Note: Sample below may appear distorted but all corresponding word document files contain proper formattingExcerpt from essay:
For instance a client without much expertise may make decisions that will lead to a lock in and not even be fully aware of it. Such decision making can be evident in scenarios where the client commits to a long-term contract without clauses that allow for ending the contract if the performance of the supplier is not adequate.
(2) Contractual Amendments- Amendments to contract can be extremely expensive, which creates a sizable risks for the client company. The costs involved is associated with redrafts, alterations of original contracts when either the supplier or client believes that such changes are necessary. Because contracting parties cannot anticipate changes that may need to occur as it pertains the contract, contractual amendments is always a risk that companies face. As such this is simply an issue that companies must make provisions for. Costs associated with altering contracts include the "direct costs of communicating new information, renegotiating agreements or coordinating operations in order to reflect new circumstances (Walker and Weber, 1984). Contractual amendments are mainly due to the uncertainty about future events and the other party's actions (Bahli & Rivard, (2003)." The three common types of uncertainty include environmental volatility, technological discontinuity, and nature of the outsourced activities (Bahli & Rivard, (2003).
(3) unexpected transition and management costs- these risks are associated with costs that are often hidden or not correctly estimate. These types of costs are often present as it pertains to the outsourcing process. These unexpected costs are usually inclusive of relocation cost, the costs of setup, the cost of leasing and human resources costs. These unexpected cost usually occur because expertise is lacking on the part of the client, absence of experience with outsourcing as it pertains to the client and the type and level of outsourcing being conducted (Bahli & Rivard, 2003).
(4) disputes and litigation- disputes and litigation is also a risk associated with outsourcing. According to the authors this involves
"any controversy concerning the association or representation of the contracting parties in negotiating, fixing, maintaining, changing or seeking to arrange the terms or conditions of a contract and the process of bringing and pursuing a lawsuit (Klepper and Jones, 1998). Three risk factors are particularly apt to cause disputes and litigation: the supplier's degree of expertise (the term expertise is used here as defined in the case of client expertise) in handling the outsourced operation, its degree of expertise in outsourcing and measurement problems
(Bahli & Rivard, 2003, 215)."
All of these risks are present when companies decide to outsource IT functions. After understanding these risks if a company decides that outsourcing still seems like a valuable alternative than a risk management strategy must be adopted, so that these risks can be handled in a manner that is conducive with business progress.
Risk management is defined as "The process of analyzing exposure to risk and determining how to best handle such exposure ("Risk Management")." There are several strategies that companies can use in the effort to manage risks (Lam, 2009). For instance, according to Hoffman (2009) companies must stop thinking of risks solely as something that needs to be reduced, they should also think of it as something that can be exploited so that the needs and desires of the company can be met. This means that a risk management strategy should focus on limiting those risks that can be harmful if not mitigated but also exploiting those risks that can result in beneficial outcomes if properly managed.
As it pertains specifically to IT outsourcing, businesses have to take all of the aforementioned risks into consideration and then develop a risk management strategy that properly minimizes these risks. For instance, if the company does not have expertise as it pertains to outsourcing, it should find consultants to assists in making the transition into outsourcing. The consultants will provide them with the knowledge needed to properly manage risks. These risks are inclusive of contractual agreements/alterations, and the appropriate cost for the outsourcing functions. Once the company understands more about the actual outsourcing process it can better negotiate and in doing so mitigate many of the aforementioned risks.
Although the company can prepare for dealing with such risks, there are some risks that will be unforeseen. As such, the company should set aside resources including capital, to offset some of the inevitable expenses that will come as a result of the IT outsourcing. Setting aside some additional resources will allow the company to avoid budget issue if problems so arise.
The purpose of this discussion was to examine information technology outsourcing risk through a transaction cost and agency theory-based perspective. The research found that there are many risks associated with IT outsourcing in the context of transaction costs theory and agency theory. The research indicates that the risks associated with IT outsourcing seems to have a great deal to do with the expertise levels of clients and suppliers. If the client has a great deal of expertise they will have the ability to greatly minimize costs and therefore minimize risks associated with IT outsourcing. On the other hand if the supplier has a great deal of expertise and the client does not the supplier can use this expertise to act in ways that are opportunistic. This creates a substantial risk for the client. Even if both the client and the supplier have a great deal of experience and expertise, there are still risks involved in the IT outsourcing process. For this reason risk management strategies must be explored and implemented so that the risks associated with IT outsourcing can be mitigated.
Bahli, B., Rivard, R. (2003) The information technology outsourcing risk: a transaction cost and agency theory-based perspective. Journal of Information Technology
(September 2003) 18, 211 -- 221
Aubert, B.A., Rivard S., and Patry M. (2004) A transaction cost model of IT outsourcing
Information & Management. Volume 41 (7), 921-932
Hofmann, M.A. (2009) Interest in enterprise risk management is growing Business I
Insurance Volume 43 (18), 14-16
Kern, T., Willcocks, L. And Van Heck, E. (2002b) The winner's curse in IT outsourcing:
strategies for avoiding relational trauma. California Management Review, 44(2),
47 -- 69.
Ketter, P. (2008) Companies Need to Manage Outsourcing Risks. T+D 62 no3(14)
Killackey, H. (2009) Integrating Enterprise Risk Management with Organizational
Strategy. The RMA Journal. Vol. 91, Iss. 8; pg. 28
Klepper, R. And Jones, O.W. (1998) Outsourcing Information Technology, Systems & Services. Prentice-Hall: Upper Saddle River, NJ.
Lam, J. (2009) Key Requirements for Enterprise-wide Risk Management: Lessons…[continue]
"IT Outsourcing This Discussion Is" (2009, May 18) Retrieved December 8, 2016, from http://www.paperdue.com/essay/it-outsourcing-this-discussion-is-21763
"IT Outsourcing This Discussion Is" 18 May 2009. Web.8 December. 2016. <http://www.paperdue.com/essay/it-outsourcing-this-discussion-is-21763>
"IT Outsourcing This Discussion Is", 18 May 2009, Accessed.8 December. 2016, http://www.paperdue.com/essay/it-outsourcing-this-discussion-is-21763
Outsourcing According to Cusmano, Mancusi and Morrison (2007, p. 5), outsourcing can occur on both the national and international level. Outsourcing, also known as offshoring, has been the target of increasing analytical and policymaking attention, as it is seen as a key driver of change in the competitive market. In technologically advanced regions, outsourcing has been present since the mid 1970s. This trend has grown towards the 1990s, with a general
Headquartered in Malaysia, Call Central provides back-to-back client communication service; voice as well as live chat, to Fortune 500 corporations all over the world. We offer a variety of client interaction services using numerous channels of communication. We are equipped to cost-effectively handle all sizes of business needs, technical service, and whatever unique communications venue you require. Our goal is to understand your business and to emphasize your particularly objectives
Contracting officers today must have the skills or competencies required to become the business leaders of the future (Steele 2000)." An article found in the ABA Banking Journal asserts that Chief Information Officers are interested in it outsourcing because companies are able to acquire it skill sets that may not be present at the internal level. In this article Siemers (1995), explains that One of the reasons CIOs believe that
In addition research has found that estimate that nearly 252,000 computer programming and computer software engineering jobs could be outsourced 2015(Zarocostas). However, 1.15 million new IT jobs could be produced by 2012 (Zarocostas). In addition to the increased number of jobs that are being outsourced. Such outsourcing impacts the economy in many ways. Although many argue that outsourcing has a positive effect in the long run, for many workers outsourcing
Outsourcing Among the list of controversial issues relating to jobs and the economy in the United States, outsourcing is right up there near the top. Politicians frequently attack each other using the phrase, "sending our jobs overseas…" and many a politician has been stung by this accusation. Thesis: While there are clearly benefits to be realized by companies that engage in outsourcing, there are also difficulties, drawbacks, and unanticipated expenses associated
Outsourcing is an inevitable market reality, however, adequate measures must be taken to support the displaced employees, and to retrain them for better employment prospects. Outsourcing has become a highly controversial and much debated issue over the last few years. The economic dynamics of the 21st century have vastly altered the mode of business. While globalization has opened new markets for companies, at the same time, it has forced them to
Outsourcing @ Best Buy In today's competitive environment only those organizations succeed that blaze the trail rather then being a mere follower of the path on which many have embarked before. Best Buy as retail outlet is trying to do the same by becoming a pioneer in achieving better results by out sourcing its IT operations. But before we ponder over what is unique about Bet Buy's deal we try to