Meg Kinzer

Chad Stefan
Richard Kanda

IT Outsourcing

Introduction
Information Technology (IT) Outsourcing is becoming more and more popular
today with all of the intense competition among U.S. businesses. Outsourcing is the
transfer of goods and/or services that were previously provided or generated internally to
an external service provider. For example, a computer manufacturing company may find
it less costly to employ workers in developing countries where wages are just a fraction
of the cost in comparison to the wages of the United States. Due to the drastic difference
in costs, it seems nearly imperative that companies need to outsource in order to have a
chance to survive financially in todays competitive marketplace. Recently, outsourcing
has become a major issue in our society. Outsourcing has grown in popularity with U.S.
businesses and corporations since they typically have to pay low wages and little or no
benefits. However, the downside is that numerous jobs are being eliminated and job
security seems to no longer exist for many Americans.
Types of Outsourcing
Outsourcing is where external service providers transfer the delegation of day-today management of business processes. There are four types of outsourcing. They
include In-House Building, Product Component Outsourcing, Process Component
Outsourcing, and Software Acquisition. In-House Building does not actually outsource,
they typically have their own Information Technology departments that cater the software
needs of the organization. Product component outsourcing occurs when an organization
hires an external party to produce a partial component of a complex product. Process
Component outsourcing occurs when an organization contracts for an external group to

conduct a portion of a process or function. Software acquisition is a term used for total
outsourcing. It is a focus on the organizations core values by outsourcing each and every
activity associated with the software such as design development, programming, testing,
and maintenance (XR Software, 2005).
Major Outsourcing Destinations
U.S. companies are outsourcing to numerous countries. Some of the most popular
countries include India, China, Philippines, Canada, Mexico, and Russia. Among this list
of countries, India is the most popular location for sending software development and
China is rapidly becoming just as common. The success and acceptance of Indias
workers by U.S. businesses has increased drastically for several reasons. Indias 2
million English speaking graduates and 75,000 Information Technology graduates give
this country a competitive advantage over other developing countries. Even Indias
government favors IT outsourcing by imposing no export taxes. Some major U.S.
countries that are outsourcing to India are Citigroup, GE Capital, and American Express
(Forbes, 2005).
Although India is the most favored country to outsource to, Chinas outsourcing
status is becoming more favorable to U.S. businesses. Although China is emerging as a
competitor to India, there are a few obstacles keeping this country second to India. First
of all, the number of English speaking workers is much less in China as opposed to the
rising number in India. Besides the language barriers that are causing it to be more
difficult for U.S. businesses to communicate, there are other cultural differences between
the United States and China that may hinder outsourcing relationships. Chinas
government has hampered growth due to its trade policies and overregulation. In
addition, intellectual property laws are weak. Two large U.S. companies outsourcing
mainly to China are Microsoft and HSBC (Forbes, 2005).
Reasons to Outsource
With the improvements in communications and the globalization of society, every
business now has the ability to make IT outsourcing an extremely valuable option. A-1
Technology Inc. suggests 6 reasons why businesses should IT outsource. The first reason

is the improved focus. Instead of a company having to master many jobs in different
areas such as accounting, law, marketing, customer service, etc., IT outsourcing allows
you to concentrate primarily on your core skills. For example, an investment bank may
wish to concentrate on the customers rather than analyzing the market. Therefore, a
particular company like this may choose to outsource the primary market analysis and
concentrate on the more technical aspects. Every business has limited resources, and
every manager has limited time and attention. Outsourcing may help your business shift
its focus from peripheral activities so that they can concentrate on work that serves the
customer and sets their priorities straight (All Business, 2005).
A recent real world example of a company in this situation was stated by Gerald
F. Kelly, the Chief Information Officer of Sears. He stated that he was informed in his
first few days on the job that the companys aging and unreliable technical infrastructure
was a big problem. Apparently he found signs that the company was not investing
appropriately and had not kept the infrastructure at a level of capability consistent with
business objectives. Some of the technical problems that they were experiencing
included CPU failures, extended recovery times and root cause analysis, lack of
redundancy, backup, and recovery. Kelly decided that if he in sourced the work, it would
be more problematic for the growth of the employees. Eventually, he began to
investigate alternatives that would minimize the time issue and maximize the economic
potential of transforming the IT infrastructure (CIO, 2004). These were some of the
issues and considerations that the CIO had to deal with. Issues likes these generally can
be solved by making the decision to outsource those particular business functions.
Outsourcing would allow Sears to get the maximum value of its dispersed infrastructure,
reach its goal of a stable future proof infrastructure, while saving a significant amount of
money and avoiding the process of hiring a large number of technical specialists (CIO,
2004).
In conclusion to the issues that Sears was facing, they eventually decided to
outsource as of June 12, 2004. Kelly, the CIO said that if he had to make an outsourcing
decision again, he would have changed one thing; he would bring in an advisor sooner for
an outsourcer. Sears current outsourcer is responsible for all voice, data, phone system,
procurement, help desk and asset and risk management (CIO, 2004).

The second reason to IT outsource is to reduce costs. Businesses are constantly

seeking ways to save money. Outsourcing provides one of the best ways to accomplish
this. Instead of paying a U.S. worker high wages you can pay a fraction of the cost to
receive nearly the same results elsewhere. For example, it is very costly to hire and train
staff, especially if they are for short-term projects. Outsourcing lets you focus your
human resources where you need them most (All Business, 2005). This allows the
company to spend more time on areas that are strengths as opposed to wasting your time
on something that you arent good at and is of little value to you. This type of strategy
will end up saving you money in the long run (A-1 Technology Inc. 2003).
Thirdly, companies can gain world class capabilities through the Internet. The
Internet has expanded the businesses horizons in finding talent. Now, companies have
the ability to locate world-class professionals from across the globe. The fourth reason is
that companies are able to free up resources for other business purposes. Not all
businesses have the time to complete all the tasks necessary in a timely fashion.
Sometimes workers are tempted to work half-heartedly because they are overwhelmed
with the amount of work that still needs to be accomplished. Situation like this may
cause mistakes to occur and every business strives to keep mistakes at a minimum.
Companies that do everything themselves have much higher research, development,
marketing and distribution expenses. All of these costs are then passed onto their
customers. In order to help this problem, businesses can outsource to make sure that all
the tasks are done right and on time (A-1 Technology Inc. 2003).
Another reason businesses may choose to outsource is that resources may not be
available internally. Through IT outsourcing, your business in capable of obtaining the
skills you need without having to hire additional staff members for different job
functions. Finally, one more reason businesses may choose to outsource is that it reduces
the time to market. Businesses are able to get projects completed in a fraction of the time
compared to how long it would have taken them to do the project themselves (A-1
Technology Inc. 2003).
There are many misconceptions regarding IT outsourcing. According to the
Global Insight study, IT software and services spending increased from 2.5 billion to 10
billion from the year 1998 to 2003. It is estimated that by 2008, there may be $31 billion

dollars available to spend on IT outsourcing. This study also shows that 372,000 IT jobs
have been lost in the U.S. since the year 2000, but the main reasons for this decline in IT
jobs is due to the dot-com bust, the recession, and the growth in productivity. Global
Insight also claimed that IT outsourcing is actually lowering costs and creating jobs in the
U.S. rather than reducing the number of IT jobs. IT outsourcing created around 194,000
new jobs, both IT and non-IT. They are predicting that by 2008, the number of jobs
created could reach over 589,000 (PC Magazine, 2005).

(Offshore Outsourcing, 2005)

We have covered several reasons why companies may choose to IT outsource. As
you can see in this graphical display, IT outsourcing is the leading area to outsource
among all business functions.
Disadvantages to Outsourcing
We have covered several reasons why companies may choose to IT outsource;
however, there are some downfalls. Beth Cohen, President of Luth Computer Specialists,
Inc. quoted a scenario in which IT outsourcing turned out to be a nightmare for a
particular company:

"There was a company in Dayton that decided to outsource much

of its IT and production to a foreign company about five years
ago. After about nine months of outsourcing, the company
realized that there was a huge loss in quality for both production
and IT support. The company decided to cancel the contract and
rehire their old employees. They ended up getting most of their
old employees back but at a higher wage than before. Most
people would think that the story ends there. However, as hard as
it is to believe, the company is actually considering outsourcing
again. They think it will be different this time. It will be
interesting to see what happens."
(Intetics Web Space Station, 2005)
As you can see, IT outsourcing may come with some disadvantages. Businesses
that outsource lose control over projects or at least over the part that you have chosen to
outsource. This is certainly a risk you take when you choose to outsource. It is inevitable
that outsource service providers should take control, at least in part, over outsourcing
projects. This is why it is extremely important to fully research and carefully study the
background of your potential vender. When outsourcing a business process, companies
tend to lose the managerial control. It is harder to manage the outsourcing provider as
opposed to managing ones own employees (Software Projects, 2005).
Another problem associated with IT outsourcing is the issue with communication.
This includes factors such as telephone conversations, e-mail messages, instant
messaging programs, time zone differences, misunderstandings, and language and/or
cultural problems. Telephone conversations are expensive and many find it difficult to
converse over the phone. Even if you make contact with one another over the phone it is
difficult to resolve arising problems. As for e-mails, you have to put up with endless
amounts of e-mails that sometimes remain unanswered which halts the communication
process. Communicating via instant messaging programs online may take even more
time. The time zone problem will surely arise no matter what form of communication

you choose to use. The time zone difference can be up to seven or more hours. For
example, you may arrive to work at the same time that your vendor is leaving for the day.
Not all workers may check their e-mail or access the Internet on off hours outside of
work. Misunderstandings may frequently occur when dealing with vendors from foreign
countries. It may be difficult to correspond with each other over such far distances.
Language and cultural problems may contribute to all kinds of mix-ups. Many people
know the fundamentals of the English language; however they may not be entirely fluent
in English. There may be certain words and phases that they may misinterpret, which can
cause the communication process to take longer (Intetics Web Space Station).
Obviously, one of the biggest challenges is managing communication. The
magnitudes of challenges are influenced by the companys size and its location. Around
32% of small firms find communicating to be the biggest challenge to their business.
37% of mid-sized companies report communicating to be the largest problem as well as
36% of large firms.
Not only is communication a huge problem with outsourcing, there are other
detrimental disadvantages. Quality can be a factor when vendors advertise services and
take on projects having little or no experience in the area. Due to their lack of
experience, the quality of their product or service may not be up to standards. This can
cause customer dissatisfaction which may lead to downgrading the reputation of the
company overall. Poor quality of products and services may cause a large outflow of
money in the long run. Outsource service providers are going to focus on the most
advantageous, profitable projects. Some of the smaller projects are going to be ignored
while outsourcing service providers expand the resources and work more efficiently on
developing the most beneficial projects. Most venders try to accumulate as many
projects as they can. The burden can be greater than the strengths of the vender and may
potentially destroy the project schedule, and possibly the entire project. Some vendors
may simply be unqualified for the project that a customer may have chosen to outsource.
A number of problems may arise with the outsourcing party over conflicts of
interest, competing priorities and confidentiality. The vendor may have certain methods
of performing and completing tasks that may differ from the ways of the outsourcer in
which conflicts may arise. The vendor may have many projects going on at once;

therefore they may need to prioritize their work. The order in which the vendor
completes the tasks may differ from the order in which the companies may want them to
be done. In the long run, this may cause competition between the vendor and the
outsourcer. Confidentiality may become a problem when outsourcing since you are
communicating over such a long distance with little security. It may be difficult to
control and monitor who has access to information and who can modify information.
When choosing to outsource business processes, most companies intend to save
money and receive cheaper labor, however, it has been recognized that businesses
generally tend to look over or miscalculate the hidden costs associated with outsourcing.
This includes legal costs of putting a contract together and the time spent on coordinating
the contracts between the companies. The hidden costs of outsourcing are hard to
predict, therefore it is difficult to truly predict or determine the overall savings of
outsourcing one or more of your business processes (Software Projects, 2005).
There are many hidden costs associated with IT outsourcing. Some companies
who outsource only take into account the quantitative measures such as cost and wages.
They fail to consider the qualitative measures which include productivity and quality.
Another key factor that seems to be overlooked is customer service. There are so many
overlooked costs that businesses dont take into consideration before they decide to
outsource. Costs can rise when company executives continually travel back and forth
between domestic and foreign offices for training and management. Also, other costs are
the time it takes to travel between the countries in addition to synchronizing the time
zones. This clearly shows that potential problems can arise because of their inability to
account for troubles that can eventually materialize. Companies are so focused on saving
money on wages that they dont take all of the costs into consideration (Insight Business,
2005).
Current Statistics
As you can see there are both advantages and disadvantages that come along with
IT outsourcing. Despite the disadvantages, statistics show that most companies still
choose to outsource their Information Technology. In a survey conducted last year, 72%
of respondents said that their companies outsource at least some of their IT functions.

However, this year, 67% reported IT outsourcing within their company. This number is
slightly lower than the previous year, although both of these statistics show that more
than two-thirds of the companies are outsourcing. North American companies tend to
outsource more than the rest of the world. Seventy-three percent of North American
companies are outsourcing some of their IT functions compared to the rest of the world
who outsource an average of 66% (GanttHead, 2005).
Even the size of the company can indicate the extent to which they outsource.
Current statistics illustrate the comparison of outsourcing of smaller business to larger
businesses. Forty-eight percent of smaller companies who employ less than 100
employees outsource their IT functions. Sixty-three percent of companies of a more
medium size with less than 1000 employees report IT outsourcing. Larger companies
who employ over 1000 employees tend to outsource around 83% of their IT tasks
(GanttHead, 2005). These statistics show that the larger the size of the company the more
likely it is for them to outsource. Fewer smaller firms choose to outsource. Larger firms
are more motivated by the cost savings of outsourcing. Of the 83% of large businesses
who outsource, 46% of them report that they do so because of the reduced costs
(GanttHead, 2005). Smaller firms choose to outsource to companies mainly in the same
country because they find it too costly to outsource over large distances.
There is a distinct controversy between American workers and American
corporations. The benefit of reducing expenses drives corporate executives to outsource
their IT functions. This, in return, saves organizations money. Several consequences are
attributed to the cost savings involved in IT outsourcing. The biggest problem that
Americans are recognizing is that many American workers are losing their jobs. As a
result, many of the unemployed workers who are aging and unable to be retrained are
obligated to live off of government assistance. These unemployed workers are certainly
not stimulating out economy and even though outsourcing saves the individual
companies money, it is increasing the debt of the government. They hurt our economy
because they spend very little money and pay small amounts of taxes. This means that
less money is being paid into our economy, therefore, not allowing it to grow.

Things to Consider
Globalization is inevitable in the business world, therefore companies want to
remain competitive and leaders in their industries should embrace IT outsourcing. Before
organizations choose to outsource, there are several points should be considered. They
are as follows:
1)

The big picture-look at your firms own goals and culture. You must
decide what goals you are trying to accomplish. How will outsourcing
affect the workflow within the company?

2)

Look beyond the dollar signs-price should definitely be considered,

however there are many other factors to acknowledge.

3)

Buy the expertise- you definitely want a partner who is willing to

contribute their expertise. They should assist your business with
operational, tactical, and strategic views.

4)

On the cutting edge- Be sure that your service provider is keeping

current. Since IT is so dynamic, it can be difficult to keep up with
current events.

5)

Values and philosophy- Does your vender value their employees? Do

they treat their employees well? This is important because happy
employees result in happy clients.

6)

Meet the team- Meet the people who will actually service your account
before you sign anything.

7)

Know what you are buying- Be sure to agree on services to be

delivered and on the measurements that will determine a satisfactory
performance.

8)

Chain of command- Know who is talking to whom. Finding a provider

or consultant that provides one point of contact is the best bet.

9)

Big or small? Big businesses may cost more but they offer a greater
depth of expertise and broader resources. Small businesses can
sometimes provide greater attention to their clients. They usually cost
less and are more eager to please.

10)

The language barrier- It is important to remember that even an

outsourced IT function does not go away entirely. You need a partner
that can give it to you plain and simple (Small Businesses Computing,
2005).

After considering all of these ten factors, many organizations are concluding that
outsourcing is the best option for their company. In todays competitive marketplace,
business that chose not to outsource are put at a disadvantage and are falling behind those
who are. In order for your company to survive, you must keep your competitive edge.
Sometimes this means that businesses are forced to outsource. Generally, the saying
goes, If you cant beat them, join them. Why would companies choose to pay high
wages to keep their services internal when they could get nearly the same results from
outsourcing while paying significantly less money?
As we have discussed in this paper, you will realize that there are both pros and
cons associated with outsourcing. Outsourcing may be beneficial to the individual
company in many ways. This includes monetary reasons, increasing efficiency, and
having more time to focus on your core business practices. Outsourcing may also reduce
risks. When you choose to outsource, your outsourcing providers assume a great deal of
your risk. On the other hand, as we have mentioned, you must consider all of the
possible disadvantages before committing to outsourcing.

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