The Pros and Cons of Outsourcing Information Technology, Research Paper Example

Introduction

Many view outsourcing as a negative aspect of business whereby it removes much needed employment from the business sector and equally deprives the domestic economies from retaining profit and investment in local business. In addition it removes the community building and bonding of people around a business that supports communities and as such has a profound social impact. Companies may well seek to reduced costs but it raises the question of how far are they prepared to go?

CIOs are beginning to see China as a cheaper alternative to India for outsourcing business IT requirements. This article explores the need for outsourcing IT requirements and examines China’s challenge to the world economy. 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 some $8.9 billion by the year 2006.

In early 2004 an average of 8% of CIOs polled by DiamondCluster 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.

Outsourcing It Tasks

Outsourcing is not a relatively new concept; it has been going on for a long time. IT outsourcing became popular in order for firms to gain competitive advantage and to reduce operational running costs.  By getting countries with cheaper labour costs they were able to save labour and overhead costs in the running of the technology infrastructure. The UK found India to being a cheaper alternative to running the IT function in the UK. Not only was it more cost effective it was also less disrupted by Union activity and involved less training costs as these were absorbed by the outsourcing firm.  Such savings go straight to the bottom line in terms of increasing profit and dividends available for distribution to shareholders. (Kakumanu, 2006).

Despite the reduction on capital investment in IT the move towards IT outsourcing has steadily continued and Gartner has indicated that global spending will increase from $268 billion in 2009 to that of $325 billion by 2013. (Qu, 2011). The benefits to industry, as predicted by research, are said to be economical, strategic and financial.

Industry Characteristics

The concept of IT outsourcing has been influenced by the characteristics of industry.  These were identified as being that of: Munificence, dynamism, concentration and capital intensity(Qu, 2011).  This impacts the types of environments that Companies operate in.  Those engaged in Financial Services may have less dependency on IT that that of a production manufacturing firm. Manufacturing would often view IT as being an integral part of their core operations and as such this becomes a more significant element of their cost of operations. Hence manufacturing industries are going to be less motivated towards the outsourcing model as this places a core external dependency against their business.  On the other hand Financial Services companies are less reliant upon IT in order to accomplish their core business e.g. If insurance then selling insurance premiums is not mission critical dependent upon the IT systems.  They do however have a heavy administrative back-office function via help desks, call centres and support functions that readily lend themselves to the outsourcing concept.

It Workers Negative Reactions to Offshoreing

There has certainly been some impact in IT workers being displaced by their jobs being sent offshore. In general terms however the % of important IT workers being laid off is small. The reason for this is that the bulk of the work tends to be the heavy mundane components of IT like that of Call Centres, Support Desks, Help functions, Maintenance work etc.  The key It folk engaged in Network management, Programming, Data Management etc.  tend to remain as they are seen as providing core operational running services to the business. (Tambe, 2010).  Some statistics however have illustrated that software development programmers are a likely target and in particular to the high tech firms in India that have a high level of sophisticated talent within a more economical labour market.

Consumer attitudes to outsourcing are mainly concerned about loss of quality service. This has been particularly targeted towards call centres and help service desk functions in overseas countries. People also see this as erosion of domestic jobs and particularly in times of economic recovery, as in the USA and Europe right now. The IPSO poll conducted by the Associated press revealed that 64% of the polled respondents in the USA felt that outsourcing was damaging the US economy (Koku, 2009).

The Chief Disadvantages of Outsourcing

Not all of IT lends itself to outsourcing and as such you can end up with a fragmented IT structure if you are not careful in the planning of this

• There are risks associated with long term outsourcing requirements owing to the rapidly evolving nature of IT and the unpredictability of same
• There is a risk of overspend on longer term outsourcing contracts, particularly where hardware, software and communications software costs decrease in value over the year.
• There is an argument that says IT outsourcing is bad for morale in terms of those IT staff you wish to retain. They will feel threatened by the fact that their job may be cut or disposed of at any time. This can spread to the more skilled and talented staff and the level of discontent will lead towards them being poached by competitive rival firms.  The aspect of loyalty declines in an environment where they feel undervalued and threatened by their employers
• There is the position of the Company being thought of as being ‘held hostage to fortune’ and as such the company may lose technical staff because of being locked into proprietary software of the outsourcing company.
• The automatic assumption theory – this is where Companies make the automatic assumption that it is cheaper to outsource as opposed to ruining their own in-house IT function. Where this is often a fairly safe assumption that economies of scale do exist, nevertheless it should not be taken for granted and the Accountants will need to compute cost models that support this business claim. Smaller companies have proven that it is possible to operate on refurbished equipment by maintaining tight controls over maintenance and other expenditures. (Lordi, 1998)

Conclusions

There are new players on the IT outsourcing scene. 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 is engaged in a multimillion $ program  for the building and development of a new software  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.

IT outsourcing has essentially been driven by the need to reduce expenditure and cut capital investment in technology and communications in business.  Where this cost can be deferred to another party taking the risk this  has seen to have certain operational benefits. IT outsourcing to India has proved to be relatively successful because of the intellectual base of the people and the investment in technology to support same, as such quality standards have remained high.  This concept is likely to change with the emergence of new players like China and as such a major disadvantage may prove to be a lack of quality in service and technology.  With increased aspects of globalization there will be an increased reliance upon computer technology and communications. The innovative and creative side of this is likely to increase in order to remain competitive. Equally, firms will seek increased control and will become more reliant upon the technology that supports it.  Hence cutting costs in this area may not be deemed to be the wisest strategic decision in the future.

Works Cited

Kakumanu, P. a. (2006). Outsourcing: Its benefits, drwbacks and other related issues. Journal of American Academy of Business, Vol 9 No 2, 1-10.

Koku, P. S. (2009). Consumer attitudes towards outsourcingof Technical support services: An exploratory study. Services Marketing Quarterly, 315-332.

Lordi, F. T. (1998). The Pros and Cons of Outsourcing. Journal of Accountancy, 26-31.

Qu, W. P. (2011). Influence of Industry Characteristics on Information Technology Outsourcing. Management Information Systems, Vol 27 No 4, 99-127.

Tambe, P. H. (2010). How offshoring Affects IT Workers. Communications of the ACM, 62-65.