Information Technology Business Outsourcing and Offshoring

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Statement of the Problem

Organizations are currently under increased pressure to improve their performance and gain competitive advantage along with continually reviewing their operations with the aim of addressing threats emanating from changes in the external environment and harnessing the opportunities (Mani, Barua & Whinston, 2010). IT outsourcing and business off-shoring face numerous challenges such as the incapacity of outsourced human capital to deliver customer expected service value, lack of clarity of contractual terms that reduce motivation and increase employee turnover (Adeleye, et al. 2004). IT outsourcing faces the challenge of dependence on business process outsourcing that increases the threat of rigidity of business processes and decreases the advantage of the flexibility of business processes (Tenner, 2011). IT outsourcing has led to the emergency of homogeneous organizations that have equivalent core competencies resulting in the loss of business core competencies through the exploitation of best practices in IT competitive advantage (Gibb & Buchanan, 2006). IT market competitiveness has provided opportunities for the equivalence service level that result in loss of brand identity and brand community as well as decreased market share.

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Development in the sectors of IT and Information Systems (IS) has resulted in leveraged technologies and threats of organizational quality improvement systems and adoption of quality improvement tools (Rist, 2008). IT outsourcing has been associated with security risks that, are characterized by communication networks for instance non-encrypted networks, technical threats, like unauthorized system access and lack of data security. There have been increasing threats that IT outsourcing cannot be implemented across continents because of the threat of data access by unintended users, threats of viruses and lack of device interoperability. IT sourcing has been characterized by a loss of organizational independence that predisposes to the inability to manage operating costs (Cuadros, et al. 2004).

Purpose of the Study

The purpose of this study is to examine, explore and discover substantial causes that have led organizations to switch to IT business outsourcing and off-shoring. Furthermore, there is a knowledge claim that IT business outsourcing and off-shoring have advantages. Therefore, the study will be conducted with an aim of probing into this knowledge claim, to come up with dependable evidence that truly supports this claim. The usage of IT business outsourcing has some public opinion about its usage, as a result, the study will be conducted with the purpose of discovering the kind of public opinion that the users have (Yeaple, 2006).

Scope of the Study

The study will cover the current and previous IT consultants in outsourcing and off-shoring, business individuals using outsourcing, consultants or sellers of the technology and the public. In particular, previous and current employees of organizations that use outsourcing. The interviews will be critical in providing direct insight on the advantages as well as the limitations associated with this trend. The questionnaires will be administered to the employees of these businesses and to the general public that has knowledge pertaining to the use of these two trends. The importance of administering the questionnaires is to cover a wider scope of contributions to the study (Van den Bergh, 2009).

Research Questions

Many organizations in a modern business environment have adopted the use of IT business outsourcing and off-shoring. Advances in any technology come with intended purposes but other side effects are attached to their usage. IT business outsourcing and off-shoring may not be left out since its adoption could be associated with gains as well losses. The public has its opinion regarding the adoption and use of IT business outsourcing and off-shoring. Another aspect could be the impact on the public due to its emergence. Therefore, questions such as the ones presented below will be answered in this study.

  1. What has led to the emergence and embracing of IT outsourcing and off-shoring in a modern-day business environment as opposed to former factors that may have been in place before its emergence?
  2. What are the main variables and advantages that businesses consider when making the decision to outsource and off-shoring their information processes?
  3. What are the risks or disadvantages associated with the use of IT outsourcing and off-shoring? How do they limit the assimilation of IT outsourcing and off-shoring in a business environment?
  4. What are some of the concerns the public might have regarding outsourcing and off-shoring IT services? Are there any impacts to the public because of outsourcing and off-shoring?

Hypotheses

H1: Outsourcing and off-shoring have led to the growth of business in terms of revenues received from clients.

H2: The emergence of outsourcing and off-shoring has had significant limitations and implications on the labor force in terms of employment.

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Brief Review of the Literature

Information technology is an important factor in the modern world given the advance in technology. It helps firms innovate and produce high-quality products that meet customer needs and demands. Due to changing business environment, firms have found it necessary to reduce operating costs while exploiting the comparative advantages of human IT skills offered by other countries (Manaschi, 1998). Therefore, companies have opted to outsource critical IT skills from other firms and nations that are endowed with the expertise. In spite of the benefit of cost reduction and improved operations, IT outsourcing poses security and generic risk issues to the firm (McKendrick, 2010). If these issues are well managed, the outsourcing firm is likely to benefit through increased innovativeness and high product quality that could positively improve customer satisfaction hence increasing customer loyalty. This study examines and explores outsourcing as applied in IT organizations.

Outsourcing is the act in which a company or an organization pays another firm to produce goods or offer services on their behalf (Blokdjik, 2008). In many cases, the company could have produced the goods or offered the service themselves but sometimes it involves higher costs. Off-shoring on the other hand is a business process that companies use when they decide to relocate their operations to lower-cost locations, mainly overseas (Trojahn, 2009).

The requirements and expectations of customers in different markets are becoming more demanding. Businesses are therefore required to take appropriate actions in order to satisfy the demands of a certain market. Value addition to products has for a long time been used as a means of creating a competitive advantage by many businesses, however, these strategies are not enough in themselves, thus outsourcing was embraced. Outsourcing and off-shoring have been around for many decades and companies seek these services due to a number of reasons. No matter what the reason, the rate at which companies are outsourcing and off-shoring their services is steadily increasing. This has led to the globalization of services, consequently boosting trade and commerce all over the world (McKendrick, 2010).

The level of trade has grown remarkably over the last few decades because of the advancements that are being experienced in the field of information, communications and technology (ICT) (Jovanovic, 2011). These advancements have also increased the number of tradable services in the field of IT and ICT, which have made the outsourcing and off-shoring of services to be that much easier. The ease in the tradability of these services coupled with the increased independence of the location has contributed to the off-shoring of services by many companies in the west (Kapila, 2009). Companies are now outsourcing services such as support, customer care, research and consultancy. The main reason behind this is that outsourcing for services is much cheaper and the result is desirable (Tenner, 2011). The development in IT and ICT has motivated organizations to outsource their products and services all over the world. India is the country, which provides most of these services (Blokdjik, 2008).

India is a prime location for IT outsourcing and off-shoring. It has a strong labor force that is comprised of personnel who are skilled and talented. Their high population increases competition for employment. This has made the country have a workforce that is comprised of a relatively cheap labor force. India also has a high number of competent personnel in almost all the fields of the economy. These individuals are highly educated, professional, have many experiences, knowledge and skills, which are required to execute their respective tasks effectively and efficiently. This group can also speak and write fluent English, an aspect that makes them stand at a competitive edge over rival countries such as China, Singapore, and Malaysia (McKendrick, 2010).

With the revolution in IT and ICT, location is not of high concern as it used to be. The advancement in technology has made the transmission of inputs and outputs to be much easier. These processes are to be conducted digitally and transmitted via electronic means. Companies have therefore off-shored much of their services especially white-collar jobs to improve their sustainability and efficiency. The customer care for the giant computer manufacturer Dell, for example, is located in India (Kurtz, 2010). When local residents call customer care, they are being served by an operator who is located in India (Tenner, 2011).

Despite the benefits accrued from outsourcing and off-shoring, there has been a lot of debate on the effectiveness and sustainability of this new trend. It is evident that outsourcing and off-shoring benefits both the origin and destination country. The destination country enjoys increased rates of employment and free trade. The origin-country on the other hand enjoys the availability of goods and services. The mutual relationship between these two countries is beneficial since both of their Gross Domestic Product (GDP) will increase in the short run and in the long run (Jae-Nam, 2008).

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Outsourcing and off-shoring have been referenced with success, effectiveness and efficiency. As a result, many companies have adapted these mechanisms. However, some analysts claim that such companies may lose control of their overseas organizations, an occurrence that may be very risky (Plunkett, 2006). IT market competitiveness has provided opportunities for equivalence of service level, which result in loss of brand identity, and brand community and decreased market share (Plunkett, 2006).

These criticisms of outsourcing and off-shoring raise many questions about the effectiveness and efficiency of outsourcing. Outsourcing and off-shoring have increased trade to a new level, enhanced globalization, and improved the operations of organizations all over the world. These outcomes have only been experienced in the short run. The sustainability of outsourcing and off-shoring remains a big mystery. This is because there are a number of drawbacks that are coupled with outsourcing and off-shoring of IT services. These drawbacks affect the free market by changing the balance of trade. A study should therefore be conducted to investigate the viability and sustainability of IT outsourcing and off-shoring (Lacity, Willcocks & Feeny, 2004).

Drivers of Outsourcing

According to Jae-Nam (2008), every organization in a given industry aims at various goals. However, major objectives include maximizing profit or revenues earned from sales. In order to achieve this objective, the management focuses on the reduction of all costs incurred by the firm. A study conducted by Oshri (2011) established that firms outsource IT services to other firms in different countries and regions in order to minimize operating costs. Since costs are important factors in profit determination, the organization uses various strategies to minimize costs, one of them being outsourcing among others such as large-scale production.

The theory of factor endowments that was put forward by Heckscher and Ohlin postulates that countries have different factors of production that enable them to pose a comparative advantage over other nations (Manaschi, 1998). This theory could be used to explain the pressure for companies to outsource IT services from other countries. Countries that have enough skilled IT expertise have a comparative advantage over countries that do not have the expertise. Therefore, organizations operating in such deficient countries tend to outsource the services from well-endowed nations in order to improve their competitive advantage. Therefore, outsourcing is a form of international trade occurring because of IT skill differentials between countries. Tenner (2011) supports this theory as applied in outsourcing by noting that organizations that outsource IT expertise obtain the best skills for the right cost and at the right time. Organizations have identified IT talent limits within their employees and talents from outside to best fill the gaps. Lastly, Plunkett (2009) notes that outsourcing IT expertise enables an IT firm to be nimble in the quest to fulfill business unit requests, especially operations that are likely to run behind schedule.

Generic Risks in IT Outsourcing and Off-shoring

Adeleye et al. (2004) notes that every organization gets outsourcing and off-shoring collaboration that it deserves. Therefore, firms that experience inefficiency in IT management end up getting incompetent outsourcing partners. On the contrary, organizations that do efficient management of their IT departments always obtain competent IT outsourcing partners. In addition, other firms that do not conduct enough research in determining outsourcing partners are worse off because they may end up overhauling their better IT expertise for worse outsourced expertise. In addition to these risks, there are many others, for instance, outsourcing requires the best managerial skills. Organizations that lack good management skills may not reap maximum benefits from outsourcing.

According to Varadarajan (2009), some companies have difficulties in managing their IT departments. Such organizations may face challenges in maintaining outsourcing. Other corporations that do not undertake market testing for IT outsourcing have the risk of missing the benefits of IT outsourcing.

Yang et al. (2007) argue that most companies focus on cost reduction as the main driver of outsourcing. However, overreliance on this factor is not necessary since most of the benefits of IT outsourcing are not transparent. The supply of un-updated technology is another risk common with firms that are engaged in long-term IT outsourcing contracts. This may result in an unfruitful relationship between the two companies. It is evident that IT skill outsourcing can reduce the operating costs of a firm. However, this can only be realized if the company can manage its IT management costs.

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Security Concerns

Security concerns have been raised pertaining to outsourcing and off-shoring of IT expertise from other countries. According to Tenner (2011), outsourcing firms run risks of information security hence there is a need for auditing and restricting system users for the organizations. Not all foreign software coders could be trusted by outsourcing firms. It is important that outsourcing firms conduct proper background investigations of foreign software coders. Given that only a few firms conduct such investigations, outsourcing corporations are not safe since their confidential information could be compromised (Mani, Barua & Whinston, 2010).

Customer Reactions

The reactions of customers regarding company products vary depending on the overall effects of outsourcing. To begin with, outsourcing can be preventing the innovative nature of the firm. As noted by Gibb & Buchanan (2006), companies usually have high expectations of outsourcing including innovativeness at the lowest costs resulting in unrealistic expectations. However, innovation requires that the firm provide the necessary resources, flexibility and in-house competency (Couto, et al. 2007). Due to these inadequacies, the firm may be disappointed hence disappointing the clients in terms of quality of produced goods. The customers may react by finding alternative products. On the contrary, the benefits of outsourcing could result in increased innovativeness, low costs, quality product and customer satisfaction as well as loyalty (Garner, 2004).

Reduced Differentiation

According to Mitra & Ranjan (2010), it is difficult for firms to decide on what to outsource and what not to outsource. A rule of thumb is the basis of many outsourcing contracts in IT. This rule postulates that firms should outsource non-strategic IT functions while strategic IT functions should be left to the internal IT team of the firm. Firms initially outsourced all IT functions from one vendor leading to a lack of variety and low-quality services hence reduced differentiation in the products offered by the company. However, this trend has changed over time with organizations distributing the outsourced IT functions to different corporations. For instance, British Petroleum (BP) decided that the company no longer needed to own the technologies that provide business information to its employees. With that decision, BP outsourced its IT expertise and functions from different firms from different regions (Nambiar, n.d.).

Following outsourcing of IT functions, the firm was able to benefit in many ways. Bhalla et al. (2008), note that firms outsourcing strategic IT functions are in a position of bringing about necessary organizational cultural change needed for the creation of competitive advantage. The business processes are also improved because outsourcing enables firms to improve their operations. For instance, outsourcing encourages businesses to effectively manage budgets and control project expenditure. Thus, firms are encouraged to outsource the latest IT technologies that can enable them properly budget and manage undertake projects. Another benefit that firms realize is the cost management controls. According to Doh (2005), outsourcing and off-shoring help firms minimize expenditures while increasing company savings. In a survey conducted by Lall & Narula (2004), it was noted that outsourcing and off-shoring are able to reduce costs incurred by an organization up to 20% of the annual budget. Although many organizations dispute outsourcing costs, IT costs could have risen for corporations in the industry.

Doh (2005) examined the implications of outsourcing to multinational IT corporations. He began by examining multinationals and their international ventures in order to assess the elements of theories that could explain the internationalization of firms. The survey was conducted among multinational corporations that outsource IT technology and personnel from other countries. The survey found out that most concerns of outsourcing raised by outsourcing firms could be mitigated by international labor, environmental standards and corporate codes.

The data collected during a study by Garner (2004) is vital for the relevance of the study. In a survey conducted by Garner to measure the economic impact of off-shoring on IT firms, a study population comprising of all outsourcing firms was selected. However, only a small sample of the study population was selected for the purposes of the study. The sample selected was by stratified sampling technique. Similarly, this survey would examine a population of all off-shoring firms in the U.S. However, a sample of 200 firms would be selected using a stratified sampling technique to represent the entire population.

Lacity, Willcocks & Feeny (2004) revisited the importance of strategic partnership and outsourcing to commercialization of the back office at Lloyds in London. Their survey collected data on the importance of outsourcing to the firm. Data was collected using questionnaires and interviews. The two methods are important in collecting data for a survey since they enable respondents to provide all his/her has concerning the study topic without bias or prejudice. The interviewer should not provide lead questions to the respondent to avoid biasness. This would grant the study’s findings credibility and reliability.

Mani, Barua & Whinston (2010) conducted a study that sought to establish the impacts of information capability on the ability of a firm to outsource IT technology and personnel. The survey measured service satisfaction as applied in other outsourcing studies. It was established that satisfaction is a proxy for the perceived effectiveness of outsourced technology. Following their survey, this study would measure several variables that would include the effectiveness of outsourced technology, cost reductions, satisfaction and innovativeness. The data in the variables would be collected using interviews and questionnaires as explained above. The coding process would take place in preparation for analysis by SPSS.

A study conducted by Mitra & Ranjan (2010) focused on the impacts of off-shoring on unemployment. In their survey, they established that in a two-sector labor market, an increase in off-shoring of IT skills given labor mobility would result in increased wages and reduced unemployment. They used questionnaires to collect data on the level of outsourcing in the different sectors. The questionnaires were subjected to pilot studies to establish their effectiveness. Similarly, this survey would subject formulated questionnaires to pilot studies to establish their effectiveness in collecting the required data for the study.

Summary

Outsourcing is the ability of firms to seek human capital from other nations. Many firms operating in different fields have been reported to be outsourcing different skilled human capital from different countries. One of the most significant skills sought is IT, outsourced by IT firms. The outsourcing of IT personnel is driven by many factors including the need to minimize costs while maximizing the profits, need for innovation, inadequate skills in IT locally among other reasons. IT outsourcing is good for IT firms because it enables the firms to obtain rare skills that cannot be obtained locally, the ability to minimize operating costs and improved business processes among other benefits. In spite of the benefits, outsourcing poses some generic risks to the firm (Shachaf, 2008). The outsourcing firm is likely to obtain incompetent IT personnel or obtain IT technology that has not been tested. In addition, untrustworthy vendors that may also compromise the security of confidential information of the firm may exploit the firm. It is therefore important that the outsourcing firm conduct enough investigation regarding IT technology vendors before outsourcing (Bhatt, et al. 2010).

Organizations have resorted to carrying out IT business outsourcing and off-shoring by pursuing the advantages that come with it. On the contrary, this process may not be entirely what it brings assessing it by its word value. This research shall therefore bridge the gap of the knowledge claim of the advantages or disadvantages of IT business outsourcing and off-shoring. The design chosen will help interact with people with knowledge in this field thus providing required information that will be used to validate the findings. Since analysis shall purely be done, using categories there will be little in the conclusions made pertaining to the population at large (Safizadeh, et al. 2003).

Research Methodology

In this research, the quantitative method will be employed. There are three aspects of this study that include reasons for the emergence of IT business outsourcing and risks associated with its use and the public opinion about its use. The method is suitable for this study because it will enable the researcher to obtain first-hand data that will increase the reliability and validity of the study hence making the study valid for any user. The quantitative research method is selected because it is easy to conduct and cheap to execute since it involves the collection and use of numerical data. The researcher in this study will develop a structured questionnaire and send it to various IT outsourcing and off-shoring managers in designated countries. The researcher on the other hand will be observing the trend from a distance meaning that there would be no direct interaction between the research and the researched (Tashakkori & Teddlie, 2010).

Research Design

This study will take the form of a survey whereby the researcher will select a particular population for study. The sampling technique to be applied will be random sampling where the IT outsourcing and off-shoring officials will be selected randomly that is, without bias. For representativeness, the researcher will sample from each stratum. On the other hand, the study will also employ a case study design. The researcher will take some time to examine a particular population. In this case, the researcher will exploit the services of an interview.

Operational Def. of Variables

The operational definition of variables involves defining concepts in terms of their indicators and their practical measures. The two indicators of the concepts of IT outsourcing and off-shoring are technology and labor. IT outsourcing and off-shoring could not exist were it not for the new technology while the new technology could not get into real practice without labor.

Data Collection Methods

The researcher would collect data using structured questionnaires and interviews. The questionnaire would be developed using all types of questions including Likert scale questions. Information related to IT outsourcing and off-shoring would be the basis of questions included in the questionnaire. The questionnaire is preferred to any other method of collecting data because it will enable the researcher to collect fast hand data on benefits and issues in IT outsourcing and off-shoring. In addition to the questionnaire, the researcher would interview key personnel running outsourcing firms.

Data analysis

The collected data would be coded and analyzed using quantitative methods. The coded data would be regressed and results interpreted based on the hypotheses and objectives of the study.

Measurement

The effectiveness of any study device evaluates its tools in terms of consistency, validity and sensitivity as well as specificity. These impressions will as well be useful in this study since it is imperative for the researcher to establish the consistency of the study. As far as Clarke is concerned, reliability is the capacity by which an investigation is capable of generating outcomes that are unswerving and constant over a specified episode and given an analogous state of affairs (Clarke, 1998). Types of validities that exist include internal validity and external validity. Internal validity relates to the connection between items when measured on a scale. Every time a study presents the same outcomes after the submission of two different measures, the result is assumed to be corresponding.

Validity is the degree to which a particular device premeditates to measure. The legitimacy of a study can fluctuate in the different samples used. In a single circumstance, a study can be legitimate while in other situations, it may not. The strength of a study measures the study it alleges to conduct and the accessibility of rational errors in the conclusions exhausted from the study. Crotty (2003) argues that internal validity is the scope to which it is possible to make independent conclusions from the results of a study particularly if the independent variable manipulates the dependent variable. Alternatively, exterior validity is the universal relevance of the results of a study to other surroundings.

The measurement of the conjectural makeup of a study is calculated using construct validity while convergent legitimacy makes evaluation between the scores acquired from diverse apparatus used in the study. In comparison with convergent validity, divergent validity balances the apparatus used in the study that measures contradictory perceptions. Given the above legality and consistency, the study is legal ad consistent for use by any person or tactical subdivision (Clarke, 1998).

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