IT Operations Agree or Disagree: Standard Financial

IT Operations

Agree or disagree: Standard financial investment information and criteria are all that is needed to effectively evaluate IT outsourcing decisions.

Over the last several decades, outsourcing has become an effective tool for many companies to reduce their costs and increase their profit margins. As time went by the reduction in trade barriers and availability of highly skilled workers (in select locations) made these practices more acceptable. This has resulted in an increasing number of jobs being outsourced to different countries (i.e. China and India). (Buck, 2011)

Evidence of this can be seen with data provided by Statistics Brain. They found that in 2011 there were a total of 2.27 million American jobs outsourced to these locations. There are a number of different reasons as to why this is occurring. The below table is highlighting the most common factors influencing the decision to outsource various services. ("Job Outsourcing Statistics," 2012)

Factors as to why Corporations will chose to Outsource

Reason for Outsourcing

Percentage

Reduce Costs

44%

Inability to have Access to In House IT Resources

34%

Utilize Everyone's Time more Effectively

31%

Improve the Focus of the Business

28%

Reorganization / Transformation

22%

Gain Access to Additional Management Skills and Resources

15%

Reduce Time to Market

9%

("Job Outsourcing Statistics," 2012)

These figures are showing how there is the desire to: increase profit margins, reduce costs and have access to additional resources (which are the primary reasons why most firms are outsourcing). To fully understand what is happening, there will be a focus on the standard of financial information and criteria that are needed to evaluate IT outsourcing decisions. Together, these elements will highlight the risks vs. rewards of this practice. ("Job Outsourcing Statistics," 2012)

The Impact of Outsourcing

It is obvious that when any kind of firm is outsourcing, there are tremendous risks that they are facing the process. This is because, a number of companies believe that this is the end all solution that will increase their revenues, competitiveness and address critical challenges. However, when looking a little further the success of company using this strategy, will depend upon factors inside the business itself. As a result, there are mixed reviews surrounding the effectiveness of IT outsourcing and its ability to help a firm remain competitive. (Bucki, 2011)

The reason why is based upon the impact of these activities in relation to the total amounts of debt and equity on the balance sheet. For any corporation, debt can help them to rapidly expand during times when the economy is growing. This can increase their earnings and the total returns that investors are receiving. While equity, is directly associated with how fast a company is able to take the funds they are receiving from investors and their cash flow to increase the profit margins. Moreover, interest rates have declined and are going to be rising at some point in the future. This makes it advantageous to swap debt or issue new amounts. These are the primary reasons why a number of growing firms will increase their debt when the economy is strong. (Bucki, 2011)

Outsourcing has become one of the keys that firms are utilizing to reduce their costs and address critical IT functions. This is because they can have specific tasks performed at a much lower fee in contrast with hiring workers of their own. At the same time, they do not have to comply with different regulations such as: overtime, increased employee benefits and meeting different safety standards in the workplace. When these costs are compared with many developing countries, the upfront savings for the firm can be dramatic. As time has went by, the success of various organizations utilizing this model have only continued to increase in popularity. This has resulted in more firms turning to IT outsourcing in an effort to remain competitive and gain market share.

Evidence of this can be seen in the below table (which is highlighting those organizations that are conducting the most IT outsourcing).

Outsourcing by Sector

Industry

Percentage

Manufacturing

53%

IT Services

43%

Research and Development

38%

Distribution

26%

Call / Help Centers

12%

("Job Outsourcing Statistics," 2012)

This is showing how outsourcing has become very common among a wide variety of firms. As a result, a number of organizations are assuming that this is the best solution in addressing their IT related challenges. ("Job Outsourcing Statistics," 2012)

The Risks of Outsourcing

However, despite these perceptions, the reality is that outsourcing involves tremendous amounts of risk (with its success depending on the financial strength of the company). This is because the world economy is cyclical in nature. Those organizations that have low amounts of debt will have a higher probability of succeeding by utilizing this approach. (Bucki, 2011)

While those firms, which have lots debt and are showing negative amounts of equity will face the most challenges. This is from executives using the strong economy to help increase working capital and to finance short to medium term growth. Once there has been a fundamental change in the business cycle (i.e. A recession or slowdown has begun), is when these firms will face considerable challenges. This is because executives did not have any kind of long-term strategy for the company to become profitable. Instead, they were going based on assumptions that the economy would continue to remain strong and interest rates are favorable. (Bucki, 2011)

This is problematic, as these kinds of challenges will negatively impact their earnings, ability to obtain additional financing, working capital and investor confidence. When this happens, is the point that an organization can face increased liquidity problems. To make matters worse, many executives are fooled into thinking that outsourcing is the end all solution in helping the firm. This will increase the risks to the entire company (with a possibility that they will be forced into bankruptcy). (Bucki, 2011)