Pros and Cons of Outsourcing IT - Essay Example

Running Head Outsourcing: Good or Bad Outsourcing: Good or Bad Outsourcing IT has been the 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. outsourcing proposes great opportunities for modern organizations to reduce financial costs and improve technology. The terms outsourcing and insourcing do not capture the complexity of sourcing options available on the market place. There are several taxonomies of sourcing decisions that have been adopted. 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. Some companies state that the reason for initiating outsourcing was for restructuring their IS budgets from cumbersome capital budgets to more flexible operating budgets. Through outsourcing, organizations could more efficiently purchase IS resources as needed rather than invest in capital (Greaver, 1999). Business Benefits Even within companies, perceptions over IS's contribution to core activities varied. In general, senior executives tend to view the entire IS function as a non-core activity whereas IS managers and some business unit managers contend that certain IS activities are core to the business. Also, outsourcing help companies to pursue a growth strategy through mergers and acquisitions. Mergers and acquisitions create many IS nightmares. For IS managers because they are required to absorb acquired companies into existing systems. Organizations expect that outsourcing solve the technical incompatibilities, absorb the excess IS assets, such as additional data centers, and absorb the additional IS employees generated by mergers and acquisitions (Greaver 1999). Some companies outsource IS when the company is first incorporated. At the time, they expect that outsourcing is a quicker and cheaper way to provide IS services. Taylor (2005) explains that: Producing more per hour is how an economy raises the average standard of living over time. U.S. firms have generated this remarkable productivity growth in large part by taking advantage of the gains in information and communications technology--and outsourcing is one mechanism by which this has happened. The practice of outsourcing both to domestic and foreign firms allows businesses to harness dramatic innovations in communications and information technology more effectively than they could if they just gave each of their own payroll-department employees a fancy new computer (p. 367). As start-up companies, they simply could not afford the capital investment required to erect internal IS departments. Managers from a number of organizations initiate outsourcing evaluations in response to devolution of organizational and management structures occurring in a wider business context. Often termed downsizing, participants intended to use outsourcing as a means to reduce headcount and thus the costs associated with salaries, pensions, and benefits. In addition, the length of many contracts is relatively unusual. According to Burnett (1998), short contracts are for companies that are experimenting with outsourcing and are not really convinced. The previous experience in outsourcing in other areas gives them great confidence in the way that they are able to deal with IT. IT is different but not that different; the general outsourcing lessons and principles from other areas are seen to be applicable. Technical Benefits At the beginning of the 21st century, many companies are dissatisfied with the technical services provided by their in-house IS departments. In this case, outsourcing helps to overcome negative impact of modernization and create a completely new structure of dealing with environment. For instance, the IS departments deliver systems late and over budget and do not respond in a timely manner to user requests. Outsourcing becomes a way to improve technical service; managers explain that outsourcing vendors possess a technical expertise lacking in internal IS departments. Some companies prove that outsourcing provides access to technical talent. Many companies find it difficult to retain staff with the state-of-the-art technical skills. Vendors are felt to have core competencies in technology skills which allow them to bring these skills to the organization through outsourcing. Numerous companies consider outsourcing partly for the access to greater IS expertise it would bring. Some organizations state that outsourcing provides a conduit to new, emerging technologies (Greaver 1999). They view outsourcing as a way to hedge bets on emerging technologies, providing them access to the products of the vendors' large research and development departments. Participants from a number of companies initiate outsourcing evaluations to focus the internal IS staff on core technical activities, such as the development of new applications, while outsourcing non-core technical activities, such as the support of legacy systems. Many companies initiate outsourcing decisions to acquire new resources, such as machine upgrades, additional personnel, or cash. IT managers reported that enhancing competitiveness, creating strategic advantage, improving service quality to customers, and increasing access to expertise were primary benefits" (Crandall and Murray 2006, 4). IS managers are well aware that their requests for capital funds would be met with questions such as, 'isn't it cheaper to outsource this' outsourcing evaluations help managers acquire resources by showing that outsourcers could not provide the additional resources at a lower cost (Crandall and Murray, 2006). Following Greaver (1999) because IS demand is erratic, IS managers have difficulty planning for IS services. Rather than react to demand fluctuations, IS managers outsourced. By including a clause that varies fees with volumes, IS managers effectively dispensed with the risks associated with uncertainty. Another political reason identified was the desire of participants to eliminate a troublesome function. Since senior executives do not fully value IS, IS administrators receive few accolades for managing the function. Many senior managers assume that outsourcing vendors submit lower bids because they are inherently more efficient due to economies of scale. The theory of economies of scale states that large-sized companies achieve lower average costs than small-sized companies due to mass production and labor specialization efficiencies. In the outsourcing arena, however, the applicability of the economies of scale model may be questioned. Crandall and Murray (2006) find that managers eventually doubted that IS managers would meet their cost reduction mandates and decided that outsourcing is the solution. The outsourcing threat served to align all stakeholders to their cost minimizations agenda. Following Crandall and Murray (2006): "outsourcing requires additional resources for managing the outsourcing relationship, such as monitoring vendor performance, collaborating on service problems and negotiating change" (p. 4). By creating this shared agenda, some IS managers were able to compete with vendor bids by proposing to replicate their cost reduction tactics. Business unit managers and users realized that either their familiar IS managers or external vendors would implement cost reduction tactics. While companies desperately attempted to reduce IS costs, most IS executives preferred to believe that customer service is crucial. In spirit IS attempted to highlight the criticality of customer support. The recent emergence of the function relationship management within IS is a case in point. This function ostensibly creates an account manager role between IS and its business unit customers, and clearly demonstrates that customer service is valued. However, customer service does suffer if cost considerations become the guiding light. Outsourcing and Multicultural Environment While cultural differences may be regarded as a barrier to the achievement of a truly harmonized single market, they do not act as a barrier to doing business abroad. By adapting to local cultural conditions firms can operate successfully across the nations. Indeed, it is possible to argue that the divergence of cultures actually offers international firms an advantage over their international competitors as it permits scope to identify national strengths and weaknesses and develop strategies which tap into these critical resources (Bartlett and Ghoshal 1999). Equally, exposure to different cultures provides opportunities for learning new ways of doing business and improving company performance. Management has to balance the need for adaptability in meeting the challenges and opportunities presented by change with, at the same time, preserving an atmosphere of stability and continuity in the interests of members of the organization. Following Taylor (2005) "The major change is that increase outsourcing, of both goods and services, challenges the traditional notions of what a successful firm looks like" (p. 367). Form post-modernization point of view, users' demands for service excellence requires that packaged software be customized to their idiosyncratic needs, a practice that drove up IS development and maintenance costs. When IS managers try to contain costs by implementing packaged software 'as is', users complained their needs are not being met (Bartlett and Ghoshal 1999). An example of the cost/service trade-off in the area of hardware was response time. Users demanded service excellence, defined by them as sub-second response time all the time. This increased hardware costs because IS managers purchased excess capacity or other devices to deliver service excellence. On the other hand, business managers and end users perceived that their data centers provided critical support and wanted a differentiated service. Unlike senior managers, business unit managers and users asserted that data centers are hardly homogeneous. Different companies used different hardware configurations, operating software, software utilities, facilities for cooling/lighting/fire prevention, levels of software automation, and disaster recovery strategies. All of these contributed to service levels in terms of response time, availability, and, in particular, support (Burnett, 1998). Users want their own dedicated and culturally competent support staff who understand what systems they run at what times with what particular problems (Bartlett and Ghoshal 1999). In general sense, the task of management in the international organization is to remove prejudice from the organization and the individuals it employs, to ensure that all employees, regardless of gender, ethnic origin, religion and lifestyle, receive equal treatment in the organization. Form post-modernization point of view, organizations which have a multi-country operation or business should give some thought to how intercultural differences impede or enhance business success. This becomes of even greater importance when entering into strategic alliances with organizations in other countries; in acquisition situations; when departments in different countries (such as research and development) have to work closely together; when individuals of one country are sent to work in another; and when there is a need to have subsidiaries of various countries commit to a common vision, and common methods and processes (Bartlett and Ghoshal 1999). The key elements in the convergence process are technology, the growth of big business and professional management and the impact of multinationals. The main imperative of all nations was seen as efficient production and the key elements were developments in science and technology that were available to all. Businesses in all nations, faced with the same problems, adopted the same solutions. These included increasing size, increasing specialization and formalization, the development of similar systems of authority, occupational types and structures and adopting similar systems of education and training. Much of management behaviour is culturally determined and that the key to successful international management lies in the understanding of these cultural differences (Bartlett and Ghoshal 1999). It is possible to singles out an anthropological approach and attempts to examine cultural differences in the way managers relate to others, in their attitudes to time and in their attitudes to the environment. The greater the differences between the cultures of the seller and the buyer, the greater the probability for cross-cultural miscommunication to occur. To avoid this unpleasant experience every export manager should be well aware of cultural differences and traditions of the partner company (Taylor, 2005). Outsourcing is influenced by cultural context and cultural differences. For the manager, the key advantages are that ideas and techniques developed in one cultural or national setting may be transferred to another and used effectively. Furthermore, developing nations are able to learn from those more advanced countries and thus benefit from the mistakes of others (Taylor, 2005). Such thinking is clearly behind the adoption by British and American firms of Japanese techniques such as quality circles and just-in-time and the focus on American theories of motivation by British management trainers. Belief in the transferability of techniques has led management to turn elsewhere for solutions to problems. Multicultural management may be defined as that part of business action that is socially as opposed to genetically transmitted. It comprises ideas through which managers perceive and interpret the world, symbols they use to communicate these ideas, and institutions which enable individuals to become socialized and satisfy their needs. The way businesses conduct their affairs affects and often changes the particular culture in which they operate; the operation of the multinational corporation in the Third World being a case in point. In sum outsourcing proposes great opportunities for modern companies to transform their structure and meet changing market conditions. Also, outsourcing enables companies to understand the importance of putting the effort into building the contract and getting it right. It gives them the confidence to go for a long contract and seek a partnership rather than base everything on price considerations. Outsourcing helps companies to develop their own form of IS organization, that relates to the particular multi-vendor form of IT outsourcing they could adopt for a complex organizational structure and set of business requirements. Outsourcing brings in new skills and knowledge. In such cases outsourcing and introducing vendor staff usually result in improved performance from in-house staff. Outsourcing pushes organizations into large-scale changes, usually guided by the requirement to focus on core business and competencies. Finally, the international organization needs to recognize that doing business in foreign markets involves cross-cultural communication in all aspects of the relationship. When the person from the other culture does not receive the sender's message in the manner intended, cross-cultural miscommunication occurs. References 1. Bartlett, C. and Ghoshal, S. (1999). Managing Across Borders: The Transnational Solution. 2nd edition, London: Ramsden House. 2. Burnett, R. (1998). Outsourcing It-The Legal Aspects. Gower Publishing Company. 3. Crandall, R.E., Murray, M.J. (2006). IT Offshore Outsourcing Requires a Project Management Approach. SAM Advanced Management Journal, 71 (1), 4. 4. Greaver, M.F. (1999). Strategic Outsourcing: A Structured Approach to Outsourcing Decisions and Initiatives. AMACOM/American Management Association. 5. Taylor, T. (2005). In Defense of Outsourcing. The Cato Journal, 25 (2), 367. Read More