OUTSOURCING INFORMATION SYSTEMS

If a firm does not want to use its own internal resources to build and operate information systems, it can hire an external organization that specializes in providing these services to do the work. The process of turning over an organization’s computer central operations, telecommunications networks, or applications development to external vendors of these services is called outsourcing.

Outsourcing information system is not a new phenomenon. Outsourcing options have existed since the dawn of data processing. As early as 1963, Petrot’s Electronic Data Systems (EDS) handled data processing services for Frito-Lay and Blue Cross. Activities such as software programming, operation of large computers, time-sharing and purchase of packaged software have to some extent been outsourced since the 1960s. 

Because information systems play such a large role in contemporary organizations, information technology now accounts for about half of most large firms’ capital expenditure. In firms where the cost of information systems function has risen rapidly, managers are seeking ways to control those costs and are treating information technology as a capital investment instead of an operating cost of the firm. One option for controlling these costs is to outsource. 

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ADVANTAGES AND DISADVANTAGES OF OUTSOURCING

Outsourcing is becoming popular because some organization perceive it as being more cost effective than it would be to maintain their own computer centre and information systems staff. The provider of outsourcing services can benefit from economies of scale (the same knowledge, skills, and capacity can be shared with many different customers) and is likely to charge competitive prices for information systems services. Outsourcing allows a company with fluctuating needs for computer processing to pay for only what it uses rather than to build its own computer center to stand underutilized when there is no peak load. Some firms outsource because their internal information systems staff cannot keep pace with technological change. But not all organizations benefit from outsourcing, and the disadvantages of outsourcing can create serious problems for organizations if they are not well understood and managed. 

Advantages of Outsourcing: 

The most popular explanations for outsourcing are the following:

Economy: Outsourcing vendors are specialists in the information systems services and technologies they provide. Through specialization and economies of scale, they can deliver the same service and value for less money than the cost of an internal organization.

Service Quality: Because outsourcing vendors will lose their clients if the service is unsatisfactory, companies often have more leverage over external vendors than over their own employees. The firm that out-sources may be able to obtain a higher level of service from vendors for the same or lower costs.

Predictability: An outsourcing contract with a fixed price for a specified level of service reduces uncertainty of costs.

Flexibility: Business growth can be accommodated without making major changes in the organization’s information systems infrastructure. As information technology permeates the entire value chain of a business, outsourcing may provide superior control of the business because its costs and capabilities can be adjusted to meet changing needs.

Making Fixed Costs Variable: Some outsourcing agreements, such as running payroll, are based on the price per unit of work done (such as the cost to process each cheque). Many outsources will take into account variations in transaction processing volumes likely to occur during the year or over the course of the outsourcing agreement. Clients only need to pay for the amount of services they consume, as opposed to paying a fixed cost to maintain internal systems that are not fully utilized.

Freeing up Human Resources for other Projects and Financial Capital: Scarce and costly talent within an organization can refocus on activities with higher value and payback than they would find in running a technology factory. Some agreements with outsource include the sale for cash of the outsourced firm’s technology capital assets to the vendor. 

Disadvantages of Outsourcing : 

Not all organizations obtain these benefits from outsourcing. There are dangers in placing the information systems functions outside the organization. Outsourcing can create serious problems such as loss of control, vulnerability of strategic information, and dependence on the fortunes of an external firm.

Loss of Control: When a firm farms out the responsibility for developing and operating its information systems to another organization, it can lose control over its information systems function. Outsourcing places the vendor in an advantageous position where the client has to accept whatever the vendor does and whatever fees the vendor charges. If a vendor becomes the firm’s only alternative for running and developing its information systems, the client must accept whatever technologies the vendor provides. This dependency could eventually result in higher costs or loss of control over technological direction.

Vulnerability of Strategic Information: Trade secrets or proprietary information may leak out to competitors because a firm’s information systems are being run or developed by outsiders. This could be especially harmful if a firm allows an outsourcer to develop or to operate applications that give it some type of competitive advantage.

Dependency: The firm becomes dependent on the viability of the vendor. A vendor with financial problems or deteriorating services may create severe problems for its clients. 

WHEN TO USE OUTSOURCING?

Since outsourcing has both benefits and liabilities and is not meant for all organizations or all situations, managers should assess the role of information systems in their organization before making an outsourcing decision. There are a number of circumstances under which outsourcing makes a great deal of sense: 

-         When there is limited opportunity for the firm to distinguish itself competitively through a particular information systems application or series of applications. For instance, both the development and operation of payroll systems are frequently outsourced to free the information systems staff to concentrate on activities with a higher potential payoff, such as customer service or manufacturing systems. Applications such as payroll or cafeteria accounting, for which the firm obtains little competitive advantage from excellence, are strong candidates for outsourcing. If carefully developed, applications such as airline reservations or plant scheduling could provide a firm with a distinct advantage over competitors. The firm could lose profits, customers, or market share if such systems have problems. Applications where the rewards for excellence are high and where the penalties for failure are high should probably be developed and operated internally. 

-          Companies may also continue to develop applications internally while outsourcing their computer center operations when they do not need to distinguish themselves competitively by performing their computer processing onsite. 

-          When the predictability of uninterrupted information systems service is not very important. For instance, airline reservations or catalogue shopping systems are too “critical” to be trusted outside. If these systems failed to operate for a few days or even a few hours, they could close down the business. On the other hand, a system to process employee insurance claims could be more easily outsourced because uninterrupted processing of claims is not critical to the survival of the firm.  

-          When outsourcing does not strip the company of the technical know-how required for future information systems innovation. If a firm outsource some of its system but maintains its own internal information systems staff, it should ensure that its staff remains technically up to date and has the expertise to develop future applications. 

-          When the firm’s existing information systems capabilities are limited, ineffective, or technically inferior. Some organizations use outsourcers as an easy way to revamp their information systems technology. For instance, they might use an outsourcer to help them make the transition from traditional mainframe-based computing to a new information architecture-distributed computing environment. 

Despite the conventional wisdom on when to outsource, companies sometimes do outsource strategic functions. In any case, if systems development and the information systems function are well managed and productive, there may not be much immediate benefit that can be provided by an external vendor. 

MANAGING OUTSOURCING

 

To obtain value from outsourcing, organizations need to make sure the process is properly managed. With sound business analysis and an understanding of outsourcing’s strengths and limitations, managers can identify the most appropriate applications to outsource and develop a workable outsourcing plan. 

Segmenting the firm’s range of information systems activities into pieces that potentially can be outsourced makes the problem more manageable and also helps companies match an outsourcer with the appropriate job. Noncritical applications are usually the most appropriate candidates for outsourcing. Firms should identify mission-critical applications and mission-critical human resources required to develop and manage these applications. This would allow the firm to retain its most highly skilled people and focus all of its efforts on the most mission-critical applications development. Setting technology strategy is one area that companies should not abdicate to outsourcers. This strategic task is best kept in-house. Ideally, the firm should have a working relationship of trust with an outsourcing vendor. The vendor should understand the client’s business and work with client as a partner, adapting agreements to meet the client’s changing needs. 

Firms should clearly understand the advantages provided by the vendor and what they will have to give up to obtain these advantages. For lower operating costs, can the client live with a five-second-response time during peak hours or next-day repair of microcomputers in remote offices? Organizations should not abdicate management responsibility by outsourcing. They need to manage the outsourcer as they would manage their own internal information systems department by setting priorities, ensuring that the right people are brought in, and guaranteeing that information systems are running smoothly. They should establish criteria for evaluating the outsourcing vendor that include performance expectations and measurement methods for response time, transaction volumes, security, disaster recovery, backup in the event of a catastrophe, processing requirements of new applications and distributed processing on microcomputers, workstations, and LANs. Firms should design outsourcing contracts carefully so that the outsourcing services can be adjusted if the nature of the business changes.