Global IT Outsourcing
Global IT Outsourcing
Globalization of trade and economies has been instrumental in bringing the world closer through the exchange of goods and products, information, knowledge and culture. The pace of global integration has increased dramatically over the past few decades with rapid advancements in technology, communications, science, transport, and industry. This process of globalization has led to increasing inter-connectivity between individuals, groups, companies, and nations that is visible in rising global brands, international markets, increasing innovation in telecommunications and information technology.
Rapid changes are taking place in the way businesses are being conducted today. Widespread changes in communication and technology mediums have opened new vistas of commerce with immense potential that remains yet unexplored. “Far and away the largest external driver is the new economic world being formed around the Internet. This new economy began with business-to-consumer (B2C) retailing, commonly called e-tailing, which means selling over the World Wide Web. (Barbara & Ralph 2002, Pg 6)
This technological breakthrough has made a big impact on the global economy leading to the emergence of a global marketplace that is visible in the penetration of products and services in all nooks and corners targeting consumers across the globe. Even the smaller companies have a global reach owing to the Internet and E-commerce. Companies are re-defining their strategies to accommodate changes in the way businesses are communicating their message to the suppliers and consumers.
The need for business process re-engineering has become vital to spearhead changes for greater efficiency of work processes and increased returns. One of the prominent consequences of this process is the rise in outsourcing of work processes and projects by multinational companies to other countries for achieving cost benefits on the production process. Outsourcing is defined as “the strategic use of outside resources to perform activities traditionally handled by internal staff and resources. (Outsourcing Institute) Outsourcing is a relatively new term but the practice of outsourcing textile processing to Asian countries dates back to the 1970s.
Outsourcing of manufacturing processes in the 1980s and the Information Technology processing in the 1990s followed this. This trend has gained momentum ever since and the following observation in the “State of Outsourcing Industry, Report 2007” emphasizes this point. Public sector agencies and corporations of all sizes and across all industries consider outsourcing as they continue to struggle and strive to maintain core enterprise competencies that support their businesses while minimizing the required investment in time, resources, capital and expertise”. Organizations are now creating specialized units or departments to look into each aspect of the entire operations. These units have well-defined work strategies termed as work processes ensure the effective flow of information and data for enhanced productivity and greater efficiency.
This break up of the entire operations ensures high quality of work with little room for errors and risks. Moreover, the entire team gets attuned to the specific work processes that enable better chance of improvisation and innovation in work techniques. These work processes contribute to the overall success of the entire operations. “The digital revolution and the dramatic fall in international telecommunication costs have created unparalleled opportunities for businesses to take advantage of high skilled, low wage workers in emerging countries. (Diana Farrell, 2005)
Organizations are increasingly adopting the concept of transferring work processes to other nations in pursuit of lower cost of operations and increased scale of operations. The essential advantage that this strategic concept provides is the opportunity to cut costs and boost productivity. The availability of skilled labors at comparative lower wages in developing countries is the primary driver of outsourcing trends that has gained rapid popularity in the past few years.
Countries like India, Malaysia, Philippines, and China have benefited greatly from this business trend in terms of employment, better wages, and improved standards of living. The benefits of outsourcing are realized in view of reduced operating costs owing to the comparative lower wages, enhanced productivity, efficient managing of resources, improved company focus, and access to world class management and staff. The outsourcing process involves the recognition of need for outsourcing work processes at the client’s end to the selection of an appropriate vendor till the signing of the service level agreements between the client and the vendor.
The service level agreements are meant to define work-delivery parameters and improve the overall team performance for efficient completion of business processes. Initially the outsourcing of business processes was aimed at gaining cost advantage based on cheap labor. This objective took a secondary place when organizations worked the strategic outsourcing moves towards greater efficiency and enhanced productivity. The current outsourcing objectives are more oriented towards increased returns and business value addition.
Banking institutions like HSBC, Barclays, and JP Morgan and Chase have implemented this strategy to gain cost advantage, production efficiency, improved customer service, and to explore new opportunities. These multinational financing institutions have penetrated to the developing economies outsourcing their call center and vital transaction processing work to ensure prompt work delivery and efficient management of different departments. This business model has proved very effective in implementing innovative methods to achieve business goals.
The global outsourcing market is about a trillion dollars and this valuation is expected to reach almost 1. 5 trillion dollars a year within the next few years. Countries like India accounts for nearly 4 percent of this value followed by China, Philippines, and South East Asia that together account for 3 percent of this industry value. Business Process Outsourcing and Information Technology Outsourcing are the biggest sectors contributing to the growth of the outsourcing industry.
The 2007 report on the “State of the Outsourcing Industry” prepared by Brown and Wilson states that the overall rate of growth of the industry is nearly 30 percent annually. Global Outsourcing in Information Technology The outsourcing business has gained rapid momentum across the globe owing to the digital revolution. Information Technology (IT) Outsourcing in simple terms implies the transfer of a firm’s computer operations, network operations, or any other IT function to a vendor for a specified period of time.
This has become a popular management strategy adopted by most organizations. In days when the outsourcing concept was still in its nascent phase it was companies that were poorly run or departments that were ill managed that were outsourced to external parties. In 1989, Kodak outsourced its well managed IT functions and the move proved to be a great success as the company won a competitive edge in the market and the benefits of outsourcing were highlighted from this case study. The outsourcers perform the same activities for a company that the IT department will perform in-house.
Increasing volumes of work and expanding client base is one of the primary reasons for offshoring or outsourcing of working the IT sector. The IT departments of a multinational organization is involved in providing variety of products and services to the customers ranging from consulting work, building and maintaining applications, building and maintaining networks, training, to transaction processing that includes payroll checks from a service bureau or credit reports from a credit rating service.
Many IT companies contract a systems integrator whose role is to handle the entire life cycle of a systems project from planning, development, and maintenance to training requirements. There are many others who prefer to outsource the projects to external vendors who handle the whole or part of the systems project. This is mostly done to get the project or task done within specified time limits. This concept also provides the outsourcing company with more time to concentrate on vital aspects of business development and project management. Benefits of Outsourcing in the IT Sector
As the organizations grow and businesses expand the management realizes the significance of skilled personnel in all departments to enhance productivity and ensure smooth flow of operations through creative managerial approach and innovative means of achieving work objectives. It is a challenge to build an experienced and specialized team for various work processes. In a bid to simplify the operations the system project is divided into smaller work modules assigned to specialized work units. These work modules are outsourced to external service providers who have the required expertise to carry out the operations efficiently.
This process allows the outsourcers enough time to concentrate on business expansion and strategic planning. Besides the cost cutting advantage provided by outsourcing, the company also ensures efficient customer service through staff working 24 hours and 7 days a week. Working in shifts in the BPOs and processing centers has become a common practice in countries like China and India. This ensures the customer support round the clock that works well for the company’s reputation and fostering trust and confidence among its customers.
Broader economic implications of this business trend is visible in the increasing employment opportunities and better standards of living made accessible to the developing economies like China, Malaysia, Philippines, and India. These countries have huge pools of talent constituting a large base of educated younger population. The superior IT skills and interest in technological know-how in addition to the ability to converse well in English language in these nations are the primary drivers of growth in this sector.
India and China continue to dominate in terms of preferred location for IT outsourcing. India is the most favored destination owing to the “unbeatable mix of low costs, deep technical and language skills, mature vendors, and supportive government policies”. (AT Kearney Outsourcing report 2007) The growth of IT outsourcing industry in these countries has boosted their economies and given them an competitive edge improving both performance in terms of business and living standards.
A report by the Information Technology Association of America states “due to low costs and high quality, using offshore resources in selected countries makes good economic sense. Beyond the cost incentive, global sourcing provides several other practical benefits including: the ability of multinational organizations to efficiently stage 24*7 operations; the opportunity to customize products and services to meet local needs; and the means of geographically deploying workers and facilities to succeed in globally dispersed, highly competitive markets. ”
IT Outsourcing – Trends in the past two decades Major IT firms like Sun Microsystems, Dell, IBM are all actively engaged in outsourcing activities in the last two decades. The IT outsourcing history dates back to late 1980s when firms outsourced their data center operations to external companies for a period of ten years. The deals or agreements signed between the two parties generally involved selling existing equipment to the outsourcer, transferring all software licenses, moving a team of IT professionals from the company payroll to the outsourcer payroll.
The primary objective behind these data processing contracts was cost cutting. The agreement signed between these two parties highlighted the major aspects of work delivery establishing desired service levels and methods that would be used to assess performance and specifying every single service to be provided since any specific task beyond the scope of the agreement incurred additional cost for the outsourcing company.
This kind of contractual agreements usually invited problems at later stages leading to “us” and “them” mindset. Vague terms and conditions in service agreements can cause misinterpretations and differences of opinion between the two parties that in turn affects the quality of work delivered. In many cases the service levels provided by the outsourcing party did not meet the expectation of the outsourcer causing further differences. The management of the projects being executed became more tedious in such circumstances.
This type of contracts and agreements slowly gave way to well-defined and structured service level agreements that addressed each and every aspect of the project execution process along with the terms and conditions between the two parties. As Hemel Thaker observes in the July 2005 issue of Information Professional Journal “Experience shows that outsourcing works well, provided that the correct work is outsourced to the correct people and that the agreement is managed in the correct way. Efficient management of projects by the outsourcing party can be ensured through service level agreements wherein the terms and conditions and all possible situations are addressed with specific guidelines and milestones. The industry matured over time and the businesses take extra care to maintain a fruitful relationship that is mutually favorable for both. In the 1990s the IT departments outsourced various categories of work primarily comprising of infrastructure support, data center operations, and network management.
There were many organizations that outsourced different pieces of their work to multiple outsourcing service providers in order to get the best service in a specific area. This concept of Best-of-Breed Outsourcing was no doubt very effective in engaging specialized providers but coordination among these multiple providers proved to be very cumbersome affair. This concept has been modified into “collaborative outsourcing” where one company becomes the primary contractor for executing the IT operations but certain portions of the work is contracted to other external service providers.
These kinds of work agreements constitute a large area of work and task management. A large IT project is broken into smaller work modules that are undertaken by different providers. Execution and management in such types of outsourcing is a little tough. The emergence and growth of IT outsourcing gaining momentum concepts such as data center outsourcing, desktop outsourcing, and other standard IT outsourcing are increasingly becoming parts of business management strategies. More and more companies entered this industry to capitalize on the extensive opportunities presented by this popular management trend.
Increasing competition led to subsequent fall in profit margins. In order to procure high returns and higher margins of profit, firms began specializing in specific functional areas, offering to handle specific business processes along with the related IT functions. This led to the emergence of a new concept in IT outsourcing – the business process outsourcing (BPO). The BPOs offer expertise in specific functional areas that lends credibility to its services ensuring high quality premium work delivery.
This trend has seen a growth in number of companies willing to improve a specific work process by handing it over to the experts. Firms are outsourcing logistics, customer service, payroll processing, and human resource to outside agencies. The BPO concept has re-defined the business dynamics of strategic management. Another type of outsourcing trend that is recently invading the industry is the E-business outsourcing. The success and increasing adoption of the e-commerce business model has given rise to this new concept in outsourcing.
This involves the outsourcing of website development work to IT companies, development of web portals, search engine optimization work, maintenance of these websites and portals etc. The maintenance work can be undertaken by the firm’s IT department but in most cases it is outsourced to external service providers primarily for speedy actions. E-business outsourcing differs from traditional IT outsourcing in the complete charge of IT development and maintenance to external providers. This type of outsourcing does not require the firm to invest in software licenses, and additional expense of purchasing high-end machines.
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 13 January 2017
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