IT Outsourcing, Essay Example

Abstract

This paper examines the concept of IT outsourcing in the Public Sector.  The paper will be divided into the following sections: (i) Introduction to Public sectors using IT outsourcing (ii) Position in USA and overseas (iii) The advantages of outsourcing (iv) The disadvantages of outsourcing (v) Impact of globalization on public sector outsourcing contracts (vi) Future trends of IT outsourcing (vii ) conclusions. The paper will utilize a number of business models that will include SWOT (Strengths, Weakness, Opportunities, Threats); PEST (Political, Economic, Social, Technology) and statistical analysis.

The focus will be on empirical and case study research and address the critical question : Is outsourcing of Information Technology a viable proposition for Public Sector services ?

Introduction to Public Sector IT outsourcing

The concept of IT outsourcing and the creation of Public/Private partnerships really began in the 1980’s with the Reagan Administration. They took the cue from the successes of the UK conservative Thatcher administration and the successes that they were enjoying. In 2010 the UK Government showed a total expenditure of £620 billion. They have now contracted out over 1/5th of this to the VT Group who employ more than 1 million people world-wide. The de Anne Julius report commissioned by the UK Government estimates that services outsourced to the private sector cost a factor of 20% less than in-house services (Webb, 2010).

The USA ended 2009 in a more upbeat note with a slightly better performance.  Nevertheless, the recession is going to prove a slow recovery and  the future is uncertain with the gloomy outlook on the international financial stage.  The US has  the largest debt in national history, with over $1.5 trillion.  Governments will undoubtedly look towards an increasing means of reducing public expenditure and this will mean for more outsourcing, better use of IT and elimination of public sector jobs.  The UK is already see as the world leader in public sector outsourcing, and it is a trend that might well be emulated in the USA.  The USA however faces  more confrontational challenges with outsourcing as there is a need to build employment not decimate it  further.  Also the spectre  of job migration impacts the loss of tax income.  Unions are also stronger in the USA and will be formidable opponents of the government in box on massive public sector outsourcing policies.

Position of the USA and Overseas

CIOs are beginning to see China as a cheaper alternative to India for outsourcing business IT requirements. China is positioning itself to become an IT outsourcing superpower in less than five years time. Recent changes and trends in both economic and political structures pave the way for phenomenal growth in the Chinese IT services industry. According to the US based research firm Gartner Dataquest, China’s IT services market has grown by 42% per year since 1997, and it is projected to reach $8.9 billion in 2006. Gartner predicts that China could rival India as the leading offshore services provider by as early as 2007. Chinese Universities turn out around 400,000 technology graduates a year, and these highly technical and skilled workers are creating a resource base that will rival India in terms of both quality and service. Clearly western business will need to understand how best to penetrate and exploit this almost untapped resource.

In early 2004 an average of 8% of CIOs polled by Diamond Cluster International stated that they were considering some degree of outsourcing to China in the next three years. By the middle of 2005, this figure had increased to over 40%. China is very different from India, which is dominated by a very limited number of large firms like Tata, Infosys, and Satyam. The model in China avoids the danger of monopolies inherent in the Indian model because the Chinese IT sector is spread amongst a mix of much smaller firms. China has also concentrated on building up its IT infrastructure. This infrastructure growth is accelerating at a much faster rate than in India. It is also important to note that building an IT infrastructure from scratch, as is the case in China, avoids the complex issues involved in grandfathering legacy systems. While China does have problems it will need to address to overcome the ad hoc way in which its IT sector has evolved in the past, the government is working hard to pull order out of chaos.

China will emerge as a new leader in the global economy and this will foster an improved international outlook in the way it conducts business. IBM has signed deals to train 100,000 software specialists over the next three years. Microsoft is spending in excess of $750 million in the development of a new technology centre expressly designed to expose Chinese engineers to Microsoft hardware and software technology. In addition, Microsoft has agreed to donate $25 million over the next three years for education, with a further $10 million earmarked for elementary schools. UPS is spending $500 million to expand operations in China with the addition of 20 new warehouses. In addition China had 3.8 million private enterprises by late 2004, an increase of more than 26% on the previous year. External investment and internal business entrepreneurship are both booming in China.

The Advantages of outsourcing

The SWOT analysis in Fig 1  shows the different perspectives of taking on a major outsourcing program in the Public sector.  The analysis indicates the strengths, weaknesses, opportunities and threats.  Each of these post different dynamics on the organization and these need serious balancing co-ordination in the overall decision making process.   Another analytical dimension is that of a PEST analysis that examines the Political, Economic, Social and Technology considerations. Fig 2 provides details of how this business model might look considering outsourcing IT from the Public sector perspective.

Figure 1 : SWOT Analysis

Disadvantages of Outsourcing

The PEST and SWOT analysis show a number of the disadvantages of IT outsourcing.  This needs to be examined from a number of different perspectives.  In the UK experience shows the following key concerns:

1. Loss of management control — Loss of control over events and service levels
2. Hidden costs — Additional costs that were not factored into original budgets
3. Security — No adequate control over service providers security levels
4. Quality — Quality tends to deteriorate over time
5. Financial — you are reliant upon the financial well being of the service provider
6.  Bad publicity — you may be tarnished with bad publicity of the service provider

Figure 2: PEST Analysis

 Impact of globalization on public sector outsourcing contracts

“Public administration systems in both developed and developing countries tend to respond differently to the challenge of global forces.”  (Kim, 2008).  The Government are also concerned about the political fallout of loss of jobs and revenues, derived from taxes, in the outsourcing model.  As such the current administration is seeking both restraint and prudence on US business reverting to the outsourcing model. ” Obama rallied state governments to limit tax benefits of companies which employ the outsourcing business model – this is just another manifestation that stakeholders are being called to be more prudent in applying the outsourcing model to certain sectors.”  (Sengupta, 2010).

Historically the Public Sector has relied upon a strong local supply of dedicated people to provide support and services.  The people have been loyal and looked towards job security and good retirement benefits as the reward for public sector loyalty.  In the concept of globalization as Governments seek to make deep cuts, this loyalty and dedication of service is being disregarded.  ” Global trade and investment patterns are having a dramatic impact on employment relations and work arrangements around the world. But there is no single meaning of economic globalization for the global workforce. The impact can be both negative and positive and differs by context, by industry and trade, and by employment status.”  (Chen, 2001).

Future Trends of IT outsourcing

India is becoming the most favoured place for IT outsourcing owing to the high quality of the resources and cheap labour market costs, as compared to the western world.  ” India’s share of the global offshore outsourcing market for software and back-office services is 44%. According to the National Association of Software Companies (Nasscom), India’s premier trade body of the IT software and services industry, technology and IT services exports in India were worth $17.2bn (£9.5bn) in the year ended March 2005, a rise of 34.5% over the previous year. A further expansion of 30% in exports is predicted in the next twelve months, to reach $22.5bn. The US accounts for 68% of Indian exports.”  (Outsource 2 India, 2009).

Despite the advantages of outsourcing both Public and Private sector bosses remain nervous about implementing such policies and the fallout of same ” Outsourcing can generate weeks of hostile media coverage, widespread protests and industrial action. The issue is so sensitive that decisions are usually taken behind closed doors at the most senior levels in the organisation, and only announced after much careful research into how the proposals are likely to be received.”  (Dixon, 2010)

Conclusions

Given the current world-wide recession and current financial circumstances of countries the move towards outsourcing will continue as countries seek to reduce costs whilst trying to retain value for money and service levels.  Whilst the US may be a little more conservative the Europeans seem driven down this path of cost reduction policy in order to reduce public sector expenditure.  Whilst countries like India prosper this may well prove to be to the detriment of the peoples in the European countries and this once again will create class divisions between the rich and poor and the have’s and have not.  Historically the decline of jobs has caused both social and moral decay and resulted in both conflict and war.  In the context of the global economy it is difficult to ascertain exactly as to how this will play out.  The US seems trapped in a deficit of unprecedented proportions with no real policy for getting rid of it.  The Governments in Europe seem in a state of decline with expenditure reduction programs that may last a decade before they return to financial prosperity.  The shallow confidence on the investment and financial markets with further consolidate the need for austerity programs.

Works Cited

Chen, M. C. (2001). Globalization and the Informal Economy:. Institute of Development Studies, Sussex; Harvard University.

Dixon, P. (2010). The future of outsourcing. Retrieved 6 7, 2010, from globalchange.com: http://www.globalchange.com/outsourcing.htm

Kim, C.-K. (2008). Public Administration in the Age of Globalization. International Public Management Review .

Outsource 2 India. (2009). The Future of Outsourcing – Opportunities and Challenges for India . Retrieved 6 7, 2010, from Outsource 2 India: http://www.outsource2india.com/trends/future_outsourcing.asp

Sengupta, S. (2010). Government Sector Outsoucing. New York: Tholsons.

Webb, T. (2010). Boom times for outsourcing firms in the public sector. The Guardian .