Outsourcing refers to the tendency of a Company’s owners to turn over the liability of the organization concerning information system operations and applications to an outside organization. This exercise is largely entrusted to be cost-saving and to free the financial resources of the company to other functions. Information Technology on the other hand is the use of technology and technological techniques in carrying out certain performances in organizations (Thoppil 130). Therefore, IT outsourcing refers to the performance of subcontracting liability for the entire or part of an, IT purpose to a third- faction service provider that takes control of the work. Most businesses employ IT outsourcing for purposes varying from infrastructure to software support, maintenance, and development. IT outsourcing has been available for firms and organizations from the initial days of business computing precisely from the 1950s when Service Agency Processes of main hardware merchants like the Burroughs, IBM, Univac, and Control Data were operating. Most business people regard outsourcing IT as means to cut down costs, raise service degrees, modify operational flexibility; minimize management of fixed costs, and employing of new abilities (Reh 30).
In most cases, IT outsourcing makes it possible for the business to flow more rapidly than when it attempts to employ similar technology using the interior staff (Graham and Campbell, 92). Therefore, if there is sufficient time to market and such is significant and expertise IT labor is the minimum, outsourcing has acquired popularity. Several managers are settling in for IT outsourcing and steadily practicing it as an inclusive corporate Approach other than, as personal functions for different tasks. Nevertheless, IT outsourcing has also some potential drawbacks. Some organizations become doubtful when they think of providing outsourcing with full access to their interior operations. Some of them go on to question the extent of liability and the person outsourcing may accept when its overhaul turns out inadequate and, whether it can incorporate its functions completely with the available infrastructure and inheritance applications for the business. Above all, the merits of IT outsourcing suppress its drawbacks meaning that it is a good idea to implement information system applications and operations using an external firm (Reh 30). Therefore, it is essential to focus on the importance of financial deliberations in IT outsourcing decisions.
Role of Financial Reflections in IT Outsourcing Decisions
As examined in history, several organizations have come up with sourcing resolutions centered mainly on expected cost savings with inadequate consideration for technological concepts. Several organizations state that they are rationalized in outsourcing their product and service practices and holding their background capabilities in-house. The question that arises here is, are these firms actually holding onto their interior capabilities through outsourcing their Information Technology operations? The answer may be yes but again considering the costs that the outsourcing firm may charge the firm and their expectations of the investors, do they much? Will the organization benefit from it? (Thoppil 133) Actually, any organization preferring IT outsourcing in their interior operations should first examine the initial competency of the organization and weigh it against their anticipations of the new information system that would come up because of the outsourcing process. If there is no benefit in terms of future operations then there is no need to implement the, IT outsourcing process.
However, if the benefits outweigh the initial competency of the firm, then the management can go-ahead to implement the outsourcing process to enhance the operation and functionality of the firm. Research shows that IT outsourcing can be of much benefit to small and middle-class enterprises that have little or non-present organizations. Therefore, it is important to examine both sides of this process in regard to the firm’s capabilities, competency, and size which should be either small or middle enterprise (Reh 38). This is the best way of coming up with concrete and non-regrettable decision concerning, IT outsourcing that may turn up to be beneficial to the firm.
Moreover, before coming up with such a decision, it is important to consider some of the, IT functions in outsourcing. Some of the most famous, IT functions in outsourcing are disaster recovery, data center processes, and Web site or electronic commerce systems. Computers particularly the desktop support, e-commerce, and data center processes are the greatest developing outsourced IT purposes (Graham and Campbell, 101). Big organizations in carrying out desk outsourcing which are the most appropriate for them. However, the most recurrent outsource operation in small outsourcing gains is the application development although most, IT organizations have recently been cutting back on project-centered work thus making this function to lose ground on economic environment (Thoppil 133).
Debt vs. Equity in Financial Concepts of IT Outsourcing Decisions
If business owners want to expand, they must be in a position to tap their financial resources. These investors can make use of financial possessions which are divided into two major categories, debt and equity. Debt refers to the process of borrowing funds to be paid back with interest. Equity on the other hand is the process of raising funds through selling interests in the company (Peavler 44). Therefore, debt and equity plays a very significant role in making IT outsourcing decisions in organizations. However, both contain advantages and some disadvantages over each other. Below is the outline of merits and demerits of debt financing in comparison to equity financing.
Advantages of Debt in Comparison to Equity
- Debt has never diluted the interest of investors in the company since the lender is not alleged to equity in the business.
- The lender only permitted to claim repayment of the agreed amount of money and the interest but had no right to interfere with future profits of the business if the business is triumphant (Bucki 66).
- In several occasions, principal and interest compulsion are the only recognized amounts to be planned for except in situations where variable loan rates are involved.
- The debt’s interest can be subtracted on the tax return of the firm thus minimizing the real cost of the loan to the firm.
- Hiking capital of the debt is not complex since the firm is not expected to act in accordance with state and federal securities principles and regulations
- The firm is not anticipated to send intermittent mailings to broad numbers of investors, look for vote of shareholders before implementing actions and hold intermittent meetings of investors.
Disadvantages of Debt in Comparison to Equity
- Dept must be repaid no matter what which is actually the opposite of equity
- Interest on debt is always fixed which hikes the management point of the company (Peavler, 44). It means that if the interest cost is high during hard financial times, the firm may face intensified insolvency risk.
- Cash flow is needed for both interest and principal if of debt and must be included in budget for each month unlike equity which does not involve any payment. Actually it is all about enjoying its fruits (Bucki 66).
- The bigger, the debt-equity ratio of a company, the more risky the firm is assumed to be by both investors and lenders.
- The firm is mostly expected to pledge its possessions to the lenders as security and the company’s owners are sometimes required to collate the repayment of the loan (Peavler 45). This is opposed to equity where nobody apart from the investor knows all about his own assets.
- The instruments of debt mostly enclose boundaries on the activities of the firm, averting management from engaging in alternative financing means and non-centered business chances.
Bucki, James. Top 6 Outsourcing Disadvantages. About.com. 2011. Web.
Graham J and Campbell H. How Do CFOs Make Capital Budgeting And Capital Structure Decisions? Journal of Applied Corporate Finance 23, (2002): 21-24
John Reh. F. Offshoring – Outsourcing to Extreme. About.com. 2011. Web.
Peavler, Rosemary. Debt and Equity Financing: Advantages and Disadvantages of Debt and Equity Financing. Business Finance Guide. About.com 2008.
Thoppil, Dhanya Ann. IT Firms Split on Outsourcing Demand for 2011. IndiaRealTime. 2011. Web.