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.
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