or information system and other infrastructure management of an organization to an external service provider to achieve strategic goals, reduce costs, improve customer satisfaction and provide other efficiency and effectiveness improvements. This field has been in constant focus in last few years due to various social and financial issues involved with it. Analysis A number of organizations have sub-contracted all or part of their information systems / information technology function to specialist consultancies / contractors. According to Forbes Over 90% of Fortune 500 companies have outsourced at least one major business function. Encouraged by the projections of phenomenal cost savings, many Fortune 500 firms are jumping on to the "outsourcing bandwagon" (Lacity and Hirschheim 1993b). A survey of U.S. CEOs shows that 42% of communication firms, 40% of computer manufacturers, and 37% of semiconductor companies rely on outsourcing from foreign firms. These same CEOs expect the figures on outsourcing to exceed 50% before the mid-1990s (Bettis et al. 1992). Though the process of outsourcing is often considered as a non core business process it may range from low grade high volume and repetitive mechanical processes to a more sophisticated and high-tech development outsourcing. Outsourcing, in general, can be categorized as business processing outsourcing, platform IT outsourcing, application outsourcing and systems and network infrastructure outsourcing Information System outsourcing and processing services spending were approximately $200 billion in 2004, representing an 8.8% compounded annual growth rate (IDC). Information system outsourcing has been fueled by rapid technological change throughout all industries which results in more expense to upgrade systems, more time to install and increase complexity. For smaller companies which have information system and information technology department for just business support, maintaining and managing a good IT/IS department is not viable option, it is practically impossible to have a best team which can take on the market competition but IT/IS is major factor today that decide the success and failure of an organization. This lead to the outsourcing of major IT/IS outsourcings. Entire IT department or some IT/IS services are outsourced. The emerging pervasive nature of the Internet has effectively helped the communication between different parties involved in outsourcing process and has been the major facilitator of outsourcing in recent years. Easy and immediate access to information enables various parties involved in outsourcing to estimate the success of effort and control the entire process flow. Insufficient labor availability in developed countries, especially for those with IT expertise, has also led many companies in developed countries to outsource their business process and functional needs to the countries where cheap and high skilled human resource is available. Outsourcing decisions, in past, were primarily based on anticipated cost savings without the consideration of technology and security, but in recent years a more mature form of outsourcing is emerging which shifts the focus of organization towards knowledge management, technical superiority and security. Advantages and Disadvantages of Outsourcing "Outsourcing enables executives to focus their energies on the "what" of their business and less on the "how." Executives believe this is often the most compelling reason for outsourcing" (The Outsource Institute.) Explaining the advantages and disadvantages of outsourcing from a purely economic point of view is unjustifiable because inter-organizational relationships form from the social learning experiences based on specific sequential interactions. Some of the advantages of outsourcing are as follows: Enable focus on core competencies Overall cost savings to the business and organization. Cost restructuring Improved quality of products and services of organization. Better knowledge and intellectual property management. Access to intellectual property and wider experience and knowledge Access to operational best practice that would be to difficult or time consuming to develop in-house Access to a larger talent pool and a sustainable source of skills An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone Reduce Time to Market products Accelerate development or production of a product The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations. In last few years, several problems have been faced by outsourcing and third party organization. Despite its growth, outsourcing is frequently perceived as to be poorly controlled, high in cost and a drain on quality and service performance (Jacobs 1994). Some of the disadvantages of outsourcing are as follows: Quality of services: Though outsourcing has many advantages, it often leads to a poorer quality of services due to various factors such as improper selection of outsourcer or improper synchronization between outsourcing organization and service providers. Communication problems: Globalised nature of outsourcing often involves language problems and communication of terms and conditions leading to confusion. Social responsibility: Social issues such as job movements and local developments have the main reasons for local opposition of outsourcing. Information Security: Security of organizational information has been a major issue in almost all outsourcing efforts worldwide. Security of information should be maintained as it is with an internal system, which is often compromised. Example of the use of IT/IS outsourcing: In 1992, IBM was facing diverse set of problems which led the IBM to think some alternatives so that it can increase its dwindling sales and reduce the servicing cost. To overcome these problems IBM decided to take help of services of a call center that would provide quality and cost- efficient services for both sales and customer service products. IBM has had no experience in designing, staffing and managing a call center so they outsourced the job to a third party. Within a very short span of time the call center was ready and running. The call center was strategically organized to provide truly integrated and comprehensive marketing services for supporting and managing customers all along the customer life cycle. The outsourcing of call center services has had tremendous financial and operational benefits for IBM. It reduced the cost of customer contact by almost 97 percent, from $500 for field contact to $15 for telesales contact and shortened the field sales cycles up to 80 percent. It also generated 125 percent of goal for leads and enhanced customer expectations 78 percent of the time (according to various customer service satisfaction surveys). Outsourced services helped in building a marketing database which helped in customer information management which in turn helped in an improved customer targeting, responsiveness, relationships, and retention rates for the organization. Conclusions This paper clearly illustrates the various reasons for outsourcing, its advantages and disadvantages. It analyses various economic, operational and social implication of outsourcing. The above case study shows issues faced by organizations in outsourcing. Reference: 1. Curtis, G., Cobham, D. (2002), Business Information Systems: Analysis, Design and Practice, Pearson Education Limited, Harlow. 2. 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