IT Outsourcing: Evaluating Decisions Beyond Financial Criteria

Introduction to IT Outsourcing

The outsourcing of IT operations can be described as the process of sub-contracting responsibility for some or all parts of an IT function to a third-party service provider that handles the work. This practice has been present for several years since the commencement of business computing, as many firms use it for functions ranging from infrastructure to software development, as well as support and maintenance. One of the major reasons for the widespread use of IT outsourcing is that it is perceived as a means of reducing costs, enhancing operational flexibility, minimizing management overhead, and increasing service levels. Another reason attributed to this practice is that IT is not always considered a core competency of the firm, and third-party companies may be able to provide better and cheaper services. However, a company's financial manager should carefully evaluate investment in technology, especially from the shareholders' perspective.

Evaluating IT Outsourcing Decisions

As previously noted, outsourcing IT systems and services is a practice growing at a rapid rate, as companies across the globe view it as a means of accomplishing strategic goals, reducing costs, improving customer satisfaction, and increasing efficiency. Similar to other organizational decisions, this practice requires effective management from the beginning of the outsourcing evaluation through to the end of the contractual relationship, because it is not without risk. From the shareholders' perspective, IT outsourcing may or may not significantly increase or decrease share value. This is primarily because investors pay close attention to the type of IT firm and the type of outsourcing involved as part of developing sound reasoning and informed decisions (Kowalczyk, 2009). The main concern, however, is whether standard investment information and criteria are sufficient for effectively evaluating IT outsourcing decisions.

While strong management, standard financial investment information, and established criteria are critical for effectively evaluating IT outsourcing decisions, they are not all that is needed. When investments are made in a third-party company and that company fails, shareholders lose their money and seek answers from the contracting firm. Therefore, a business must be very careful and specific when outsourcing, because the sub-contractor is considered a reflection of the business itself. Standard financial investment information and criteria alone are inadequate for evaluating IT outsourcing decisions because the practice involves several other crucial factors.

Critical Success Factors Beyond Financial Criteria

Some of the other critical factors for success in the outsourcing process include defining clear objectives, answering vital questions, considering stakeholders, using a methodical approach, involving the right people, understanding the vendors, choosing a suitable relationship, and negotiating an appropriate contract (Klepper & Jones, 1999). Additional crucial factors in the successful evaluation of an IT outsourcing decision include using objective performance criteria, applying performance incentives and penalties, and managing people issues effectively. During this process, performance assessment is critical, as it helps in developing accurate descriptions of business needs. Through data analysis, a firm can estimate the potential returns from a contractual relationship.

Conclusion

As outsourcing has become a major practice for many companies across the globe, it is widely adopted because of its potential benefits to the business. However, successful evaluation of an IT outsourcing decision requires more than standard financial investment data and criteria. Organizations must also account for strategic, operational, and relational factors to ensure that outsourcing arrangements deliver the desired outcomes for all stakeholders involved.