IT outsourcing can refer to a practice where a portion or whole of IT duty is subcontracted to another party who can be a certain service provider, in order to manage duties that are assigned. In majority of the companies, this decision is a vital decision to be made as it will mean taking a major risk of loss in control of certain vital operations against the benefit or return which is to be obtained from savings in form of costs to the company. It is common for businesses to outsource IT infrastructure, software development functions, maintenance of the system and system’s support software.
IT outsourcing existed since the earliest days of business computing, that began in the late 1950s with the service bureau operations of major hardware vendors and was viewed as a way of reducing costs, improving operational flexibility, increasing service levels, instant deployment of new capabilities and reduction in management overhead. In most cases, large organizations outsource only a portion of a given IT function . Outsourcing is divided into three types: Technology Services outsourcing, business process outsourcing and knowledge process outsourcing.
The rampant changes in the business environment has destabilized businesses and a constant output in levels of production, customer’s loyalty, and market share has become a challenge which has warranted businesses to result to technology service outsourcing. The need to embrace sophisticated technologies has driven businesses to view improved technology and a good system to go with it as the key solution for the nightmare they always face of change. The companies need to adapt to these changes which include e-commerce, network infrastructures, and telecommunications among others.
This will help the company to thrive in the competitive market . Business Process Outsourcing (BPO) on the other hand is the process in which businesses solicit services of other companies, in handling their business activities. BPO can also involve operational functions such as customer relations management, and other processes in the business being outsourced. It can thus mean outsourcing specific tasks that are not among the company’s core competencies from a third-party firm. The third type of outsourcing is the knowledge Process outsourcing.
In this type of outsourcing, companies get knowledge-related skills from other firms which involve advanced research, analytical, and technical skills. It calls for work that needs higher levels of involvement from the worker. The worker has to employ higher levels of research, analytical and technical skills. Advantages of IT Outsourcing IT outsourcing has various advantages and disadvantages. Among the advantages that are cited for IT outsourcing functions is the reduction of IT costs through efficiencies and economies of scale on the part of the service provider .
This is because the size of your business might prevent you from performing this IT function at a consistent and reasonable cost. The costs might also be inflated if the process entails back-office functions that are complicated in nature and which require expensive structures to be put in place . Outsourcing also helps businesses to concentrate on their core business which is important while still having quality IT use that is outsourced from experts. The business will therefore continue to perform its functions effectively and obtaining quality services from outsourced IT functions.
Outsourcing also helps a business to reduce overhead costs. Some IT functions carry along great overheads in form of administration costs and installation of machines. These costs can therefore be greatly reduced by resulting to outsourcing these IT functions. Outsourcing provides access to world-class IT skills, experiences and resources. This is because most of the times, tasks are outsourced to vendors who have specific equipment and technical expertise. These are usually better than those ones at the outsourcing organization. The tasks can thus be outsourced faster and with a better quality of output.
This means that an organization may have access to people, processes and technology that it might not otherwise obtain economically. It provides access to advanced technology that can result in distinct technical leadership and being up to date with changing technology and gaining access to IT expertise and thus improve the quality of IT services delivered to the business and to the customers . Minimizing sizeable capital expenditure on IT infrastructure is another outsourcing advantage. It is part of risk-sharing scheme, since this responsibility is shifted to the outsourced vendor.
IT outsourcing also saves business’ marketing time. This is because IT processes can take advantage of the ready solution outsourcing offers, instead of devoting time and capital to the development and implementation of suitable IT processes that support new businesses, processes or products . Disadvantages of IT outsourcing According to Canadian Institute of Chartered Accountants (2003, p. 6), in an outsourcing arrangement, an organization’s processing is performed by a different personnel using different techniques and methods, in a changed operating environment.
This can lead to lack of data integrity, or unauthorized access to data which can jeopardize an organization’s ability to make sound business decisions using reliable system-generated information. Another disadvantage is that an organization may not be in a position to identify that operational problems exist. This is because there is increased loss of control of outsourced tasks. The organization will hardly be in a position to anticipate all the needs that arise in the outsourcing situation which acts against the company which is outsourcing IT in the time to take corrective or defensive action.
In many outsourcing arrangements, the IT assets and personnel are moved to the service provider. This can be interpreted to mean is the transfer of knowledgeable staff who had contributed to the intellectual capital of the organization. The organization thus risks losing its competencies by outsourcing. A business may also experience a variation in the standard of service it gets from the service provider. It becomes difficult for the service provider to provide the same standard and style of service as that which the IT department used to provide to the business prior to outsourcing.
The degree of difference can be contentious until the parties become accustomed to the variation. The organization may also incur unforeseen costs related to transition and management if planning is not adequately done. In fact, lack of clarity and understanding of the costs related to the many aspects of outsourcing service delivery are the biggest problems of outsourcing . Determining Business Outsourcing Needs Companies are often confused by the many logistics options available to them. Companies need to evaluate their own cultural alignment, core competencies and business capabilities before making a decision on outsourcing.
The business will thus be able to identify whether it should keep supply chain management services in-house, outsource them to a third party logistics provider or employ a combination of both. Aalders suggests that in order to determine whether outsourcing is good for a company, or a career, one requires determining the real motives for outsourcing . A cost benefit analysis should be conducted. This would require proper planning of activities which need to be outsourced and why they should be outsourced. It is from ascertaining the need to outsource that one then determines the most appropriate transition to outsourcing.
This can either be big bang, piecemeal or incremental transition. The outsourcing needs should be supported by matching and realistic goals and objectives. The company also needs to have a measure of current performance of all affected assets, people and processes. The service providers should also show clearly how they will achieve the goals that the company has set for outsourcing. It is also paramount for the business to develop a risk management plan for the outsourcing agreement from inception to termination .
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 16 October 2016
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