The business horizon within the global economy has been shaping itself in a unique way on a continuous basis and deeply impacting the resources bases of the organizations having their operation in more than one country. It has become very difficult to meet up the entire requirement of existing customer portfolios with the help of available resources. The technological environment in today’s business environment has to be scanned on a regular basis and must be matched with the predicted expectations of the client. The change process can never end and change has to be responded at any cost. The resource full organizations are very much comfortable in acquiring required resources especially within the information technology related operations. Companies with limited resources have to seek for other option to satisfy the demand of its clients. The outsourcing of information technology related function has become very common and practicable as awareness and growth with the business has come up with the emergence of a number of vendors and options to be taken by the outsourcing organizations. The industries within the globe have evidenced a huge volume of outsourcing not only within the information technology field but within a number of non-core business activities of the company. The most common motive has been the cost saving along with a number other benefits an organization can enjoy within the process of outsourcing IT related operations and other business processes.
Ample of literature is available that show sophisticated analysis on outsourcing process and its relations with the strategic management process of the company. The report will encompass a detailed analysis of literature available in regards to the IT outsourcing and recent trends within the phenomenon. A comparison of benefits and risk has also been incorporated within the report so as to reflect the important role it can play in the decision making process of any organization. Furthermore theoretical implications have also been discussed which shows hoe strategic management process of any organization can be in support of outsourcing operations.
Table of Contents
Executive Summary 2
1.0 Introduction and Background 4
2.0 Goals Outsourcing work towards 5
3.0 Drives for IT Outsourcing 6
3.1 Cost savings 6
3.2 Access to sophisticated technologies and people 7
3.3 Quality enhancements 7
3.4 Focus correction 7
3.5 Business growth as per competition 8
4.0 Emerging Concepts 8
4.1 Transaction Cost Economics Vs. Resource Based view 8
4.2 Business process Approach Vs. Knowledge process 9
5.0 Risks Involved 11
5.1 Inappropriate selection of service provider 11
5.2 Intellectual Capital claims and issues 11
5.3 Limitations on research and development 11
5.4 Culture Impacts 12
5.5 Legal Compliance issues 12
6.0 Conclusions 13
1.0 Introduction and Background
Zheng et al., (2010) stated that IT has become an integral part of business organization. Straub, Weill, and Schwaig (2008) also mentioned that IT was becoming critical in an organization's success. It can be say that outsourcing or sending of a job outside the company is a recent phenomenon which started after the development or widely expansion of internet in the mid of 1990s. But the fact is that the history of outsourcing is as old as America. Because during the early years of America the making of Ship sails was sent to Scotland so the Scotland had been provided services of outsourcing to the America. There is another thing to be noted that India has also been provided raw material for manufacturing of ship sails. And India was an outsourcing destination for the British textile industry during the 1800s, but at the end British has become more efficient in outsourced job.
Lacity along with Hirschheim in (2012) and with Willcocks in the same year have been of the view in regards to outsourcing that this is a simple phenomenon of acquiring or buying products and services that can be done within the organization by existing resources. There are number definitions within the literature which are more complex and encompass the whole of the process rather that discussing just the purchase of raw materials and standardized intermediate goods. Grossman and Helpman (2005) explained the outsourcing phenomenon as relationship between two companies where resources of one company helps the other to produce goods and services as per the need of the company. Quinn (2013) and Lacity et al, (2011) have been of the view that relationship created as a result of outsourcing can be cited as strategic partnership between the outsourcing firms and the service providers. Unanimously a major class of authors and strategists have come up with a single point that outsourcing provide with ample of benefits and has offered opportunities to well-established and operationally efficient companies to increase their profits and some of them have exploited such opportunities.
Developed economies have been found more inclined towards outsourcing of their IT related functions as well as various other processes since few years (Kim et al., 2013). Many authors along with Bhagwatwar et al., (2011) have been of the view that outsourcing is mostly done by the organizations within the areas of information systems or information technologies. Global business circumstances have been requiring companies to enhance value and update each and every function of the company as per the externalities of environment. Power at el (2006) explains the process as transfer of activities being transferred from one party to another. Sometime companies cannot afford or cannot develop resources to respond changes in the environment. To meet up the requirement of competition companies will have to rely on outsourcing which is coming up as most easily available source in every part of the world at desirable costs and type. The IT outsourcing not only enable organizations to make use of latest and updated technology but the strategic exploitation wins the companies as risk free business. It may be like one team transferring its tasks to another or a company is paying other companies to execute functions of its organization and saving cost etc. He also explained that this process may be within the same country or may be across borders.
2.0 Goals Outsourcing work towards
There must be a written strategy that leads an organization towards outsourcing their activities to a vendor organization. Companies set goals and must make a comparison of costs and benefits associated with the decision. Weidenbaum, (2005) emphasized that only those activities should be outsourced that cannot be executed within the company and organization is unable to provide its clients relevant service. He argued that there must be supporting reason in favour of decision and it must not be just a following of trend as outsourcing may also come up with some risks that may spoil the whole of the strategy. Smith et al. (1998) argue that many companies have only a vague understanding about the benefits and risks involved, and are therefore less likely to succeed in the process. Harland et al. (2008) note that there is as yet little research on the impact of outsourcing on a particular sector, and that public-sector research findings focus on challenging government outsourcing policy or methods of calculating the costs and benefits.
One of the objectives of strategic outsourcing is to gain competitive advantage. For organization it is very important that must focus their core business values as they can win the competitive edge to them. With the help of outsourcing a company may try to get rid of some of its less significant functions, thereby placing more emphasis on its core functions and strengthening its competitive advantage (Porter, 1996). Thus, it is not surprising that the most commonly outsourced functions are not among the core functions and add very little to the value chain. In such cases, outsourcing can help to streamline the production process and direct more resources to the core functions, which matter most. However, it should be noted that the core competences or core skills could be either maintained or lost in strategic outsourcing alliances (Hamel, 1991; Doig et al., 2001).
There is no doubt in saying that the outsourcing was first adopted in pursuit if saving costs and still organizations have been outsourcing those activities and function the cost of which they cannot afford. According to Hatonen and Eriksson (2009), outsourcing strategy has evolved since its early days from a strictly cost-focused approach in a more cooperative direction, and cost is only one, often secondary, decision-making criterion. Vilko (2011) discussed the outsourcing by mentioning simple and complex task being outsourced. He has been of the view that organization enjoys direct benefits and can evaluate the performances while transferring the simple functions but in case of a complex activity or the functions near to the core business of the company the evaluation of performance become difficult and results take time to show their effects.
3.0 Drives for IT Outsourcing
No doubt as per the literature cost efficiency is the major influencer for IT outsourcing but organizations opt for outsourcing in pursuit of a number of objectives that help the company to win a competitive advantage or cost leadership within the market. The acquisition of updated technologies is always desirable by the business as demand and expectations have been changing due to the technologies available with the consumers. They are well aware of the ways their demands can be fulfilling filled so the role of organizations becomes critical to develop such resources that can satisfy the demand of the consumers.
3.1 Cost savings
A number of strategists have been of the opinion that organization that are not able to reduce costs as compared to its competitors cannot be in competition for a long term period or it has to lose its market position. Duganier (2005) has been of the view that companies have been attracted towards a strategy of having exploitation of costly IT related product and services at very suitable rated and cost provoke them to opt for outsourcing its operations. Now a day there is a tough competition in exploiting resources to reduce cost and enhance the margins. In pursuit of satisfying demand companies has to invest huge funds in acquisitions of highly advanced equipment and acquire production facilities that may not be affordable in so many instances by the organization. Now with the emergence of outsourcing concept huge numbers of organizations have been outsourcing their functions especially related to the information technology and serving clients with reduced costs. Belcourt, (2006) has discussed that companies make efficient use of pricing policies of the supplier’s and vendor as they charge for the specific services they provide and those services may be impossible to be executed internally or if it can be executed within the premises that will require huge expense of labour and technologies.
3.2 Access to sophisticated technologies and people
Outsourcing of information technology related processes enable companies to have access or get their solution y using latest and expensive technologies in which vendors would have invested huge funds and they will also be offering specialized technologies and people to be competitive in their own market. Vendor themselves have to exist in their market and they usually have to accumulate both capabilities and modern technologies in order to get the competitive advantage and satisfy varying demands of their worldwide clients. Giant organizations like IBM, Accenture and KPMG have been known worldwide for skills competencies and technologies they use while providing with solutions to their diversified clients almost in every country of the world. These companies have capable professional who have been considered specialized with the business communities and huge investment have been reported by these organization in pursuit of modern technologies. The decision to outsource IT is driven by numerous factors, one of which is to obtain a strategic advantage by keeping up with ever changing technology (Mojsilovic, 2007).
3.3 Quality enhancements
Every service seeking entity is quality conscious and firms or organization outsource their functions to get improved quality that they cannot achieve within their organizations with the help of existing resources. At least in theory and according to Baldwing et al., (2001) and Lee et al., (2008) organizations opt for outsourcing so that they can have at their disposal high-quality IT services and knowledge at very affordable costs. With the help of outsourcing a definite improvement in the quality is achieved that wins the organization lost repute or goodwill within the market it has been operating. Advance method or technology for production, use of centralized data bases, cloud computing and use of latest devices has enabled the organization to create efficiency within procedures. Furthermore clients demand their solution in a modern way so that stakeholders may get satisfied.
3.4 Focus correction
Quinn (2013) has been of the opinion that organization should outsource anything that is not core to their strategy. It is very important for any company to focus on its core competencies as did by Procter & Gamble, Unilever, KPMG and IBM etc. and revolutionized their organizations. IT outsourcing enable the companies put their all of efforts for their core business. Within most of the business IT operations are not considered as core activities and they are usually considered as an important support for the execution of activities. Core competencies focus has been emphasised by many schools of thoughts. Within the organization information technology most of the time causes disruptions for the managers in their day to day routine. The managing of IT operations most of the time takes much of the attentions efforts of management and the core business activities are suffered or sacrificed to a large extent. If the IT operations are outsourced then organisation gets ample of time and energy left to be utilized for the core competencies. In some instance IT may be a core process and even outsourced with a perception that vendors are in a better position to run the processes more efficiently. Johnston et al. (2009) has been of the view that the ability to focus on core business enhanced when some of the activities are outsourced.
3.5 Business growth as per competition
Companies have to provide as per the demand within the market otherwise they will be out of competition. By exploiting resources and competencies with the help of outsourcing, organizations grow their client portfolios and sometimes they grow geographically as well and extend their business nation or international level as well. The relationship with the service companies can extend the skills available to the company that can enhance market share. So by outsourcing the IT an organization can increase its efficiency core competitiveness which leads in good IT system in the company. Several empirical studies have stated that outsourcing IT services to external vendors will help companies achieve higher service performance with lower cost and will allow corporations to gain competitive advantage (Lacity et al., 2009).
4.0 Emerging Concepts
4.1 Transaction Cost Economics Vs. Resource Based view
The transaction cost economics theory also help to understand the concept of outsourcing phenomenon and a number authors also explained the process with the help of this theory. Companies have to seek for economies so that they can enjoy the differences of cost as a result of higher margins. If the cost involved in executing activities in house is higher the activities are outsourced because vendors do have the economies of scale and can do the thing by comparatively low costs. The theory explained the markets for external purchases and hierarchies for internal development as two alternative governance mechanisms (Coase, 1937). The RBV proposes that organizations should evaluate the activities of the organization, internalize those resources that contribute to the organization’s core competency or strategy, and externalize or discard those resources that do not. Barney et al., (2011) shares this view of the organization and argues that the unique mix of activities that the organization’s resources engage in represent the strategy of the organization. The process of sorting those activities that should be internalized from those that should be externalized is the RBV explanation of IT outsourcing. The RBV suggests that IT activities that not part of the organizations technical core should be externalized to allow the organization to focus its attention of those activities that are part of the core competency of the organization.
4.2 Business process Approach Vs. Knowledge process
Lacity & Willcocks (2012) has been of the view that a number of business process are outsources by organizations which come under the concepts of business process outsourcing. Outsourcing has been being opted by a number of companies around the world and each organization has been adopting unique ways of exploiting resources as per their needs and circumstances. Business process outsourcing and knowledge process outsourcing are major out sourcing phenomenon that can be discussed to understand the whole of the concept. It can encompass managing of human resources, preparations of financial statements, procurement and legal frameworks and even sometimes research and development as well. Organizations have some specific objectives concerning successful execution of various functions to achieve successfully companies also plan to outsource these functions the process has been termed as by a number of schools of thoughts as business process outsourcing or BPO. Within the company especially residing in developed countries such process of managing human resources, customer services and accounting department personnel have huge costs and other related costs reduce the margins to a great extent. They in an attempt to reduce cost involved outsource these functions into developing countries where labour costs are less or there is a huge difference in the currency.
Organizations exploit the situation of unemployment there and get desired objectives within affordable costs. To protect the local population and maintain the employment level governments also sometimes discourage the process of outsourcing but in spite of restrictions organizations for higher values opt for outsourcing and raising contracts with the individuals and organizations within or outside the borders. The main drivers behind the BPO decisions are similar to the major drivers behind ITO decisions which are cost reduction and the focus on core capabilities of the firm, and to improve the client’s business processes. Similar to the findings on ITO, practices, research suggests that companies are less likely to outsource business processes that are deemed to possess high levels of ‘uncertainty and criticality’ (Lacity et al, 2011)
Knowledge Process Outsourcing (KPO) as per Mudambi & Tallman, (2010) has been discussed as the new industry trend and the 'next step up the outsourcing value chain. All around the world knowledge outsourcing has been flourishing and new markets have emerged in recent years. Organizations have to innovate and think something out of box so that a competitive edge can be won to sustain market share and profitability. They are in a continuous effort to create value as much as possible and irrespective of costs involved companies opt the policies and strategies that serve the purpose. Knowledge process outsourcing covers the said objectives and facilitates the organization to develop such capabilities that cannot be done within the organization. Sometimes organizations also outsource core functions or activities so that value can be created. KPO has been evidenced within organizations for the activities that require advanced research and analytical, technical and decision-making skills. Services which KPO encompasses are capital and insurance market service, biotechnology, pharmaceutical research. and development, data mining, and patent research. As per the report by KPMG on knowledge process outsourcing it is forecasted that the KPO phenomenon will have long lasting results for the global financial services’ industry over the next three years.
Sen and Shiel, (2006) have been of the view that outsourcing of knowledge intensive services which require specialized skills and domain knowledge as well as knowledge of the client’s strategic stance. Offshoring strategies are expected to embrace new locations in pursuit of more efficient resources at attractive costs. Within the financial services industry a number of global banks and insurers have been expected to adopt KPO strategies. Decisions about outsourcing may be accelerated to preserve and increase competitive advantage and it has been suggested by the team of advisors that “Boutique” providers should leverage KPO to create new services and offerings. More rigorous regulatory and compliance control will likely be demanded, as KPO providers deliver more complex services. Devi & Devi, (2010) while explaining the origin in regards to knowledge process outsourcing mentioned India as an important location for multinational are very interested.
5.0 Risks Involved
The phenomenon of outsourcing some important activities by one company to another is not just the transfer of job from one place to another but it involves numerous issues to be dealt with on the part of both parties. Along with the benefits and influencers there are a number risks involved within the option of outsourcing IT related functions of any company.
5.1 Inappropriate selection of service provider
At the moment outsourcing has become very common and service organization also competing with each other in terms of diversified capabilities and technologies. Outsourcing Company has to analyse the exact need and urgency and on the basis of analysis it has to select service provider. Feeny et al., (2005) highlighted a risk that it may be possible the project handed over to a specific vendor may not be his favourite area or area of expertise or on the other side a tough competition may force venders to accept that project for which they do not have the required skills and competencies and ultimately client suffers with quality and repute. Following the same risks companies have to be very careful and analytical in regards to the selection of correct and appropriate vendor. The inappropriate selection of vendor may end up infusion of no desirable or even threatening technologies into the company and company may suffer huge losses in terms of financial and non-financials.
5.2 Intellectual Capital claims and issues
Whatever solution is created becomes the property of service proving company and it the practice of vendors that they usually share the client’s idea to their competitors and even other clients to increase their own market share. Thus it is clear that there is an intrinsic risk of misuse of intellectual property of the organization while taking outsourcing as part of their strategy especially in developing countries. In the process of outsourcing, a vender uses the ideas of its clients and develops technologies for its client. Most of the knowledge produces or created by him may not be transferable or in tacit form. Only the explicit form can be delivered by the vendor to client. At the same time it is probable that the client may be in need of professional and experts to grasp the technology delivered to it.
5.3 Limitations on research and development
Innovation is the key to the competitive advantage. In the process of outsourcing both technologies and human resources exist at vendor premises and complete activity is done at the vendors offices. Organizations do not bother to think about alternate resources and solution and completely rely on the solutions being provided or offered by the vendors. This very much understand able that if the activities are done in house a number new and alternative ways of doing things can be experimented with existing resources as per the need of clients and circumstances within the market. Macbeth (2008) has been of the view that outsourcing a complete activity may remove all internal competence, skills and learning related to its performance. Organizational innovation process gets stuck and process of inventing unique solution does not exist anymore in the companies relying on outsourcing.
5.4 Culture Impacts
The cultural impact affect the success of the projects being outsourced as the impact is twofold. The activities are to be done not only in a different company environment but it has also to be executed in a different country as well. The culture is developed by the people who are working there and once the activity is outsourced the existing workforce may have to see a series of changed procedures and policies. Rao, (2004) defined culture with help of gained experiences’ patterns of interrelated system. He is of the view that culture is composed of grouped thinking, their sayings, actions, language and other character traits. Within multinational companies conflict during performing roles can concern to the disagreements in output standards, techniques, and decision-making schemes. On the other hand, national cultural differences refer to language barriers and complications in understanding various accents. It is very important for the project that cultural differences must be dealt with within no time and management must take necessary steps free the people from all pride and prejudice with the intent of creating a solid relationship between the in-house team and the outsourced talent.
5.5 Legal Compliance issues
The legislative environment at both ends is usually very much different and must be communicated to vendors so that there may not be any issue of compliance and instead of having gains companies end up facing penalties. These laws may be of normal day to day business or even challenge the existence of the entity sometimes. Every organization takes too much time to understand the legislations of the vendor’s country similarly vendor has to spend time to understand the rules and regulations prevailing in the client’s country. To be stick to the specific laws may end up not only with huge time consumption but piling up huge cost for the client and ultimately deprive of him a major benefit of cost saving which is the main source of inspiration to outsource.
Companies can increase area of operations into new markets by exploiting the resources with the help of outsourcing. Organizations must consider the IT outsourcing and its functions also to enhance the market size. Main objectives to increase in IT functions for increase in organizations performance. Product service or quality service outsourced from external service provider, which organizations easily conduct and calculate the risks and benefits. There have been a number of concerns in regards to the outsourcing and in some areas the industry is seen as a cause to deprive local population with jobs and there are other risks associated with outsourcing but the industry has still been growing. In the upcoming years, it is expected that more IT outsourcing news will continue to shock the industry and will offer novel solutions to existing problems. While no one knows exactly what will happen as discussed within the report recent IT outsourcing trends will most likely be apparent and will cause significant shifts in the operations of IT outsourcing companies in coming years. The consumer has become very much sensitive to influence it bargaining power and companies are forced to adapt themselves as per the expectations of their clients.
Knowledge management has been becoming very hot issue and companies have been drafting policies in building of intellectual capital. Service companies while in the process of providing services developed assets and own them as well. But in this way organization remains deprived of for the ownership of such assets. In outsourcing companies hav to sacrifice for the knowledge being developed at vendor data bases and creates an important issues to be considered before signing any contract. It is much better to include clauses to cover such issues of ownership of knowledge built during the contract. Both of the parties can avoid any inconvenience and may be additional legal cost at some instance. The situation may get more than worse if the vendor is residing across the borders
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