Outsourcing of it Functions Term Paper

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Outsourcing would have on IT Functions in the Information Systems Area of an Online Business

The term "outsourcing" has received a lot of bad press lately, but the good news is that the process itself does not have to be harmful, and can in fact add significantly to the accomplishment of an organization's goals - if certain steps are followed in making the decision to do so are followed. To this end, this paper provides an analysis of the potential effect that outsourcing would have on the IT functions in the information systems area of an online business, including what factors must be considered in making the decision to outsource or not, risks and benefits associated with outsourcing the IT function, as well as typical cost origins in outsourcing agreements and some examples of the associated dollar amounts involved. An assessment of the implications of using an outsourced IT department on organizational structures will be followed by a summary of the research in the conclusion.

Review and Discussion

Technology Assessment of the IT Departmental Tasks Dealing with the Company Information Systems. Over the last decades, businesses have invested handsomely in communications technology in order to better leverage their revenues. Today, more than ever, having the ability to access important data remotely and to communicate is crucial. Online businesses competing in the modern and increasingly globalized marketplace must focus the abilities on gaining access to information quickly, securely, and reliably. Virtually all online companies must have access to various effective IT functions in order to conduct business, but the time may well come when the demands outweigh the company's ability to provide these services internally. Oppenheimer (1998) emphasizes the need for making a careful assessment of the technology employed currently, as well as what future needs may be faced by a company before proceeding any further. The assessment process involves examining divisional and group structures to identify who the people for whom the IT function provides services and from whom information must be sought in order to make the operation to succeed. In addition, the assessment process is iterative; in other words, assessments should remain flexible and avoid getting bogged down in details too quickly. Oppenheimer emphasizes that the assessment process must recognize that the logical model and the physical design may change as more information is gathered and will require fine-tuning, including the need to develop in-house expertise or to outsource the function altogether.

a. Determining Factors that Guide a Decision to Outsource. Oppenheimer points out that in today's networking environment, voice, data, and video networks are being increasingly merged. While every situation is unique, Oppenheimer notes that the factors that serve to guide a decision to outsource the IT function would relate to the business's needs whether the existing function adequately addresses these needs. If the expertise to accomplish the IT function does exist within the business, then the decision to outsource or contract must be made. Since each online business situation is in fact different, Oppenheimer recommends that before developing business goals for the IT function, it is a good idea to research the client's business to better understand what industry the client is in and to learn something about the client's market, suppliers, products, services, and competitive advantages. Based on this comprehensive understanding of the customer's business and its external relations, the decision can then be made as to what technologies and products will help strengthen the company's status and IT function in the respective industry.

b. Risks and Benefits Associated with Outsourcing the IT Function. The management of the IT environment is very tightly linked to the security that must be embedded in sensitive transactions. "The issue of trust is of key importance, for this network management entity to fulfill an essentially threefold role, that of service delivery, administration and security / authentication" (Sakkas & Malkewitz, 2001, p. 229). According to Carr (2001), "The potential benefits of harnessing information technology will be huge for companies that can effectively figure out how to align the Internet with their own value chain, or those that create a new value chain in order to reach this goal" (p. 27). Carr emphasizes, though, that the term is "value chain," rather than "supply chain," and says that although each situation is different, every business has a value chain. "Some folks in our industry use the term to describe the union of the supply chain and the demand chain: the combination of how you get the components of your product, and how you get the finished product [or service] to customers" (p. 27). Michael E. Porter argues that too many companies have been using the Internet in ways that are actually counterproductive. A number of companies, for example, have used Internet technology to shift the basis of competition away from quality, features, and service toward price, making it harder for anyone in their industry to make a profit. According to Porter, some companies have forfeited important proprietary advantages by rushing into misguided partnerships and outsourcing relationships. Porter describes the value chain for online business as being a framework for identifying the discrete but interconnected activities that make the business run and how those activities affect both the cost and the value delivered to buyers.

The benefits to be gained by effectively managing the Porter value chain as it pertains to the IT function would mean bringing the features that augment and facilitate the actual marketing and delivery of the company's services to its internal and external customers to bear on the organization, rather than how these technologies simply provide a means of telecommuting, for instance. In other words, if an intranet provides the best way for an online business to keep track of projects and to provide a seamless communications environment, than an intranet should be used; on the other hand, if an intranet is perceived as a barrier to an "open-door" policy where employees feel frustrated in their attempts to communicate with their peers and management, than this approach should be avoided.

d. Cost Origins in Outsourcing Agreements, and Examples of Associated Impacts. The primary expense for establishing and maintaining any online businesses will initially be the acquisition and leasing costs for the web domain and for web site development. With the aid of the deregulations, telecommunications costs at a wholesale level have become cheaper. Standardization also had substantial impact on the business strategies of telecommunications companies. The use of common protocols enhanced price reduction at the retail level and unleashed unprecedented competition in access provisioning. For providers to gain market share, they had to introduce lower costs to the end user. Further, the telecommunications companies that already had enviable and advantageous position, with regard to their large modem pools, concentrators, and dedicated networks quite easily tapped into the market at significantly reduced rates. Besides providing access, these ISPs had particular attraction to the content providers such as medical abstracts, and legal proceedings. The versatility of the Internet, in terms of unimaginable reach, distance, independent pricing, browsers that are standard, enticed content providers. Advertising costs on the Internet are equally far reaching at very low costs; therefore, firms take advantage of the sophisticated, effective and yet inexpensive business environment offered by the Internet. However, in order to take full advantage of these resources, an online company must remain aware of changes and innovations in the IT function that might well tax their abilities.

e. Implications of Using an Outsourced IT Department on Organizational Structure. If an online business determines that it is in its best interests to outsource all or part of the IT function, the organizational structure will also naturally be affected. Since people are naturally reluctant to change (Robbins, 2001), an online business's chances of success in outsourcing the IT function are improved when the organization's culture is characterized by trust, risk taking, and employee participation, when employees have been trained in empowerment skills and provided the necessary resources; and when management has put into place a comprehensive control system that monitors employees' actions and alerts management quickly of major problems (Robbins, 2001). A key aspect of managing the Porter value chain when IT functions are outsourced is ensuring that remaining employees have what they need to get their jobs done, and feel empowered to take advantage of the environment to accomplish personal and organizational goals. To this end, Carr points out that the secret to managing a value chain is to ensure that the "technology is the servant of your business, not its master. Porter's warnings against standardized Internet software echo earlier arguments against the adoption of standardized ERP systems, which naysayers warned would lead businesses to fritter away competitive uniqueness by operating too much like competitors running the same software suites" (Carr, 2001, p. 27).

Recommendations for Potential Outsourcing of IT Functions Associated with Information Systems. The research shows that the IT function can actually be performed entirely in-house, completely delegated to a third-party vendor, but there is another alternative that online businesses in particular…[continue]

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