Advising on Future IT Sourcing - Essay Example

? IT SOURCING APPROACH: ADVICE ON FUTURE IT SOURCING ------------ ------------ ------------ ------------ ------------ The term offshoring has extended from its only financial meaning to the term materials (Winkler 2009). Offshoring is the process of relocating a company's business process from the country where this business is based, to another country. This occurs especially when considering operational processes for example information technology or manufacturing processes. Information technology outsourcing has been made possible by the rapid development and reliability of the infrastructure and communication. The above variables have also become affordable in many parts of the world. Offshoring has a significant positive effect on productivity in the US (Amiti 2005). The idea of IT offshoring is supported by the fact that some countries have low costs in handling the IT processes than others. In these countries, the tax policies may also be more business friendly resulting into extra cost savings. It so happens that companies will wish to shift their IT activities from their home country if operational costs of supporting their activities are higher relative to those of the other country. The diagram below gives the basic model that is often used for IT firms that outsource their services from overseas companies. Source: Lab Partners Off shoring has also been motivated by the improved internet connectivity and high speed internet connections in most parts of the world. India has somehow benefited from IT offshoring due to several favorable factors. First, the country has benefited from the impact of offshoring since her people are well versed in the English language hence minimal language barrier. Another factor is that India has significant technical abilities and proficiency compared to its other Asian counterparts. As an IT consultant for GlobShop, I would take several considerations into account to assess the feasibility of moving more value-added IT work offshore. Offshoring in the IT industry led to an increase in productivity of zero point three percentage points for the period 1995 to 2002 (Amiti 2005). From the company’s report on the first phase of introduction of offshoring, it is clear that the company enjoyed a reduction in its IT expenses by over thirty five percent. Since as of the time, the managers can only go by historical data, moving more value-added IT work offshore would imply that the company will enjoy further reductions in costs by an even greater magnitude. When costs are reduced, the net returns to the company will increase thereby improving the profitability of GlobShop Company. As profitability increases, the value of the company consequently increases and this is good for both the shareholders and other stakeholders such as the company’s creditors and financiers. The increase in profits will lead to growth and expansion in the long run. It is evident in this report that as the company undertook offshoring for the first time; some of the workforce was laid off since there was no more work left for them. This presents a substantial logistical problem to GlobShop’s managers. The IT staff of the company was cut off by about forty three percent in the first year and around fifty nine percent the second year. This is quite a large number of employees being sent home within a span of two years. This laying off of the workforce is not healthy for the GlobShop’s image as a company. The laid off workers will not be happy by the management’s decision of relieving them of their duties. Since these workers hail from the society in which the company offers its travel services, the workers’ families and friends will not be impressed by this act. This might cut the company’s returns since the locals will shift to other competing firms in the travel industry. If the company decides to move more IT work offshore, it will also face some challenges in firing IT workers. This is so because the company relied on their IT employees such that the IT processes that the company undertook were known exclusively to these workers who had been working for this company for so long. Most of these processes are not documented .This means that if they lay off these workers, they will leave with this knowledge and the company will need this knowledge to transfer to ISS IT staff so that they can offer their services to the company. The company should consider restructuring the IT workforce before undertaking random retrenchment of these workers. The company will have to design send off packages to the IT staff that gets laid off. These packages have to be made up of a substantial amount of cash so as to make the workers to feel lesser pain in leaving their jobs. These packages are known as severance pay and as it is being implemented, another package would also be designed for those workers that have to be retained so as to transfer their knowledge to the ISS company staff in India. All this will definitely lead to increases costs to the company thereby reducing its net returns. Any activity that reduces profitability of a firm is not welcome to the shareholders and therefore this will present itself as a challenge to GlobShop’s managers in terms of balancing shareholder interest with those that have long run feasibility for the company On the other hand the management believes that continued offshoring will have a positive effect on the company since it defines the company for what it is; a global travel retail. Management believes that competitiveness will not be affected by offshore outsourcing of the company’s IT work. They have a reason to support this claim since the initial offshoring led to a significant decrease in the company’s expenses. The initial implementation also led to the boosting of the confidence level of various business leaders. Despite initial success, there still looms an uncertainty in entrusting responsibility of handling important processes such as supply chain initiatives to offshore vendors. This is considered too risky to a firm’s operations and may not go down well with the interests of the shareholders. The management should weigh these uncertainties against expected returns from value-added offshoring and also the welfare effects of such an under taking. The management should then pick the alternative that promises the best welfare effects for all the stakeholders of the company. Globshop also managed to withstand economic storms during the three years that the company had outsourced initial offshoring. This was complemented by an increased revenue growth. Studies also showed that user satisfaction had improved from two to three point five on a five point scale since they started offshoring. This is means that the company has not lost its clients’ trust and this proves that the offshoring can actually be beneficial both to the company and its clients. The management will have to take this into consideration before implementing or doing away with the idea of offshoring more value-added IT work to the Indian company. Going by this information, the company should strongly consider implementing the offshoring. Globshop’s priorities are expansion of the company’s operations to become a global travel-retail company and improving retail business. To achieve this objective, the company should only undertake those strategies that maximize this objective. Taking this into account, the company has observed that offshoring IT work has previously been advantageous to the company and has been a strategy that is contributing significantly to the accomplishment of this objective. The company should therefore take this as a reason to undertake the proposed moving value-added IT work offshore. There exist some doubts in a section of the management that this act might reduce the relevance of the company in the market. This is because the company will be transferring most of the important processes of the company to another company, especially a company in another country. This might affect the sovereignty of the company. This might result to overdependence on ISS Company. This will give GlobShop Company a negative public image. The management’s suggestion to use multiple vendors instead of relying solely on ISS would solve a part of the problem, but caution should be taken when carrying out this action. This is because the company has already worked with ISS and therefore has gained trust on them. Having to deal with multiple vendors will increase the risks of underperformances by these other vendors. In some cases, risks are higher when offshoring IT enabled services relative to offshoring IT (Carmel 2005). Furthermore, ISS has grown to be one of the most successful companies in Asia and has expanded its clientele base to include top retailers. This gives GlobShop Company a reason to gain more confidence in them than any other vendor. In conclusion, GlobShop Company’s future depends on the decision of the management concerning those critical processes such as IT work. If the company decides to move more value-added IT work offshore, the decision may put the company’s IT department in jeopardy. If a firm is offshoring to a growing competitor nation-and many of the Asian destinations are in this category-then it runs the risk of transferring key know-how abroad to its eventual rivals (Carmel 2005). There are risks involved in offshoring majority of a company’s processes to another company. Therefore the company should improvise strategies to deal with issues arising from offshoring. References Amiti, M & Wei, S 2005, Service offshoring, productivity, and employment: Evidence from the United States, International Monetary Fund, Research Dept, Washington, D.C. Carmel, E & Tjia, P 2005, Offshoring information technology sourcing and outsourcing to a global workforce, Cambridge University Press, Cambridge. Aalders, R 2001, The IT Outsourcing guide, Wiley, New York. Carmel, E & Tjia 2006, Offshoring information technology: Sourcing and outsourcing to a global workforce, Cambridge University Press, Cambridge. Winkler, D. 2009, Services offshoring and its impact on the labor market: theoretical insights, empirical evidence, and economic policy recommendations for Germany. Read More