What are the issues and challenges of IT outsourcing during an economic crisis?
Introduction:
Outsourcing is defined as the work is generally done in the organization but the performed by the external organization. (Beaumont, N. & Shoal, A, 2004).
Information system (IS) outsourcing means that the human resource needed for the one organization’s information technologies are supplied or handled by an external organization. (Claver,et al. 2002). IT outsourcing is very complex and it is in many shapes and forms like company can outsource within the country and outside the country as well. When company outsource in different country or outside the country it is called off shoring and offshore It is especially seen in the developing countries for example, India, Malaysia, Ireland, Philippines and China where labor market is cheaper compare to developed countries. (Pfannenstein&Tsai, 2004, p 72).
Businesses underwent various procedures, planning and strategies in order to run the organization at its optimal level and to maintain the marginal benefits higher than the marginal cost. IT outsourcing is one of the option being explored and it has been described as ‘One of the major issues of the decade for the computer industry’ (Burnett, 1998). Outsourcing offers flexibility, which is very much necessary in today’s rapidly changing world.Information system (IS) outsourcing means that the human resource needed for the one organization’s information technologies are supplied or handled by an external organization. (Claver,E. et al, 2002)
Outsourcing technically started during the industrial revolution. But the long term vogue was enlarged by various companies. Companies tend to outsource low strategic and low value tasks also known as back-office processing. Examples include tasks such as data entry, answering, collections, billing, third party verification and online research (Kakumanu & Portonova, 2006). American Express has been outsourcing a variety of back-office processing to India since 1994 and GE Capital has done the same. More recently, financial service firms have used cost factors to justify outsourcing functions including software design and call center support. Between 1989 and 1995, the IT outsourcing market grew to 76 billion dollars. The outsourcing issue is one of the agendas for IT executives (Davis, Phillip, William and Reza, 2006).
IT outsourcing during economic crisis:
India is one of the major countries of the outsourcing because of cheap cost and labor and skilled manpower. According to survey, India, Malaysia and China are the major destinations of the outsourcing. Obama inhibits the companies on hiring of H1 B visa holders and stops the outsourcing outside the company who provide the job to the another country. This decision affect greatly to the Indian IT sector. Software development outsourcing put stress more on time and energy for the business growth and income producing strategies likepromotions, networking and other ongoing marketing activities.offshoring brings a lot of innovations and advantages but at the same time it is more challenging. During global economic crisis, cost reduction is the main factor which turns both the IT Service providers and the investors to outsource.
Economic Crisis
The root of current economic crisis begins from US, where Wall Street market went down because of social agenda allows former unqualified borrowers to extend home mortgage credits. While the defective policy called “Affordable housing mortgages” of US government, allows bankers and mortgage lenders to create mortgages and sell them without any recourse. Furthermore, during the down time of real estate market, the mortgages become very risky because the value of the derivative product become higher than the actual mortgages assets and all leads to global financial crisis. The current economic crisis became worst due to financial industry, trying to grebe advantage of short-profit opportunities by creating and underwriting mortgages without looking forward to long-term risk involve in it (Spahr,2009, p 42-43).
Furthermore, the indirect reasons which boosted up economic crisis is the high standard of living of American people because during financial crisis US economy suffered with trade deficit and budget deficit to maintain standard of livings and it added the fuel in recent financial crisis. Whereas other reasons are the taxation structure and high labor cost, as the US has one of the highest corporate tax rates in the world and higher labor rate which makes difficult for American business to compete with other countries (Spahr,2009, p 44) .
Although IT outsourcing, during economic crisis offers some strategic and economic advantages like increased access to specialized skill, reduce production time and gives higher product quality, strengthen core competencies and increase cost efficiencies (Smith, Smith,& Stringer,2000, p.4) along with risks and issues such as security issues, legal issues and risks of hidden cost, hollowing out of the organization, loss of innovative capacity and possibility of weak management (Kakumanu& Portanova, 2006, p3-4).
Advantages of outsourcing:
Reduce and control operating cost:
Outsourcing reduced the IT cost by many ways. Having expertise and intelligent software and hardware system an outsourcer may be able to built and run an application more cheaply than in the home or in-house. (Collins and Millen, 1995; Lacity and Willcocks, 1998; Lacity et al., 1996; Lohand Venkatraman, 1992; McFarlan and Nolan, 1995; Willcocks et al., 1995).Labor cost through international outsourcing:
Economies of scale can down the cost. Outsourcer can provide the software for a common application and that way they can divide costs over many clients. (Behara et al., 1995, p. 48).
Access to specialize skills
The main advantage companies can get from outsourcing it services is that they get to access specialized skill which sometime cannot be available in house. In some western countries there is still lack of expert talent and shortage of man power, so by outsourcing IT services companies can get benefits of specialized skills (Smith, Smith, & Stringer, 2000, p.5).
Cost savings: Cost saving is the biggest driver of any companies to outsource services. Recent economic crisis drove prices very low and most of the companies get tempted to outsourcing and off shoeing IT services because it reduce the labor cost as it is very cheap compare to in house. So, companies basically get benefit of direct and indirect cost reduction by outsourcing (Smith, Smith, & Stringer, 2000, p.5).
More working hours
Companies can get benefits of more working hours by outsourcing or off souring IT services because of time difference between the different countries of the world. Companies utilize that time difference in very efficient way like using of both day and night shifts. So, working 24 hours can be more profitable to company (Kakumanu& Portanova, 2006 p2).
Recession is a duration when an economy inclined towards negative growth in the GDP for more than two quarters. During that period company and organization take initiative steps to reduce the price of the product and try to reduce the outflow of the money. Many studies found that during the period of recession the company give more importance on productivity and sell them in to lower price. These studies concluded that grabbing to outsource and improve the product and margins of service would create more liquid money and viability in the company. One of the example of countries like India have taken a big jump towards the improved quality and service at very cheap cost and bring more flexibility to outsource companies. (Brunelli, M, 2004).
Outsourcing leads to many risk factors. This figure showing many risk factors that are associated with the outsourcing. (Tafti, H.A.M., 2005)
Contract: sometimes contract leads to many risks like financial and legal issues.
Decision process: outsourcing decision process includes management involvement. It also include the It departments for the decision process.
Privacy and security: privacy and security are the major factors when doing outsourcing. Those organisations which are engaged in the outsourcing they must have protective measures against the risk that are arise within the organisation.
Outsourcing scope: when doing the outsourcing there is a great need to think about what are the resource or IT functions needs to outsource. (Tafti, H.A.M., 2005)
Hidden cost: There are many hidden cost involve in outsourcing IT services like due to deficient in of clarity in between customer and supplier can cause legal problem and it can cause operational problem. Sometimes transferring of services like hardware and software may not be done in appropriate manner for example behind schedule can cause problem. Some of the costs which may be underestimate by company like management cost, setup cost, redevelopment cost and relocation cost, can create huge problem for company (Ramanujan,&Sandhya, 2006, pg 52).
Loss of It expertise: When companies go for option of outsourcing IT, they have to loss in house expertise and their staffs do not get experience of advance IT skill. Companies also have to experience outdated technology in house and they do not get knowledge of latest and advance it technology skill (Earl, & Michael, 1996, pg 27-28).
Threat of theft of information: Due to outsourcing, companies sometime has to face threat of stealing of information because when any company outsource their services they have to provide information of the functions and services of companies which may create problem for company in future like employees of outsourcer company may misuse the confidential information of outsourcing company (Kakumanu& Portanova, 2006, p3).
Government Pressure: Barrack Obama states that companies outsourcing jobs will not be beneficiaries of Government support. He said that we should not provide tax breaks for companies that provide job for other countries but for those that benefit domestically (“Obama opposes outsourcing of jobs,” 2008).
The risks mentioned above are just certain basic risks involved in a volatile normal economy. But during economic crisis the Outsourcing is seen as a feasible option but the risks are even higher than usual. During economic crisis organizations generally tend to freeze. But doing that is not in the company’s best advantage. There are various issues to be taken into consideration while outsourcing during an economic crisis. These include Service provider evaluation, Structure of the arrangement, Business continuity, Scope change, and termination or renegotiation.
Examples of IT outsourcing companies during economic crisis:
Satyam computer service
Satyam computer service was one of the key outsourcing companies has done fraud involving accounting books and more than 70,000 invoices, lots of falsified bank statements and false employees and auditors fees payments during financial crisis.
Satyam computer service had more than 300 subsidiary companies under it and they were investing lone amount in real estate and agricultural during peak periods of real estate market. While at the beginning of financial crisis US real estate market broke, the market value of those investments went down and they had to face huge amount of loss.
Moreover, they maintained wrong image of company in the market by making fraud in the books of accounts and invoices and showing fake employees salaries. So, they got hit by recent economic crisis (Timmon, 2009).
Indian outsourcing industry hit by recent financial crisis
The recent economic crisis hits Indian particular Bangalore which is called IT industry hub because most of banking insurance and finance service sectors has reduced their budget and IT industries also getting delayed in their project. Indian IT outsourcers has been passing with difficult time as they have lost their one of major outsourcer from US, Lehman Brothers and Merrill Lynch, IT got more hit because IT outsourcing is flexible than spending on business operations.
Due to recent economic crisis in US, IT outsourcers in India has lost almost 15 to 18 percent banking, insurance and finance sector services for example Infosys technology, India’s second largest IT outsourcers has reduced its business in outsourcing up to 34.5 percent. While it is expected that Indian outsourcer will have to face the impact of this financial crisis up to four or five year until the financial sectors go for major restructuring.
Moreover it is predicted that in the long run in future due to financial crisis there will be more offshore due to cutting cost and investment bank want to offshore its low volume activities (Ribeiro, 2008).
Conclusion:
In conclusion, during economic crisis it is very difficult to decide whether to outsource outside the organization or doing inside the organization. Many firms are engaged in outsourcing for so many reasons like cost, scarce of IT talents, quality and tax incentives among others. Outsourcing makes great benefits to companies whether, small or big around the world. Outsourcing activity growing slightly during the recession, the boom of outsourcing transactions expected to result from the need of companies to reduce expenses has not occurred
Inherently, economic crisis is the only time when rival companies can get ahead of you by adapting a new technology or innovation. So, companies should not close up out IT costs and find out the new ways like off souring and reducing the staff but companies can also hold on the people who have experience in the IT industry for so long and such people can be useful during unpredictable circumstances like economic crisis. Even though economic crisis are usually detrimental for a firm looking at alternatives like outsourcing might end up saving a firm if not profiting it. So, IT outsourcing has bright future because of its flexibility and cost saving and it proves as blessing during economic crisis. Outsourcing makes great benefits to companies whether, small or big around the world