Pros and Cons of Outsourcing it Services Term Paper

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Outsourcing IT Services

Some History

The information technology outsourcing industry was established in 1962 by H. Ross Perot, who left IBM to launch Electronic Data Systems (EDS) in Dallas, Texas. EDS gets proper respect for developing most of the practices that are essential to the performance of the industry today: the management and integration of complex systems, client/server transaction processing, and private networks transmitting data, video and voice in digital format. The company's first long-term commercial facilities management contract was signed with Frito-Lay in 1963. But, it was President Lyndon Johnson's (a fellow Texan) Social Security Act of 1965, creating Medicare and Medicaid, which really put EDS in business. EDS was the first to develop a complete insurance claims processing system for Texas's Medicare/Medicaid program. Next on the horizon, in 1969, was California Blue Cross which was horribly backlogged in its Medicare data processing system. EDS' proprietary claims processing programs were widely admired and resulted in a rapid increase in the company's revenues, which topped $16 million by the end of the decade. In May 2008, Hewlett-Packard Co. acquired Electronic Data Systems for $14 billion. As of the date of acquisition, EDS operated in 64 countries and provided jobs for nearly 140,000 people. As a stand-alone entity, EDS was one of the largest service companies in America, serving about 2,000 clients. Today, HP Enterprise Services has continued to grow the business and currently has one of the industry's most extensive product offerings of outsourcing applications, and business process services. (HP, 2009)

The term EDS used to describe its service was "facilities management," but it was the early precursor for the "IT outsourcing" terminology. While many IT functions are hired out to domestic service providers, Ryan Frank from Suite 101 points out that many large corporations have transferred their customer service programs overseas to countries such as Asia, Mexico and India to take advantage of lower labor costs; hence the term "offshoring" -- a specific kind of outsourcing which gets most of the public awareness. The argument goes that, while the costs are lower, the quality of service remains the same, which allows the company to focus on its core functions and to build up its financial strength. Many services other than IT have been successfully outsourced; including help desks, payroll systems, data entry, human resources, and more. However, most of the jobs outsourced to foreign countries are IT services. As with every business decision, the pros and cons of outsourcing IT services are hotly debated.

(Frank, 2009)

The Pros of Outsourcing IT Services

The single most significant advantage of outsourcing IT services is the lower personnel costs, especially in the offshoring situation. The full-time employees in the United States want to be provided consistent increases in basic pay, annual bonuses, retirement plans, medical, dental, vision, and other benefits. Workers in India or China, for example, may be paid one-fourth to one-fifth the wages of a U.S. worker. (Frank, 2009) IBM published the results of an internal review conducted in 2004. A programmer in the U.S. earned $56 per hour and that same work could be accomplished in China for $12 per hour. During 2004, IBM shifted 3,000 jobs overseas, added 15,000 jobs worldwide and added 5,000 jobs in the U.S. (IBM, 2010)

Outsourcing information processing services also allows the company to free up extensive and expensive real estate space housing employees, computer systems, and other equipment. Newly available space gives the company the opportunity to consider other productive uses for the area where the IT service team had been residing. (Frank, 2009)

The web site Outsource2India provides an admittedly biased list of advantages to offshore outsourcing of non-core business processes:

More time to concentrate on core business processes

Access to professional, expert and high-quality services

Save time, effort, manpower, operating costs and training costs

Savings on capital expenditures for hardware, software and infrastructure

Reduced management problems (Outsource2India, 2011)

The Cons of Outsourcing IT Services

The advantages to outsourcing are enticing, but a rational decision requires consideration of the disadvantages. The glaring con of outsourcing is the loss of local jobs. Local job losses are always a burning issue for politicians, but in the current economic conditions well-trained and skilled American IT workers in cities across the United States are unable to find full employment. The company employing an…[continue]

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