Assignment completed as apart of my Master Studies in University College Cork.
Course: CKL18 Information Systems for Business Performance
Grade Received: 68%
Introduction:
Course: CKL18 Information Systems for Business Performance
Grade Received: 68%
Introduction:
This piece will focus on the risks and rewards of IT
outsourcing and IT insourcing to an organisation. A said organisation could be
a business, a charity or even a government. While specific industries outsource
more than others, IT outsourcing can be seen in almost every industry. IT
insourcing and IT outsourcing are not exclusive to either the public or private
sector, and often an agreement can involve both sectors working together. Some
companies are, in fact, the providers and the customers when it comes to IT
outsourcing. This literature review will examine a wide range of academic
pieces and give many real-world examples of both practices. This ambition is
even though the vast majority of the existing literature is based on IT
outsourcing. Find the matrix below which will be used as a fixed reference
point to the references and citations made in this piece.
The
Risks and Rewards of IT Outsourcing: Literature Review
This first topic that the
literature investigates is how to measure the success and failures of IT
outsourcing. According to (Qu, Oh, Pinsonneault 2009) "studies typically
evaluate IT outsourcing benefits by comparing manager satisfaction before and
after the adoption of IT outsourcing." According to (Lacity 2000), the
value of IT outsourcing is often valued in people's and especially managers
points of view rather than any imperial data from past examples to support such
views.
Secondly, how much of a risk is it
for a company to hand over its IT department to an outsourcing company. (Rohde
2004) Explains how UK based supermarket Sainsbury "signed a seven-year
deal with Accenture in 2000 to outsource all of its IT operations"
However, according to the supermarket, Accenture "failed to deliver the
anticipated increase in productivity." This decision led to renegotiation
and extension to the contract. On the other hand, other companies have seen
great success with outsourcing. (Sen 2016) explains how tech giants Google
"now increasingly is starting to outsource non-core parts of its business,
such as IT infrastructure management, software development and maintenance to
IT services firm." (Hirschheim, Lacity 2000) Argue that venders may not
have the best interest of the paying company at heart. Like all companies,
outsourcers or venders want to maximise profit. Outsourcers may cut corners
like the training of staff and investing in new technology.
Unfortunately, for Kodak, they are
a company that perhaps took IT outsourcing too far. (Plant 2011) writes about
how outsourced activities such as high-value functions such as infrastructure
development and database administration, which led to a lack of IT knowledge and
direction in the company. "(Dinu 2015) Points out that firms should
specialise and focus on its main object of activity. Amazon is a company that
benefits from being the outsourcer. According to the Amazon Web Services
website, they offer storage solutions to the likes of Kellogg's, Vodafone,
Comcast and Abode. (Amazon Web Services 2019). (According to Investopedia 2019)
"Amazon Web Services (AWS), Amazon's cloud service, generated nearly $7.3
billion in operating income in 2018" This was more than half of Amazon's
total.
Outsourcing can be beneficial to
both the buyer and the seller of a service. For example, in 2001, Canadian bank
Scotiabank signed a deal with IBM, which was renewed in 2007. IBM continued to
"manage the big Canadian bank's information-technology operations,
including its data centres, branches and automatic banking machines."
Kitchener (2007) However, also, the bank kept software development in-house.
IBM's work with non-core business activities allowed Scotiabank to focus on its
core banking and financial services.
A prevalent form of outsourcing is
offshore outsourcing. According to (Webb 2017) offshore outsourcing is
primarily a geographical activity in which firms find areas of the world with
cheaper labour and production costs than their own. |(Sparrow 2003) argues that
India is 60-80% of the worlds insourcing market. According to the World
Population Review 2019 cost of living index, India ranks below countries such
as war-stricken Syria and Venezuela. This fact means that the wages US and
European countries have to pay Indian workers are much lower than in their own
countries. For example, due to the cost
of living, one might expect that someone in India will earn less than a quarter
than someone in Norway for the same work. If we compare India with a cost of
living index score of 25.14 and the United States having 70.95, someone in
India could only expect to earn 28% of what someone in the US would get for the
same work. Despite being a US company, IT outsourcer Cognizant Technologies has
the majority of its employees in India and a growing number in Europe and the
rest of the world. Note the numbers in the USA the wealthiest region declined
in 2018. With employees in America, Europe, India amounts' other places in the
world, Cognizant is one of the many companies who can follow the sun modal.
(Carmel, Espinosa, Dubinsky 2014) Describe this as the appeal of the workday
ending in one place but continuing elsewhere in the world. This option means
companies can be potentially making money all day every day due to off
offshoring which often comes in the form of outsourcing.
See graph one below:
Graph 1. Source; Statista
The Risks and Rewards of IT
Insourcing: Literature Review
According to (Beers 2019)
"Insourcing assigns a project to a person or department within the company
instead of hiring an outside person or company." (Beers 2019) also
mentions that "insourcing is relatively common and is seeing greater usage
by companies seeking better control of important projects and tasks."
While it is often believed that outsourcing saves money, this is not always the
case. (Hirschheim, Lacity 2000) In 2019
many firms do outsource IT work, yet (Qu, Oh, Pinsonneault 2009) argue that it
is difficult to say if firms who outsource perform better than firms who do
not. This view is due to a lack of research on the topic.
IT insourcing is one way for a firm
to save money. Not so much for what it does itself but rather through the money
it saves due to lower transaction costs compared to IT Outsourcing. Firms are
starting to understand how much money they could save on transaction costs.
These costs are "organizing information, coordinating behaviour,
safeguarding the interests of the transacting parties, monitoring the
transactions, inducing the appropriate behaviour adjustments." (Aubert, Rivard,
Patry 1996) While firms will have to do a lot of this whether they have the
store the data or not themselves, the information will be easier to access and
use if it is in-house. If the IT staff and equipment is there, it may be
cheaper for firms to insource.
One significant advantage of
Insourcing is keeping hold of the same staff.
Forell (2004) writes JP Morgan Chase, who is an example of a company who
cancelled a contract altogether. When they terminated their contract with IBM,
it did not just cost both companies much money, but it resulted in about 4,000
IBM employees, transferred to J.P. Morgan.
Many of those same workers had made the transfer in the other direction
when the contract started. If this contract or any other outsourcing contract
ended, it might cause those same employees to have to change again. (Brookes
2000) Found that companies with the highest intention rate also earn the
highest profits. Consistent outsourcing may risk that.
According to (Hirschheim and Lacity
2000) outsourcing leads to a reduction in IT costs, this reduction. Outsourcing
can be a great money saver. "IT can also help to reduce other expenses
such as sales and general administrative costs which are often four or five
times IT Costs". (Han Mithas 2014) One example of a company who did this
successfully was Axa. According to (Sparrow 2003 pg 15) Axa with the help of
its own IT department reduced technology costs by 6% and in the meanwhile
rejecting the introduction of outsourcing within the company.
Small to medium-size business
(SMEs) may struggle to invest in every service due to financial constraints.
(Qu, Oh, Pinsonneault 2009) Point out that IT insourcing can be advantages over
IT outsourcing because it allows for the easier passage of information between
business and IT staff. The alternative IT outsourcing, the "coordination
is between outside IT vendors and business clients." IT insourcing is a
form of shared knowledge which is the common knowledge that two or more parties
share. Two different companies may use different systems or work in completely
misaligned time zones. All of these factors make it harder for a buyer of
service to potentially get in contact with the vender than it would be with
someone from within their own company.
Discussion from Study of Literature
The first risk is that it is dangerous to use manager
satisfaction an accurate measure of the success of IT outsourcing as some
managers bring satisfaction from having less work to do rather than getting
satisfaction from what is best for the company.
At the highest level when organisations agree to outsource IT, they
understandably expect an increase in productivity or a decrease in costs for
the same productivity. So, when managers satisfaction and especially managers
that are not the buyers' employees are the judge of this, it can lead to
problems.
Companies need to be careful about what outsourcing
companies they trust to do a good job. Objectives need to be measurable,
attainable and specific, timely and relevant for both firms. Companies also
need to follow the example of Google and be careful that they are only
outsourcing non-core activities. They have to avoid the traps of Kodak who by
outsourcing all of their IT operations and falling behind their competitors.
This decision led to the company missing out on many-core IT developments due
to a lack of IT knowledge within the company. (DiSalvo 2011) writes that
"Kodak was making odd manoeuvres, like acquiring pharmaceutical giant
Sterling Drugs for $5.1 billion and trying to establish a brand in the battery
business." Had the company's IT staff is more significant and had more say
it is improbable that Kodak would have been so resistant to the emergence of
digital photography which led to them falling behind the like of Canon and
Nikon. Kodak did not realise how vital its core IT Activities and knowledge
were and paid the price. IT outsourcing can work for any company, but the
importance keep core IT activities within the company cannot be mentioned
enough. Kitchener's (2007) example of IBM and Scotiabank is an excellent
example of this.
Buyers of services are also at risk that outsourcers will
do the bare minimum in terms of investing in their staff and technology. This
possibility is challenging for buyers of services to keep an eye on compared to
if said IT activities were happening in-house. Buyers need to protect
themselves in agreements to make sure that outsourcers do not cut corners which
would reduce the buyer's competitiveness in the marketplace.
One advantage IT insourcing has over IT Outsourcing is
that staff members are more consistent. Situations, when employees are
switching between companies, can be very unsettling for them and their
families. A firm with many outsourcing changes may struggle to attract the
highest skilled workers because they may become wary of said upheavals in their
lives. Taylor 1996 argues that companies who only see employees as costs and
not assets will cut the "bone" of a company "rather than just
trying to remove the fat." On the other hand, SMEs will find it
challenging to find the money to invest in the capital and people. Companies
who fail to outsource risk becoming overstretched trying to do everything. This
fact could lead to IT staff becoming overwhelmed and leaving due to a heavy
workload. To stay competitive company's need to have access to modern tools.
Offshoring, as a form of outsourcing, will likely
increase in a globalised world. Companies based in more affluent countries will
continue to seek employees within and outside of their own country to save
money and to provide better services. The prevailing trend over the last few
decades has seen European and American companies outsource many of their IT
services to India. This is due to the high number of English speakers in the
country. According to (Masani 2012), there are over 125 million English
speakers in India. India is a lot poorer than its English-speaking counterparts
from as the UK, USA, Canada, Australia and Ireland. Meaning this trend will
likely continue unless a cheaper market emerges. While that seems impossible
now, over the last few decades, European and American companies have outsourced
many businesses to China. While this is still happening, there are hundreds of
millions of Chinese people joining the middle class and leaving poverty behind.
McKinsey Quarterly (2006). So much so that China is now the exporter to
countries in Africa like Ethiopia. (Donahue 2018). A similar rise in the
standard of living and wages in India would be a massive risk to companies in
the western world looking for cheap, English speaking IT outsourcing labour.
Conclusion
IT
Outsourcing
IT Insourcing
Reward Risk
This piece finds that both IT outsourcing and IT insourcing come with
many risks and rewards. However, what is most vital for sellers is that they
identify what their core and non-core activities are. They must be sure that
they only outsource non-core activities. When they do this, they need to
commutate with their own IT to make sure employees do not become demotivated
and feel like they are being replaced. It makes sense for SMEs to look for
agreements with outsourcing companies. This view is because they may not be big
enough or to have the money to specialise in every aspect that is needed for
their business to flourish. It sometimes just makes more sense for a business
to export some of its business to experts.
One reason why capitalism is successful is that it allows people to
specialise in producing expect products and provide high-quality services. It
is hard for any company but especially small to medium-size ones to be good at
everything, and they should not try to be as it would prove too costly.
With IT Outsourcing and IT insourcing been relatively new things
compared to other focuses of academia, one might expect a lack of academic
literature. However, this is not the case for IT outsourcing. So much, so that
is was impossible to discuss every aspect of IT Outsourcing. However, in the
case, in terms of IT insourcing, there is a real lack of literature. Due to
this, at times, one must invert the rewards of IT outsourcing to talk about the
risks of IT insourcing and invert the risks of IT outsourcing to find the
potential rewards of insourcing.
In the future, there should be an increased focus on IT insourcing. This
view includes the impact on businesses as a money saver and its overall
effectiveness. The role of IT is increasing with every passing year, and
significant question companies need to ask is “should we outsource or insource
said activity?” This decision is made difficult by a lack of research into IT
outsourcing. The challenge will be getting organisations to release information to researchers.
This is from both a competition point of view but also new EU GDPR. It is still unsure how this will affect
research a whole and not just this particular topic.
References:
Aubert, Rivard, Patry (1996), A
Transaction Cost Approach To Outsourcing Behavior: Some Empirical Evidence,
Information and Management Volume 30 https://www.sciencedirect.com/science/article/pii/0378720695000453
Beers (2019) Outsourcing vs.
Insourcing: What's the Difference?
Beulen & Ribbers (2010) Managing
IT Outsourcing
Brooks, R., 2000. Why loyal
employees and customers improve the bottom line. The Journal for Quality and
Participation, 23(2), pp. 40-44
Carmel, Espinosa, Dubinsky (2014) "Follow
the Sun" Workflow in Global Software Development, Journal of
Information Management Systems https://www.tandfonline.com/doi/abs/10.2753/MIS0742-1222270102#aHR0cHM6Ly93d3cudGFuZGZvbmxpbmUuY29tL2RvaS9wZGYvMTAuMjc1My9NSVMwNzQyLTEyMjIyNzAxMDI/bmVlZEFjY2Vzcz10cnVlQEBAMA==
DiSalvo (2011), The
Fall of Kodak: A Tale of Disruptive Technology and Bad Business https://www.forbes.com/sites/daviddisalvo/2011/10/02/what-i-saw-as-kodak-crumbled/
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