It outsourcing Introduction

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Meg Kinzer

Chad Stefan

Richard Kanda
IT Outsourcing

Information Technology (IT) Outsourcing is becoming more and more popular today with all of the intense competition among U.S. businesses. Outsourcing is the transfer of goods and/or services that were previously provided or generated internally to an external service provider. For example, a computer manufacturing company may find it less costly to employ workers in developing countries where wages are just a fraction of the cost in comparison to the wages of the United States. Due to the drastic difference in costs, it seems nearly imperative that companies need to outsource in order to have a chance to survive financially in today’s competitive marketplace. Recently, outsourcing has become a major issue in our society. Outsourcing has grown in popularity with U.S. businesses and corporations since they typically have to pay low wages and little or no benefits. However, the downside is that numerous jobs are being eliminated and job security seems to no longer exist for many Americans.

Types of Outsourcing

Outsourcing is where external service providers transfer the delegation of day-to-day management of business processes. There are four types of outsourcing. They include In-House Building, Product Component Outsourcing, Process Component Outsourcing, and Software Acquisition. In-House Building does not actually outsource, they typically have their own Information Technology departments that cater the software needs of the organization. Product component outsourcing occurs when an organization hires an external party to produce a partial component of a complex product. Process Component outsourcing occurs when an organization contracts for an external group to conduct a portion of a process or function. Software acquisition is a term used for total outsourcing. It is a focus on the organization’s core values by outsourcing each and every activity associated with the software such as design development, programming, testing, and maintenance (XR Software, 2005).

Major Outsourcing Destinations

U.S. companies are outsourcing to numerous countries. Some of the most popular countries include India, China, Philippines, Canada, Mexico, and Russia. Among this list of countries, India is the most popular location for sending software development and China is rapidly becoming just as common. The success and acceptance of India’s workers by U.S. businesses has increased drastically for several reasons. India’s 2 million English speaking graduates and 75,000 Information Technology graduates give this country a competitive advantage over other developing countries. Even India’s government favors IT outsourcing by imposing no export taxes. Some major U.S. countries that are outsourcing to India are Citigroup, GE Capital, and American Express (Forbes, 2005).

Although India is the most favored country to outsource to, China’s outsourcing status is becoming more favorable to U.S. businesses. Although China is emerging as a competitor to India, there are a few obstacles keeping this country second to India. First of all, the number of English speaking workers is much less in China as opposed to the rising number in India. Besides the language barriers that are causing it to be more difficult for U.S. businesses to communicate, there are other cultural differences between the United States and China that may hinder outsourcing relationships. China’s government has hampered growth due to its trade policies and overregulation. In addition, intellectual property laws are weak. Two large U.S. companies outsourcing mainly to China are Microsoft and HSBC (Forbes, 2005).
Reasons to Outsource

With the improvements in communications and the globalization of society, every business now has the ability to make IT outsourcing an extremely valuable option. A-1 Technology Inc. suggests 6 reasons why businesses should IT outsource. The first reason is the improved focus. Instead of a company having to master many jobs in different areas such as accounting, law, marketing, customer service, etc., IT outsourcing allows you to concentrate primarily on your core skills. For example, an investment bank may wish to concentrate on the customers rather than analyzing the market. Therefore, a particular company like this may choose to outsource the primary market analysis and concentrate on the more technical aspects. Every business has limited resources, and every manager has limited time and attention. Outsourcing may help your business shift its focus from peripheral activities so that they can concentrate on work that serves the customer and sets their priorities straight (All Business, 2005).

A recent real world example of a company in this situation was stated by Gerald F. Kelly, the Chief Information Officer of Sears. He stated that he was informed in his first few days on the job that the company’s aging and unreliable technical infrastructure was a big problem. Apparently he found signs that the company was not investing appropriately and had not kept the infrastructure at a level of capability consistent with business objectives. Some of the technical problems that they were experiencing included CPU failures, extended recovery times and root cause analysis, lack of redundancy, backup, and recovery. Kelly decided that if he in sourced the work, it would be more problematic for the growth of the employees. Eventually, he began to investigate alternatives that would minimize the time issue and maximize the economic potential of transforming the IT infrastructure (CIO, 2004). These were some of the issues and considerations that the CIO had to deal with. Issues likes these generally can be solved by making the decision to outsource those particular business functions. Outsourcing would allow Sears to get the maximum value of its dispersed infrastructure, reach its goal of a stable future proof infrastructure, while saving a significant amount of money and avoiding the process of hiring a large number of technical specialists (CIO, 2004).

In conclusion to the issues that Sears was facing, they eventually decided to outsource as of June 12, 2004. Kelly, the CIO said that if he had to make an outsourcing decision again, he would have changed one thing; he would bring in an advisor sooner for an outsourcer. Sears current outsourcer is responsible for all voice, data, phone system, procurement, help desk and asset and risk management (CIO, 2004).

The second reason to IT outsource is to reduce costs. Businesses are constantly seeking ways to save money. Outsourcing provides one of the best ways to accomplish this. Instead of paying a U.S. worker high wages you can pay a fraction of the cost to receive nearly the same results elsewhere. For example, it is very costly to hire and train staff, especially if they are for short-term projects. Outsourcing lets you focus your human resources where you need them most (All Business, 2005). This allows the company to spend more time on areas that are strengths as opposed to wasting your time on something that you aren’t good at and is of little value to you. This type of strategy will end up saving you money in the long run (A-1 Technology Inc. 2003).

Thirdly, companies can gain world class capabilities through the Internet. The Internet has expanded the businesses horizons in finding talent. Now, companies have the ability to locate world-class professionals from across the globe. The fourth reason is that companies are able to free up resources for other business purposes. Not all businesses have the time to complete all the tasks necessary in a timely fashion. Sometimes workers are tempted to work half-heartedly because they are overwhelmed with the amount of work that still needs to be accomplished. Situation like this may cause mistakes to occur and every business strives to keep mistakes at a minimum. Companies that do everything themselves have much higher research, development, marketing and distribution expenses. All of these costs are then passed onto their customers. In order to help this problem, businesses can outsource to make sure that all the tasks are done right and on time (A-1 Technology Inc. 2003).

Another reason businesses may choose to outsource is that resources may not be available internally. Through IT outsourcing, your business in capable of obtaining the skills you need without having to hire additional staff members for different job functions. Finally, one more reason businesses may choose to outsource is that it reduces the time to market. Businesses are able to get projects completed in a fraction of the time compared to how long it would have taken them to do the project themselves (A-1 Technology Inc. 2003).

There are many misconceptions regarding IT outsourcing. According to the Global Insight study, IT software and services spending increased from 2.5 billion to 10 billion from the year 1998 to 2003. It is estimated that by 2008, there may be $31 billion dollars available to spend on IT outsourcing. This study also shows that 372,000 IT jobs have been lost in the U.S. since the year 2000, but the main reasons for this decline in IT jobs is due to the dot-com bust, the recession, and the growth in productivity. Global Insight also claimed that IT outsourcing is actually lowering costs and creating jobs in the U.S. rather than reducing the number of IT jobs. IT outsourcing created around 194,000 new jobs, both IT and non-IT. They are predicting that by 2008, the number of jobs created could reach over 589,000 (PC Magazine, 2005).

(Offshore Outsourcing, 2005)

We have covered several reasons why companies may choose to IT outsource. As you can see in this graphical display, IT outsourcing is the leading area to outsource among all business functions.
Disadvantages to Outsourcing

We have covered several reasons why companies may choose to IT outsource; however, there are some downfalls. Beth Cohen, President of Luth Computer Specialists, Inc. quoted a scenario in which IT outsourcing turned out to be a nightmare for a particular company:

"There was a company in Dayton that decided to outsource much of its IT and production to a foreign company about five years ago. After about nine months of outsourcing, the company realized that there was a huge loss in quality for both production and IT support. The company decided to cancel the contract and rehire their old employees. They ended up getting most of their old employees back but at a higher wage than before. Most people would think that the story ends there. However, as hard as it is to believe, the company is actually considering outsourcing again. They think it will be different this time. It will be interesting to see what happens."

(Intetics Web Space Station, 2005)

As you can see, IT outsourcing may come with some disadvantages. Businesses that outsource lose control over projects or at least over the part that you have chosen to outsource. This is certainly a risk you take when you choose to outsource. It is inevitable that outsource service providers should take control, at least in part, over outsourcing projects. This is why it is extremely important to fully research and carefully study the background of your potential vender. When outsourcing a business process, companies tend to lose the managerial control. It is harder to manage the outsourcing provider as opposed to managing one’s own employees (Software Projects, 2005).

Another problem associated with IT outsourcing is the issue with communication. This includes factors such as telephone conversations, e-mail messages, instant messaging programs, time zone differences, misunderstandings, and language and/or cultural problems. Telephone conversations are expensive and many find it difficult to converse over the phone. Even if you make contact with one another over the phone it is difficult to resolve arising problems. As for e-mails, you have to put up with endless amounts of e-mails that sometimes remain unanswered which halts the communication process. Communicating via instant messaging programs online may take even more time. The time zone problem will surely arise no matter what form of communication you choose to use. The time zone difference can be up to seven or more hours. For example, you may arrive to work at the same time that your vendor is leaving for the day. Not all workers may check their e-mail or access the Internet on off hours outside of work. Misunderstandings may frequently occur when dealing with vendors from foreign countries. It may be difficult to correspond with each other over such far distances. Language and cultural problems may contribute to all kinds of mix-ups. Many people know the fundamentals of the English language; however they may not be entirely fluent in English. There may be certain words and phases that they may misinterpret, which can cause the communication process to take longer (Intetics Web Space Station).

Obviously, one of the biggest challenges is managing communication. The magnitudes of challenges are influenced by the company’s size and its location. Around 32% of small firms find communicating to be the biggest challenge to their business. 37% of mid-sized companies report communicating to be the largest problem as well as 36% of large firms.

Not only is communication a huge problem with outsourcing, there are other detrimental disadvantages. Quality can be a factor when vendors advertise services and take on projects having little or no experience in the area. Due to their lack of experience, the quality of their product or service may not be up to standards. This can cause customer dissatisfaction which may lead to downgrading the reputation of the company overall. Poor quality of products and services may cause a large outflow of money in the long run. Outsource service providers are going to focus on the most advantageous, profitable projects. Some of the smaller projects are going to be ignored while outsourcing service providers expand the resources and work more efficiently on developing the most beneficial projects. Most venders try to accumulate as many projects as they can. The burden can be greater than the strengths of the vender and may potentially destroy the project schedule, and possibly the entire project. Some vendors may simply be unqualified for the project that a customer may have chosen to outsource.

A number of problems may arise with the outsourcing party over conflicts of interest, competing priorities and confidentiality. The vendor may have certain methods of performing and completing tasks that may differ from the ways of the outsourcer in which conflicts may arise. The vendor may have many projects going on at once; therefore they may need to prioritize their work. The order in which the vendor completes the tasks may differ from the order in which the companies may want them to be done. In the long run, this may cause competition between the vendor and the outsourcer. Confidentiality may become a problem when outsourcing since you are communicating over such a long distance with little security. It may be difficult to control and monitor who has access to information and who can modify information.

When choosing to outsource business processes, most companies intend to save money and receive cheaper labor, however, it has been recognized that businesses generally tend to look over or miscalculate the hidden costs associated with outsourcing. This includes legal costs of putting a contract together and the time spent on coordinating the contracts between the companies. The hidden costs of outsourcing are hard to predict, therefore it is difficult to truly predict or determine the overall savings of outsourcing one or more of your business processes (Software Projects, 2005).

There are many hidden costs associated with IT outsourcing. Some companies who outsource only take into account the quantitative measures such as cost and wages. They fail to consider the qualitative measures which include productivity and quality. Another key factor that seems to be overlooked is customer service. There are so many overlooked costs that businesses don’t take into consideration before they decide to outsource. Costs can rise when company executives continually travel back and forth between domestic and foreign offices for training and management. Also, other costs are the time it takes to travel between the countries in addition to synchronizing the time zones. This clearly shows that potential problems can arise because of their inability to account for troubles that can eventually materialize. Companies are so focused on saving money on wages that they don’t take all of the costs into consideration (Insight Business, 2005).
Current Statistics

As you can see there are both advantages and disadvantages that come along with IT outsourcing. Despite the disadvantages, statistics show that most companies still choose to outsource their Information Technology. In a survey conducted last year, 72% of respondents said that their companies outsource at least some of their IT functions. However, this year, 67% reported IT outsourcing within their company. This number is slightly lower than the previous year, although both of these statistics show that more than two-thirds of the companies are outsourcing. North American companies tend to outsource more than the rest of the world. Seventy-three percent of North American companies are outsourcing some of their IT functions compared to the rest of the world who outsource an average of 66% (GanttHead, 2005).

Even the size of the company can indicate the extent to which they outsource. Current statistics illustrate the comparison of outsourcing of smaller business to larger businesses. Forty-eight percent of smaller companies who employ less than 100 employees outsource their IT functions. Sixty-three percent of companies of a more medium size with less than 1000 employees report IT outsourcing. Larger companies who employ over 1000 employees tend to outsource around 83% of their IT tasks (GanttHead, 2005). These statistics show that the larger the size of the company the more likely it is for them to outsource. Fewer smaller firms choose to outsource. Larger firms are more motivated by the cost savings of outsourcing. Of the 83% of large businesses who outsource, 46% of them report that they do so because of the reduced costs (GanttHead, 2005). Smaller firms choose to outsource to companies mainly in the same country because they find it too costly to outsource over large distances.

There is a distinct controversy between American workers and American corporations. The benefit of reducing expenses drives corporate executives to outsource their IT functions. This, in return, saves organizations money. Several consequences are attributed to the cost savings involved in IT outsourcing. The biggest problem that Americans are recognizing is that many American workers are losing their jobs. As a result, many of the unemployed workers who are aging and unable to be retrained are obligated to live off of government assistance. These unemployed workers are certainly not stimulating out economy and even though outsourcing saves the individual companies money, it is increasing the debt of the government. They hurt our economy because they spend very little money and pay small amounts of taxes. This means that less money is being paid into our economy, therefore, not allowing it to grow.

Things to Consider

Globalization is inevitable in the business world, therefore companies want to remain competitive and leaders in their industries should embrace IT outsourcing. Before organizations choose to outsource, there are several points should be considered. They are as follows:

  1. The big picture-look at your firm’s own goals and culture. You must decide what goals you are trying to accomplish. How will outsourcing affect the workflow within the company?

  2. Look beyond the dollar signs-price should definitely be considered, however there are many other factors to acknowledge.

  3. Buy the expertise- you definitely want a partner who is willing to contribute their expertise. They should assist your business with operational, tactical, and strategic views.

  4. On the cutting edge- Be sure that your service provider is keeping current. Since IT is so dynamic, it can be difficult to keep up with current events.

  5. Values and philosophy- Does your vender value their employees? Do they treat their employees well? This is important because happy employees result in happy clients.

  6. Meet the team- Meet the people who will actually service your account before you sign anything.

  7. Know what you are buying- Be sure to agree on services to be delivered and on the measurements that will determine a satisfactory performance.

  8. Chain of command- Know who is talking to whom. Finding a provider or consultant that provides one point of contact is the best bet.

  9. Big or small? Big businesses may cost more but they offer a greater depth of expertise and broader resources. Small businesses can sometimes provide greater attention to their clients. They usually cost less and are more eager to please.

  10. The language barrier- It is important to remember that even an outsourced IT function does not go away entirely. You need a partner that can give it to you plain and simple (Small Businesses Computing, 2005).

After considering all of these ten factors, many organizations are concluding that outsourcing is the best option for their company. In today’s competitive marketplace, business that chose not to outsource are put at a disadvantage and are falling behind those who are. In order for your company to survive, you must keep your competitive edge. Sometimes this means that businesses are forced to outsource. Generally, the saying goes, “If you can’t beat them, join them.” Why would companies choose to pay high wages to keep their services internal when they could get nearly the same results from outsourcing while paying significantly less money?

As we have discussed in this paper, you will realize that there are both pros and cons associated with outsourcing. Outsourcing may be beneficial to the individual company in many ways. This includes monetary reasons, increasing efficiency, and having more time to focus on your core business practices. Outsourcing may also reduce risks. When you choose to outsource, your outsourcing providers assume a great deal of your risk. On the other hand, as we have mentioned, you must consider all of the possible disadvantages before committing to outsourcing.


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