Essay Examples - Information Systems Essays
IS OUTSOURCING - THE STRATEGIC BENEFITS AND RISKS ASSOCIATED WITH OUTSOURCING.
Outsourcing is the process of contracting out key company functions such as business processes, manufacturing, and IT to external companies that are more specialised and skilled in dealing with those particular functions. Today this is occurring on both a national and global scale.
This process of outsourcing allows companies to concentrate on their core competencies and is a shift in business thinking from the past, where diversification and vertical integration were seen as key to business success. In fact there is a growing argument that even certain core functions can be outsourced. (Fuerst, Oren, 1999)
Outsourcing is a key mechanism by which enterprises manage costs and long term business objectives. However as with any benefit there are numerous risks that accompany the process of outsourcing. The whole process of outsourcing needs to be carefully understood and managed to ensure that the cost/benefit is less than the cost of keeping the functions in house. This paper looks at these issues from the viewpoint of the commonly outsourced function of Information Systems but the discussion can be applied to any industry.
The Strategic Benefits and Risks Associated With Outsourcing.
The interest in IS outsourcing is largely a consequence of a shift in business strategy and thinking. The commonly held view in the business world is that the best way to maintian competitive advantage is to concentrate on what an organization does better than anyone else while outsourcing the rest (Salvetti& Shell,1996). For example in many large enterprises the IS function although essential to business success is seen as a non-core activity that can be outsourced. It is a commonly held view that IT vendors possess economies of scale and technical expertise to provide IS services more efficiently than internal IS departments. Another major driver behind IS outsourcing in particular is that the future direction, growth and value delivered by IS systems is not clear (Lacity & Willcocks, 2001). Therefore many companies view IS as an essential overhead that needs to be minimised.
In today's complex business environment, the use of external services/products can be fundamental in achieving high levels of operational performance and commercial flexibility. It can also provide access to specific skills and experience that is not available in-house.
Service delivery models are now more mature and this coupled with maturing global communication infrastructures such as VPN's has allowed outsourcing to become location independent. This has also reduced the need for company specific data centres.
Type of Outsourcing
There are four fundamental parameters that determine the kind of outsourcing arrangement that a firm may enter into (Lacity and Hirschheim et al, 1995)
- 1 Degree - total, selective, and none
- 2 Mode -single vendor/client or multiple vendors/clients)
- 3 Ownership- totally owned by the company, partially owned, externally owned
- 4 Time frame - short term or long term
- The combination of specific instances of these parameters yields different types of sourcing arrangements such as joint ventures, facilities sharing, spin-off, etc.
The Benefits of Outsourcing
Outsourcing has a number of benefits common to all industries. These are discussed in greater detail in this section (Domberger 1998)
Specialization- All organizations have core competencies and others which are not so key. Outsourcing the non-core functions will leave the functions in which the organization specializes and leads to enhanced enterprise functionality and efficiency, e.g. Ford produces cars but the tyre manufacturing is now outsourced to a tyre manufacturers Firestone. IT is another function that could be outsourced to allow Ford to concentrate on Motor Manufacture. This specialization leads to economic benefits as by concentrating on activities in which an organization is competent and relatively more efficient, total value added is maximized. It also facilitates cost reduction through the exploitation of scale of economies. It is now considered the most important reason to outsource functions.
Market discipline- This creates a condition in which the purchaser is separated from the provider and a business transaction takes place under contract. Market discipline provides a range of benefits, namely, focus by the purchaser on outputs not inputs, competition (contestability) between suppliers, choices by purchasers, and innovative work practices.
Flexibility- The ability to adjust the scale and scope of production upwards or downwards at low cost and rapid rate. Networks of small organizations linked to their clients via contract can adjust more quickly and at lower cost to changing demand conditions compared to integrated organizations.
Cost savings- The resource costs associated with outsourcing have been shown to be to the order of 20% than the equivalent in-house production cost. Once this was the most important factor in Outsourcing decisions
Quality - The gains in efficiency and cost do not lead to lower quality, in fact if the requirements have been defined correctly is actually better in many cases.
For IS development and operations projects, outsourcing also provides
- Improved time to market as the vendor will have all the required skills and there will be fewer issues with staff turnover.
- Reduced risk of technical obsolence as the vendor will be competent in all the required areas and have experience in the latest technology
- Risk transfer to the vendor if their project overruns or there are support issues.
Risk and Critical Success Factors of Outsourcing
In any business, complex changes create risk, and this is especially so in the area of outsourcing. The key areas in which risk is increased for a company when outsourcing are lack of control and visibility, cost overruns due to lack of understanding and lack of flexibility.
Therefore when outsourcing there are some key and critical factors for success that need to be considered to reduce the associated risks.
1 Clear Understanding of Requirements and Objectives - Companies must be clear on their corporate vision/strategy and formulate objectives that will get them there. The scope of the project and level of change must also be clear as this will fundamentally determine the kind of outsourcing agreement required and also the vendor chosen. If for example an organisation wishes to outsource its IT department , there are many vendors that could meet this requirement. However far fewer would be able to perform say business transformation. Both long term and short term requirements need to be considered when entering into an outsourcing agreement of any length.
For IS systems if a key operational service is outsourced in the absence of a clear understanding of the operational strategy, robust processes and a clear path to achieve business benefits, the service provided is unlikely to meet the organisation's needs. Before handing over a function to a chosen vendor it is essential to work with them so they know what is wanted and that both parties are clear on expectations.
2 Cost benefit Analysis- It is good practise to calculate the cost of retaining business functions in-house and comparing them to the cost of outsourcing. From this a cost benefit analysis can be performed and Return on Investment (ROI) calculated.
3 Availability of competent resources and processes - Failure to implement robust processes and an appropriate management structure to manage suppliers can result in a costly legal dispute (Hirschheim & Lacity, 2000). Failure to effectively manage risk and performance throughout the supply chain can result in complete failure of an outsourcing project. To mitigate the risk, a management team should be put in place, developing integrated management processes with the vendor(s). This will also allow the building of a common language, and an environment in which mutual benefit can be fostered and conflicts mediated
4 Cooperation with vendor/Partner - In the early days of outsourcing where the key driver was cost cutting and reducing headcount, the vendor chosen was not considered to be a crucial element. However for success in today's complex business environment and to fulfil the more complex outsourcing requirements it is crucial to choose a supplier that is able to meet a company's vision and create solutions that enable a clients business to operate better. Today it is common for clients to seek the advice of outsourcing partners for the best solution.
5 Proper planning and SLA benchmarking - Establishing key performance measures that support the organisation's strategy is critical if the services are outsourced since the supplier will balance cost to be expended against the need to achieve these measures. A cost benefit analysis should be carried out regularly to ensure that the benefits of outsourcing are still attractive. A flexible pricing model should be incorporated into the outsourcing agreement to cover Service Level Agreements (SLA's) as future requirements can change. A few years into any contract and , business drivers can change for both parties. It's best to have an agreement where it is possible to realign expectations and benefits on an annual basis. This included benchmarking performance, measuring customer satisfaction and revising service level agreements.
Models, theories and approaches to Outsourcing
The Benefits and risks discussed above give an overview of the reasons to outsource and the problems associated with it. In the academic space , there has been and is ongoing research in the area of outsourcing particularly IS functions and there is a huge volume of literature on the subject. This research can be categorized as being focused on 5 major outsourcing issues :
- Why outsource - The majority of research work in the area of why companies outsource draws attention to the economic and managerial concepts and factors which influence outsourcing. Also this work is concentrated to considering an organization as a whole and not at the individual level. This research points to cost as the primary reason for outsourcing. However in more recent work the focus of research appears to be shifting to consideration of other factors such as strategy and the risks involved.
- What to Outsource - IS systems are complex and interconnected at all levels of an organization. Therefore if outsourcing only certain parts careful analysis needs to be carried out to ensure that there are no interdependencies. A shortcoming of the research is that it does not present a common framework for deciding what to outsource. Again the research generally focuses at the organization level and not the individual task or work level.
- Which Process to Outsource - This is essentially the decision making process behind deciding what to outsource. The research material shows that there is a clear gap in the decision making process between academics and what happens in practise within companies. There is also a lack of research with regards to stakeholder involvement in the decision process.
- How (Implementation )- This phase of outsourcing a project comprises 3 of three main functions , Vendor Selection, Build + Structure a relationship, Manage the Relationship. The how is closely linked to the Outcome (described below). The research material in this area emphasises the importance of the vendor/client relationship to the success of outsourcing. However the specific processes of build , structuring and managing a relationship are not clearly defined and more research needs to be conducted in this area.
- Outcome - The outcome desired from outsourcing is that of success. The research material describes ,the following factors as key to a successful outcome:
Good Customer Relationships
Management of Contractual issues and Vendor
End user perspective
Quality of decision making in deciding the outsourcing function i.e. what to outsource, which vendor
The research also highlights the fact that setting unrealistic goals and expectations or basing the reason to outsource on cost alone can lead to failure of the project. i.e. Neglecting stakeholders. A shortcoming of the research is that it does not collectively consider all the factors crucial for outsourcing success.
The academic research in the outsourcing space is quite diverse, using a number of theories and methods and applying them to the key issues. There has been significant work carried by applying the following theories:
- Transaction Cost Theory- Comparison of Transaction and Production costs(Williamson,1981)
- Agency Theory - the existence of different perceptions of risk between principal and agent as well as uncertainty (Jensen, Meckling, 1976)
- Strategic Management Theory - Theories which explain the activates of a firm to meet objectives (Quinn,1980),(Porter, (1985)
Empirical and non-empirical research approach methods have been applied in the research literature which can be divided into the following types
- Empirical - Research through collection and study of data through studies, surveys etc
Positivist - use of hypotheses which can be tested and proved or disproved using observation or experiment (Burrell and Morgan,1979)
Descriptive - Objective factual descriptions i.e. case studies (Orlikowski & Baroudi, 1991)
Interpretive - Studies that exhibit empirical characteristics, but with emergent insights i.e. getting close to a subject and exploring its detailed background and life-history (Burrell & Morgan, 1979). - Non-Empirical - Research through conceptual and analytical reasoning
Conceptual- frameworks and arguments that structure thoughts and concepts. In IS, conceptual research is typically illustrative in nature providing guidelines, recommendation and warnings (Alavi 1989)
Mathematical - modelling that is based on a set of restrictive assumptions about the world, and is often based on minimizing costs or maximizing profits by changing certain parameters. (Whang, 1992)
Back to: Essay Examples
Conclusion and Findings
Any business change carries risk. Even in apparently trivial outsourcing initiatives, poor attention to service level agreements, supplier selection, appropriate contract duration, and a host of other issues will lead to problems. Early research has shown that the primary reason to outsource was cost however today this focus has shifted and more research is needed other areas to better understand the impact of outsourcing. These areas are highlighted below
- Outsourcing success- This is not currently clearly defined and outsourcing success has many meanings even within a single organization.
- Vendor Perspective- One of key issues is that emphasis seems to be given to the company outsourcing and how its needs are met. However the vendor must also gain something out of outsourcing for it to be a viable proposition.
- Vendor\Client Relationship- More analysis and examination of this area needs to done so that it is better understood.
- Individual Level- the majority or research seems to be focused at the organization level. More work is required at the individual level.
- Stakeholder Involvement- More work is need to understand the impact of stakeholder involvement in the decision making process.
More recently research has diversified to also focus on emerging issues in outsourcing. These being Business process Transformation (BPO), Off shoring to developing countries such as India and China and Application Service Providers. This is in line with a general trend that more and more research is being, and needs to carried out in the area of outsourcing to help companies better understand its implications and make more informed decisions on when to and when not to implement Outsourcing.
Bibliography
Alavi, M , Carlson P, Brooke G (1989), The ecology of MIS research: a twenty year status review, Proceedings of the tenth international conference on Information Systems, p.363-375, December 1989, Boston, Massachusetts, United States
Barney, J. B. (1991). "Firm Resources and Sustained Competitive Advantage," Journal of Management, Vol. 17, No. 1, pp. 99--120.
Buehler S and Justus Haucap , Strategic Outsourcing Revisited, Journal of Economic Behavior and Organization, Forthcoming,University of Zurich - Socioeconomic Institute (SOI) and University of Bochum - Faculty of Economics
Burrell, G. and Morgan, G. (1979). Sociological Paradigms and Organizational Analysis, London.
Chaudhury, A., Nam, K. and Rao, H. R. (1995). "Management of Information Systems Outsourcing: A Bidding Perspective" Journal of Management Information Systems, Vol. 12, No. 2, pp. 131--159.
Cheon, M. J., Grover, V. and Teng, J. T. C. (1995). "Theoretical Perspectives on the Outsourcing of Information Systems," Journal of Information Technology, Vol. 10, pp. 209--210.
Cronk, J. and Sharp, J. (1995). "A Framework for Deciding What to Outsoure in Information Technology," Journal of Information Technology, Vol. 10, pp. 259--267.
Currie, W. L. (1996). "Outsourcing in the Private and Public Sectors: An Unpredictable IT Strategy," European Journal of Information Systems, Vol. 4, No. 4, pp. 226--236.
Cronk, J. and Sharp, J. (1995). "A Framework for Deciding What to Outsoure in Information Technology" Journal of Information Technology, Vol. 10, pp. 259--267.
De Looff, L. A. (1995). "Information Systems Outsourcing Decision Making: A Framework, Organizational Theories and Case Studies" Journal of Information Technology, Vol. 10, pp. 281--297.
Dibbern, J. and Heinzl, A. (2002). "Outsourcing of Information Systems in Small and Medium Sized Enterprises: A Test of Multi-Theoretical Model," In Information Systems Outsourcing : Enduring Themes, Emergent Patterns and Future Directions, R. A. Hirschheim, A. Heinzl and J. Dibbern (Ed.), Berlin, Heidelberg, New York: Springer-Verlag, pp. 77--99.
Doh Jonathan P. (2005), Offshore Outsourcing: Implications for International Business and Strategic Management Theory and Practice, Journal of Management Studies, Vol. 42, No. 3, pp. 695-704, May 2005
Domberger, Simon (1998), The Contracting Organization: A Strategic Guide to Outsourcing , Oxford University Press
Fuerst, Oren and Melumad, Nahum D(1999), Consider Outsourcing Even What You Do Best .[Online].[Accessed 24/10/2005]. Available from WWW: http://ssrn.com/abstract=190388
Hirschheim R, Lacity, M (2000), The myths and realities of information technology insourcing, Communications of the ACM, v.43 n.2, p.99-107, Feb. 2000
Jensen, M. C. and Meckling, W. H. (1976). Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure Journal of Financial Economics, Vol. 3, pp. 305--360.
Kern, T., Lacity, M. and Willcocks, L. (2001). Application Service Provision, Englewood Cliffs: Prentice Hall.
Lacity MC, Hirschheim R (1995), Beyond the Information Systems Outsourcing Bandwagon : The Insourcing Response, John Wiley & Sons, Inc., New York, NY
Orlikowski, W. J. and Baroudi, J. J. (1991). "Studying Information Technology in Organizations: Research Approaches and Assumptions" Information Systems Research, Vol. 2, No. 1, pp. 1--28.
Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance New York, London: Free Press; Collier Macmillan.
Quinn, J. B. (1980). Strategies for Change: Logical Incrementalism, Homewood, Ill: Richard D. Irwin.
Salvetti J.R, and Schell N.D 1995, Is Outsourcing Right For You, Bank Marketing
Seungjin Whang, Contracting for software development, Management Science, v.38 n.3, p.307-324, March 1992
Strategic Outsourcing. [Online].[Accessed 24/10/2005]. Available from World Wide Web: http://www.ashridge.org.uk/www/ASMC.nsf/web/Strategic+Outsourcing
Willcocks, L. P., Fitzgerald, G. and Lacity, M. C. (1996). "To Outsource IT Or Not? Recent Research on Economics and Evaluation Practice," European Journal of Information Systems, Vol. 5, No. 3, pp. 143--160.
Williamson, O. E. (1981). "The Economics of Organization: The Transaction Cost Approach" American Journal of Sociology, Vol. 87, No. 3, pp. 548--577.
More Free Information Systems Essays...
Get free Information Systems essays from our extensive online resource library. Hundreds of example essays available from all the major essay topics to help you with your research...
Please note: The above essay was written by a student and then submitted to us to display and help others. Thanks to all the students who have submitted work to us.
