Information Systems Outsourcing Advantage and Risks
There appears to be some confusion and trepidation about the use of outsourcing for Information Systems in today's organizations. While some advocate for the use of IS outsourcing still others state claims that it is not an effective or efficient organizational practice.
The objective of the research contained in this study is to determine the effectiveness and efficiency of information systems outsourcing practices.
The significance of the research in this study is the knowledge that will be added to the existing knowledge base on information systems outsourcing practices in the organization.
The work of Gonzalez, Gasco and Llopis (2009) reports that the status of Information Systems (IS) or Information Technology (IT) as a "growing, increasingly global phenomenon in the new millennium" is confirmed by "a wide range of facts and figures." (p.181) There are stated to be various reasons to support outsourcing of IS and IT systems including the focus on strategic issues. Stated is that market forces "are somehow driving firms to outsource everything but the core business. And outsourcing makes it easier for these firms to focus on their basic competencies." (Gonzalez, Gasco and Llopis, 2009, p.181)
Outsourcing Liberates Lines Managers
Outsourcing is reported to liberate line managers in that they do not have to coordinate with a large IS department resulting in simplification of the organization. Outsourcing of the organization's most routine IS activities enables the computer experts to dedicate their time to key IS activities. This enables clients to concentrate on their business and the outsourcing company to take over the responsibility in updating hardware and software and in meeting the business requirements that the outsourcing contract specifies. As well, this allows for an increase in flexibility as the changes experienced in technology recently provides many organizations the chance to "obtain a considerable advantage from outsourcing, as they prevent becoming technologically obsolete without having to make large investments in technology." (p.181)
Outsourcing Increases Business Organization Flexibility
Flexibility of the business organization can be increased through use of a "continuous redesign of their contracts that will allow them to meet their information needs at any given time." (Gonzalez, Gasco and Llopis, 2009, p.181) In addition, outsourcing makes provision of a large degree of flexibility in the utilization of IT resources and as well make it much easier to cope with business level volatility, as the provider is left to deal with fluctuations in IT workloads." (Gonzalez, Gasco and Llopis, 2009, p.181-182) Outsourcing can be used as a strategy for achievement of flexibility during the restructure of a reorganization initiative. (Yang, Kim, Nam, and Yin, 2009, cited in: Gonzalez, Gasco and Llopis, 2009, p.182)
Outsourcing Used to Respond to Needs of Clients and IS Users
In addition, outsourcing can be used in response to the needs of clients and IS users, which are constantly changing. The quality delivered by IS services can be improved by outsourcing and the reasons stated to support this are as follows:
(1) The provider can access more advanced technologies and count on more motivated staff and better management systems in order to be able to achieve a better service coordination or control, or, simply, is more strongly committed than the internal staff to make the alliance with the client work properly; and (2) Firms outsource so that they can have at their disposal high-quality IT services and knowledge. (Gonzalez, Gasco and Llopis, 2009, p.182)
Outsourcing Rids IT Management of Routine Tasks
One of the primary benefits of outsourcing is ridding the IT management of routine tasks, which consume a great deal of time in the IT management process. (Grover, Cheong and Teng, 1996; Hayes, Hunton, and Reck, 2000) Outsourcing is additionally credited with facilitating technological access as it brings "client firm advantages related to technology as these business organizations can have access to specialized, state-of-the-art technology which is supposedly supplied to them by the provider. On the other hand, the efficient use of outsourcing will most probably reduce the need to make investments in mature technology, simultaneously increasing the availability of resources related to new technologies for the client." (Clark, Zmud, and McCray, 1995 cited in: Gonzalez, Gasco and Llopis, 2009, p.184)
Outsourcing as a Means of Testing New Technology Without the Risks
Organizations that are reluctant in nature and who generally adopt the wait and see stance when it comes to new technology are reported as being likely to outsource "as a way to minimize the risks incurred if the technology used is not the most appropriate. In this respect, outsourcing is likely to emerge as a way to experiment with new technologies." (Baldwing, Irani and Love, 2001 cited in Gonzalez, Gasco and Llopis, 2009, p.184) Gonzalez, Gasco and Llopis (2009) site the reduction of the risk of obsolescence as being a key reason to outsource and state:
"It is precisely the fast pace of change in the field of technology that places firms in front of a dilemma: either making investments on new technologies very often or working with very mature technology. This problem can equally be minimized with technological outsourcing, since the technology accessed by the client is owned by the provider, which means that this risk is assumed by the latter and not by the former. Firms can increase their level of flexibility through a process of continuous redesign of the contracts that will help them to cover their information requirements." (Gonzalez, Gasco and Llopis, 2009)
Saving Staff Costs
Saving staff costs is cited as one of the primary reasons for outsourcing and is the reason most often cited as well since outsourcing "…paves the way to a more specialized IT management, as the provider firm finds itself in a better position to select, train and manage its technological staff; in this way, clients can have at their disposal high-level specialists without them having to be permanent members of their staff." (Gonzalez, Gasco and Llopis, 2009) The retention of a permanent workforce that possesses high-level and up-to-date skills and training is a very costly pursuit. Outsourcing rids the organization of the necessity of these particular expenditures. It is reported that this reason, or that of staff costs savings is "one of the strongest reasons that have led to many organizations adoption of global or offshore outsourcing.
Having Alternatives to the IS Staff Results in Benefits to the Organization
When the organization uses outsourcing it is no longer completely and exclusively dependent on IS resources that are internal to the organization. (Gonzalez, Gasco and Llopis, 2009, paraphrased)
Technology Cost Savings
Savings in terms of technology costs is reported as one of the primary reasons mentioned in all studies reviewed by Gonzalez, Gasco and Llopis (2009) for outsourcing. Saving Technology Costs. It is reported that service providers "are exposed to a wider variety of problems and experiences associated with IS, which is why a greater volume of knowledge and skills can be obtained that will help to solve these problems. Likewise, service providers dedicate all their capacity to the provision of IS services, as a result of which greater economies of scale and scope can be obtained." (Gonzalez, Gasco and Llopis, 2009)
The assumption stated is that a portion of these economies are realized by the client in terms of prices being lower while receiving the same services through outsourcing and through the IS internal department's work. Equal outsourcing enables the fixed costs for maintenance of the IS department into variable costs based upon the needs of clients. When the contract is designed properly this results in costs that are predictable in nature. (Gonzalez, Gasco and Llopis, 2009, paraphrased) In addition, contracting outsourcing IS services and management will result in more liquidity for the client firm when software licenses and staff are transferred to the provider.
Firms decisions to adopt outsourcing to match the success of other firms that are already outsourcing should be based upon examination of the amount of pressure service providers attempt to exert, the Stock Exchange and the attitude towards outsourcing as well as the coverage in the press both popular and economic in nature both of which have served to make outsourcing not only a reality but a popular option as well. (Gonzalez, Gasco and Llopis, 2009, paraphrased)
Just as with any change comes the associated risks which are varied in the area of outsourcing since the outsourced tasks are in the nature of tasks that are "complex, expensive, largely inefficient or difficult…" (Gonzalez, Gasco and Llopis, 2009, p. 188) The first stated risk is that of 'Provider Staff Qualification' and stated is that while outsourcing "…theoretically facilitates the access to the technical knowledge and expertise of IS specialists, it very often happens that the outsourcing firm is supported by the same staff as before because that staff has been transferred from the client firm to the service provider." (Gonzalez, Gasco and Llopis, 2009, p.188) Also stated as a risk of the 'Lack of Compliance with the Contract by the Provider' and it is reported that this problem "…inherent…