Outsourcing Research Paper Advantages and Disadvantages

1. Outsourcing Research PaperAdvantages and Disadvantages TERRENCE GLEASON GLOBAL STRATEGY AND PLANNING BUS 540

2. Outsourcing Overview • The benefits IT can provide a company, independent of its size, are common knowledge, as are the rapid changes in the IT field. • It is generally held as a good idea to turn IT operations and especially IT development over to external providers, as it significantly saves on staff, equipment, training and maintenance, as well as it allows customers to concentrate more on business. • The lack of IT professionals in developed countries reached critical proportions, with 340, 000 vacant IT positions in the USA alone. • This fact makes outsourcing increasingly challenging and expensive. • The solution is, therefore, to go offshore.

3. Advantages • Here are some of the reasons why outsourcing is a better choice for managing the IT department, rather than maintaining IT internally: • Activity can be performed better or more cheaply by outside specialists. • Activity is not crucial to achieving competitive advantage. • Reduces firm’s risk exposure to changing technology and/or changing buyer preferences.

4. Advantages • Streamlines firm operations in many ways to • Cut cycle time • Speed decision-making • Reduce coordination costs • Allows firm to concentrate on its core business. • Top IT professionals are available offshore and they can work for you. • Customers can be assured that their projects will be done on time and according to the highest quality and technical standards. • Customers are sure to save at least 50 per cent of all expenses if development is done in-house, not even taking into account the expenses on infrastructure and equipment.

5. Advantages • It is usually much easier and faster to start up a project offshore than in-house. Besides, offshore companies can take projects at any stage. • All intellectual property rights will belong to the original company. • Financial protection is also guaranteed as payments are made only when specific milestones have been achieved. In addition, it is quite usual now for offshore companies to offer fixed-price solutions on guaranteed deadlines. • You obtain a faster response time when market conditions are changing. • You get strategic support and value-added services. • You reduce complexity in case of technology shifts.

6. Advantages • You gain access to IT competencies. • You become part of a network with others in the same or similar business sectors. • IT costs become more visible as all billable hours must be accounted for. • Outsourced services are utilized as needed, and organizations pay only for what services are actually used. • An outsourced IT department can reduce costs by utilizing its extensive knowledge base of various IT specialists, as opposed to an organization maintaining a comprehensive in-house staff.

7. Advantages • Outsourced companies make performance reports and measurements available to their clients. • Communications between business functions improve at all levels and ensure that IT resources are not being misused. • Outsourced companies can provide 24x7 supports at a fraction of the cost. • Outsource staff tend to drive planning and budgeting improvements. • Staffing levels can be adapted quickly to client requirements, thereby avoiding gaps due to attrition, business growth or economic downturns. • IT consultants are fully trained on the latest technologies.

8. Advantages • Retention of technically qualified in-house personnel is more difficult when external job opportunities are rapidly changing. • Continuous IT supports coverage without having to rely on only one or two key people. • Outsourced services use established standards for equipment and software requirements, saving time and money. • Outsourced services use approved lists of reliable vendors, which improves the quality of goods and services received. • Client management can concentrate on core competencies and revenue generating activities, while leaving technology management to IT professionals. • Management of non-essential core functions is transferred to the outsourcer.

9. Disadvantages • The perceived disadvantages of outsourcing include: • Contract length, • Competitive edge • Contract renewal • Confidentiality • Scope definition

10. Contract Length • Most of the outsourced IS contracts are for a relatively long time-period. This is because of the high cost of transferring assets and employees as well as maintaining technological investment. The long time-period of the contract causes three particular problems. (a) Difficulties in getting out of a contract if the supplier turns out to be unsuitable; (b) Problems in foreseeing what the business will need over the next five or ten years (typical contract lengths) hence creating difficulties in establishing an appropriate contract; (c) Almost insurmountable problems in re-forming an internal IS department after the contract period is finished (see below).

11. Competitive Edge • Many writers believe that effective and innovative use of IS can give an organization a competitive edge over its rivals. • Some commentators believe that this will be lost in an outsourced arrangement. They claim that a competitive business advantage can only be provided by an internal IS department that understands the organization and is committed to its goals. • In an outsourced arrangement, IS staff is striving to achieve the goals and objectives of the outsourcer, which may conflict with those of the host organization. • Consequently, the host organization may fail to take technological opportunities that could have been identified by internal employees.

12. Contract Renewal • In some outsourced services it may be relatively easy to change suppliers at the end of the contract, or indeed to go back to an in-house operation. • For example, a large organization has recently re-appointed internal cleaning staff after six years of outsourcing to two external companies. • In other words, it is difficult to re-build an Information Systems department after you have systematically closed it. • Hence the host organization is at a disadvantage in contract renewal because the option of returning to an in-house operation is so daunting.

13. Confidentiality • In some organizations the information stored in the computer systems is central to the enterprise's success or survival. • For example, there may be information about pricing policies, product mixing formulas or sales analysis. There are examples of companies deciding against outsourcing for fear of placing confidential information in the hands of vendors, particularly if those vendors offer services to companies competing in the same market place. • Although the outsourcing companies usually dismiss this threat, because it is covered by confidentiality clauses in the contract, there are recorded instances of companies not choosing a particular supplier because competitors were already being supported.

14. Scope Definition • Most IS projects suffer from problems associated with successfully defining the scope of the system. The same problem inflicts outsourcing arrangements. • Many difficulties are due to contractual misunderstandings between the outsourcer and the outsourcing supplier. • In such circumstances the customer believes that the service they require is within the contract scope while the supplier is sure it is outside and so is subject to extra charges. • Contractual disagreements often lead to tension and mistrust. • In some instances the scope of the original contract has been purposely restricted to justify the outsourcing agreement and award the contract. • Unfortunately this leads to significant extra charges to cover variations and this again contributes to customer/supplier tensions as well as under-use of technology as the customer strains to keep the contract within the bounds of the budget.