Management Information and Communication System

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January 2, 2018
Contents
What is outsourcing? .................................................................................................................................... 3
Why organizations outsource IT services?.................................................................................................... 3
During Transformation.............................................................................................................................. 4
To respond to Organizational Politics ....................................................................................................... 4
To Boost Morale and Employee Motivation ............................................................................................. 4
To Deal with Lack of Skills and Technologies ............................................................................................ 4
IT Services and Responsiveness ................................................................................................................ 5
To Support Financial Position of the Company ......................................................................................... 6
To Accomplish Business Objectives .......................................................................................................... 6
Evidences Academic and Practitioner Literature .......................................................................................... 6
Transaction Cost Perspective .................................................................................................................... 7
Resource-based Perspective ..................................................................................................................... 7
Risks Associated with Outsourcing ............................................................................................................... 8
Loss of Privacy ........................................................................................................................................... 8
Loss of Control .......................................................................................................................................... 8
Loss of Competitive Advantage ................................................................................................................ 9
Poor Integration ........................................................................................................................................ 9
Conclusion ................................................................................................................................................... 10
References .................................................................................................................................................. 11
 Management Information and Communication Systems (MICS) Assignment Task
Question 1
What is outsourcing?
Outsourcing can simply be defined as obtaining the goods/services from some outside suppliers.
Outsourcing is different from trading as the goods/services which are being outsourced can be
produced in-house; however, the company may choose to outsource because of one or more of
several reasons. The key reasons due to which the companies decide to outsource may include
reduction of cost, capacity management, risk management, and lack of expertise. Outsourcing has
become a very common practice in different industries because it is a viable solution. It is more
common in those industries where high levels of diversity exists. For example, a major proportion
of outsourced products/services belong to information technology (IT) field. IT has become
necessary for almost every institution (i.e. schools, hospitals, departmental stores, manufacturing
firms, etc.). Most of these institutions require IT operations for efficient and effective functions
but they do not have capability to produce those IT systems. For example, inventory management
and control system is requirement of every hospital but hospitals do not have software developers
to develop such a system and manage inventory using it. The hospital management may decide to
hire IT team for this purpose but it is a very costly option. Therefore, the hospital management
will choose to outsource the IT operations which is a viable option. The hospital will simply hire
an IT firm to install and management the inventory control and management system.
The study of literature suggests that outsourcing was not common until the end of first half of the
twentieth century. A few businesses outsourced during 1950s but the total number of such
businesses was very small. Outsourcing trend remained significantly low even during 1980s until
Kodak decided to transform its operations to digital technology. The company outsourced the IT
operations starting from 1989. The outsourcing decision was taken by the management at Kodak
because they did not have the capability for digital transformation and they also wanted to reduce
their cost. When the company successfully achieved the targets of outsourcing operations, the
outsourcing trend became very popular. As mentioned above, the major proportion of outsourced
products/services belong to the IT industry and different IT products/services outsourced by the
companies include application programming, system operations, telecommunication management,
and system integration. The recent outsourcing trends indicate that some institutions have started
to outsource entire IT departments to handle the IT operations at organizational level. On the other
hand, some other institutions outsource specific IT functions. For example, the nonprofit
organizations hire IT firms to carry research & development (R&D) function for them. The
decision of outsourcing depends on the needs and availability of the resources for that particular
organization. The purpose of this assignment is to highlight the reasons due to which the IT firms
decide to outsource IT operations and the key risks associated with outsourcing IT operations. This
assignment will also highlight how those risks can be reduced through appropriate risk
management strategies.
Why organizations outsource IT services?
Some of the most common reasons due to which the companies select the outsourcing option
include the lack of expertise, to reduce the cost, and to manage the risk. However, the companies
outsource IT services due to a number of reasons. Following are the key reasons due to which the
organizations outsource the IT operations:
During Transformation
The organizations have passed through significant transformation during past two to three decades.
The nature of change have been varying during this period. Most of the organizations passed
through technology-based transformation. Technology-based transformation is needed by almost
every organization of the world but most of the organizations do not have established information
technology department due to which they cannot carry out technology-based transformation. On
the other hand, the vendors which provide technology-based outsourcing services have the skills
and the equipment through which they can help the organizations in passing through significant
phase of technology-based transformation. The studies indicate that most of the small and medium-
sized companies go for outsourcing option when they have just started the operations. These
organizations have limited capital and skills due to which they cannot establish high-tech IT
department. The IT outsourcing vendors, on the other hand, are well-equipped with the skills and
equipment through which they can provide IT solutions to these small firms.
Some organizations need IT outsourcing at a particular phase of lifecycle or the event which do
not occur frequently in the organizations. For example, the situations of mergers and acquisitions
represent the events which are not very common in the organizational lifecycle. However, they are
very important events in the organizational lifecycle and they require specific IT skills. The
organizations usually do not develop IT skills for mergers and acquisitions because they do not
need such skills frequently. When any organization passes through such phases, the IT skills are
outsourced to pass through this phase. In-house IT skills are not good enough in such cases and
the organizations go for the outsourcing vendors.
To respond to Organizational Politics
This aspect is very closely related to the organizational change. The organizations anticipate
challenges and resistance when they pass through the phase of transformation. Facing resistance
during the process of change is natural for the organizations and it is not appropriate to suppress
the resistance using force. The best practice in this regard is to deal with organizational politics
using outsourcing vendors. The resistance emerges from the hierarchy when the change agents are
from within the organization. However, the research indicates that the strength of resistance
decreases when the organizations ask the outsourcing vendors to carry out change in the
organization.
To Boost Morale and Employee Motivation
Some organizations use outsourcing services to boost the morale of their employees and increase
the level of motivation. It is very important advantage of outsourcing operations. For this purpose,
the organizations benchmark the operations of the outsourcing firms. The outcome of such
benchmarking is in the form of expected level of performance form the in-house employees. The
employees are encouraged to achieve such level of efficiency and effectiveness. The employees
are highly motivated when they have to compete against each other to achieve the highest level of
performance.
To Deal with Lack of Skills and Technologies
Modern technologies have become requirement for every organization; however, every
organization cannot afford to work on every aspect of IT to achieve the technological requirements.
For example, the hospitals require storage space to store different kinds of data including the names
of patient, their history, their medical record, and other aspects of their health. Similarly, they also
need storage space to deal with the inventory-related data. The hospital requires complete hospital
management system along with hardware to support this system. The hospital also need people
who would manage this system. The hospital will need to incur a lot of cost to acquire the software
and hardware system. On the other hand, the hospital can outsource the services from any IT
company and buy the cloud storage instead of physical storage media. It will be a lot cheaper
option as compared to the option of acquiring the physical as well as the software media for this
purpose.
Some businesses go for outsourcing option because it is less risky option. It is highly risky for
small- and medium-level businesses to incur significantly large amount of money to establish the
entire IT department. They risk of business failure will be very high and the business will have to
face big loss in case of failure. On the other hand, if the businesses select the outsourcing services,
the risk is automatically transferred to the outsourcing vendor. The outsourcing vendors have all
kinds of equipment as well as the skills through which they can develop and implement the IT
systems. The IT outsourcing vendors have more polished skills through which they can mitigate
the risks associated with the IT operations.
IT Services and Responsiveness
IT operations have become part of many of the functions of the organizations but they do not
comprise core operations in some of the companies. The organizations in which the IT operations
are not the core functions can outsource the single of multiple required operations. However, in
the companies where IT operations comprise the core operations of the company have to establish
the IT departments. Many large organizations can afford to establish the IT departments because
they have large revenue streams and the outcome from the IT department can support the cost of
the department. On the other hand, most of the small- and many of the medium-level enterprises
cannot afford the IT department. Such organizations outsource entire IT operations because of the
low cost. Some small organizations outsource the IT functions because they do not have expertise
required to perform the IT operations. Outsourcing specific IT operations and the entire IT
departments allow the employees of these organizations can focus on the other operations of the
company and perform better.
Some organizations adopt the outsourcing IT functions because of the low-response rate from the
in-house IT department capabilities. Some of the IT functions are too complex and the
organizations do not develop the capabilities to produce/perform those functions using in-house
capability. In such cases, these organizations hire the outsourcing vendors to perform these
complex functions. The IT vendors can perform these IT operations better than in-house
department because vendors have the equipment as well as the skills which they can use to perform
the IT functions. In addition to skills and equipment, the vendors have valuable experience of
performing the same functions many times in different organizations. They can use their
experience to perform the IT operations better than in-house capability.
Some organizations have enough revenue as well as skills to perform the IT functions but they
choose to outsource the IT operations because they want to focus the other operations. The
proportion of such organizations is small but they exist. They may include some very large
organizations as well. Outsourcing some of the IT operations allow these organizations to focus
their core operations and perform the core functions well. Some companies choose this option to
save the cost. For example, many western companies have established their call-center operations
in India and China because the cost of operations in India and China is very low. The organizations
just need to find some appropriate vendors to which they can allocate the IT operations and start
focusing on their core operations.
To Support Financial Position of the Company
There is no doubt in the fact that outsourcing some of the specific IT functions is a cost effective
option. Outsourcing the IT operations can leverage the finances by saving the capital investment
in IT department and boosting the profit margins by saving the cost of IT operations. The research
has indicated that outsourcing IT vendors is a financial viable option because the outsourcing
vendors have skills, knowledge, and the abilities to deal in the IT projects. They have all the
equipment required to perform the IT operations which enhances the efficiency as well as
effectiveness of the IT operations. Therefore, the organizations are now using this option
increasingly to save the cost.
When the businesses decide to outsource the IT operations, they do not have to make capital
investment in establishing the IT department. IT departments require a lot of capital investment to
be established and the variable cost (i.e. the cost of operations) associated with the IT departments
is also very high. By outsourcing the IT services, the companies can use the capital to invest in
other segments of the company. It is a very useful advantage for all kinds of organization. It is a
kind of leverage which these organizations can use the capital for some other options and not
investing it to buy the fixed assets for the IT department.
The IT departments also have cyclical cost which the businesses have to incur to keep the IT
department updated. It is very important to keep the IT department up-to-date to keep it efficient
and effective. The organizations have to invest in the software as well as the hardware to update
their IT systems. The organizations are now saving this cyclical cost as well because they do not
have the IT department. They hire the outsourcing vendors and they get their tasks done at the low
cost. The vendors are able to provide the services at low prices because they have appropriate skills
and they can perform the functions at large scale.
To Accomplish Business Objectives
IT operations have become part of business operations of almost all kinds of organizations. The
organizations which traditionally did not need the IT functions now need them. For example, the
hospitals now need hospital management systems because such systems have proved their
usefulness in managing the hospital operations effectively. Similarly, these systems have proved
their effectiveness in managing the inventory of medicines. Such organizations now establish their
business objectives while keeping IT applications in mind. The key reason due to which these
companies consider the IT operations is that they have improved the business process. The
hospitals are now able to perform better than the traditional hospitals. The cost of keeping
inventory has reduced. Similarly, the inventory control techniques have allowed the hospitals to
keep the medicines from getting expired. Similar is the case with other kinds of organizations. As
mentioned above, the IT operations have proved their usefulness in the organizations where they
are part of core operations and also in those where they are not the part of the core operations.
Evidences Academic and Practitioner Literature
Different organizations use outsourcing as an option because of different reasons. For example,
some organizations use them to achieve strategic objective. Some others use it to reduce the overall
cost of the company. The literature suggests that IT operations have achieved strategic significance
for all kinds of organizations and it is not possible for such organizations to serve the market
properly without these IT functions. The companies can perform the IT functions effectively and
efficiently only when they have appropriate knowledge, skills, abilities, and equipment.
Performing IT operations require IT infrastructure and complex IT operations cannot be performed
without strong IT infrastructure. If the organization does not have these capabilities, it may not be
able to provide the products/services to its target market. However, the outsourcing option provides
these organizations with ability to perform the IT operations through outsourcing vendors and
serve the markets.
The literature suggests that some organizations select the outsourcing option only because of the
fact that the others are doing so. This process is known as herd mentality. The organization may
have good skills, knowledge, and abilities but it may still choose the outsourcing option because
its competitors are doing so. These organizations are viewing the outsourcing option as an
advantage neglecting the fact that they can get more advantage by producing the IT operations
using their in-house IT capability. Two very prominent theories can be discussed from literature
which explain why companies choose the outsourcing option.
Transaction Cost Perspective
This is an economic perspective. It is important to understand transaction before discussing the
transaction cost perspective. When exchange of two or more items having some monetary value
are exchanged, the transaction occurs. The transaction cost theory explains why organizations
choose outsourcing option to save the cost. Transaction must be an economic activity. The
organizations which choose outsourcing option to save the cost. Therefore, an economic
transaction is involved. For organizations which have to make this decision, it is like “make-or-
buy” decision. The organization will produce only those products which they can produce
incurring less cost than buying the product. If the cost of buying the product is less than producing
the product, they will buy the product. Similar is the case with IT operations. Most of the
companies which cannot reduce the cost of production outsource the IT operations. On the other
hand, the companies which have established IT departments do not outsource the IT operations.
The transaction cost perspective is the economic perspective which compares the cost of
production and the cost of buying the product from the market. The production cost is the amount
which any organization spends to produce any particular good/service. On the other hand, the cost
of buying or coordination cost is the amount which the organization pays to outside vendor to
acquire the same product/service. It is usually considered that the cost of buying the product from
the market is less than cost of production because the outsourcing vendors have the advantage of
economies of scale. The economies of scale is the concept which means that the outsourcing
vendors are able to minimize the cost to minimum because they have very large quantities to
produce. Another advantage that these outsourcing vendors have is specialization. The outsourcing
vendors become specialists of producing the particular good/service due to which they incur less
cost for producing it. Therefore, according to this theory, most of the companies select the
outsourcing option because the outsourcing vendors have the advantage of economies of scale and
the specialization. They can produce the same goods and services at low cost. On the other hand,
if the organization’s production cost is low, the organization will produce it using in-house
capability.
Resource-based Perspective
It is another economic perspective which can be used to explain why the companies choose
outsourcing option. The key focus of resource-based perspective is on resource gaps. These
resource gaps have economic value which determine the value of outsourcing options in the
decisions of the company. For example, when IT operations do not comprise the core operations
of the company, the business employees keep their focus on the core operations only. However, a
gap emerges due to their lack of emphasis on the IT operations. The resource gaps may also emerge
due to the lack of specific IT resources. Different theorists view organizations as collection of
production resources. The resource gaps become evident when some organizations modify their
resources in unique, valuable, and hard-to-imitate way. The other organizations cannot use these
forms of resources which result in resource gaps. For example, Google has developed a cloud
which is unique and very hard to imitate. Not all organizations of the world can develop such
cloud. Therefore, a resource gap emerges because the other organizations cannot produce such
resources. It is better for these organizations to hire Google to provide the cloud services rather
than trying to develop the IT capabilities to match the services offered by Google’s cloud.
The findings from research suggest that outsourcing option is very good in the markets where the
level of diversification is very high. It is not possible for the competing organizations to keep
updating their IT resources all the time and keep developing the new product/services on the basis
of these IT capabilities. The outsourcing option becomes a leverage for the other core operations
of the organization in such cases. On the other hand, when the level of diversification is low, the
companies can develop the IT capabilities because they do not have to update the IT capabilities
all the time. The organizations can afford to produce such IT operations using in-house IT services.
Risks Associated with Outsourcing
The researchers as well as the practitioners have highlighted several kinds of risks associated with
the outsourcing option. Some specific kinds of risks are associated with all kinds of IT outsourcing
option. On the other hand, some other kinds of risks are associated with some specific situations.
The managers of the organization have to assess the risks associated with these options cunningly
so that they can avoid the disadvantages due to the associated risks. Following are some major
sources of risks:
Loss of Privacy
The outsourcing vendors are not the part of the organizations and they have separate entity. The
organizations which use outsourcing option face the risk of loss of privacy. The outsourcing
company interacts with the management of the organization and they require access to core
business operations as well as the other confidential information of the organization. Providing
such information is very important for effective and efficient functioning of outsourcing vendor.
However, it is also a fact that the outsourcing vendors are working for several other organizations
and some of these organizations may be competing against each other. Therefore, the risk of loss
of privacy and loss of confidential information is very high and serious.
Mitigation of this risk is very important before choosing the outsourcing option. For this purpose,
it is the responsibility of the senior management of the organization to investigate the outsourcing
vendor and establish the reliability of these vendors. Some outsourcing vendors are highly
professional and they have very good repute in the market for this purpose. The organization’s
management must find out such vendors and use their services.
Loss of Control
The loss of control is the risk which is associated with almost all kinds of outsourcing options.
This risk emerges because the organizations usually do not have control over the operations of the
outsourcing vendor. A very large proportion of organizations choose outsourcing option because
they do not have expertise and skills to produce the IT products/services using in-house IT
department. The employees of outsourcing Vendor Company are highly trained and expert in
performing the IT functions. The organizations have to allow the employees of outsourcing vendor
to work along with their workers. The employees of outsourcing companies work according to
rules and regulations of their company rather than the rules and regulations of the company which
has hired them. The lack of control over operations is very common disadvantage of using
outsourcing option.
Some organizations have also experienced a lack of control over cost. The outsourcing vendors
have their vested interested and they are providing the services to earn money. They sometimes
deceive the organizations which have hired them. The result of such situation is the loss of control
over the cost of outsourcing. The company may also have to face losses because the cost of
outsourcing increases as compared to the cost of producing the IT products/services in-house.
Mitigating this risk is very difficult and the managers can apply the control measures to reduce the
amount of risk associated with outsourcing. To mitigate this risk, it is important to make explicit
agreements with the outsourcing vendors. The terms of contract must be clear so that the
outsourcing vendor knows what organization expects from the vendor in terms of performance.
Similarly, the cost structure must be mentioned along with each aspect of the contract. The
organization must develop contracts which should discuss different elements of cost extensively.
The losses can be avoided if the organizations make clear and explicit contracts.
Loss of Competitive Advantage
Competitive advantage is the characteristic which the organizations possess and makes them
different and better as compared to their competitors. The competitive advantage is usually
associated with the core business operations. The competitive advantage is achieved either by
reducing cost or promoting differentiation in production. The companies may lose the competitive
advantage after adopting outsourcing option if the cost increases or differentiation property is lost.
This risk is associated with some kinds of IT outsourcing. For example, if the cost of outsourcing
option is higher than the production cost of the company, the company faces the risk of losing
competitive advantage.
Mitigating this risk is important for survival of the organizations. This risk can be mitigated by
keeping the outsourcing operations away from the core operations of the business. It is not always
possible in all of the cases. It is also important to monitor the outsourcing operations using very
strict measures. The companies cannot afford to lose the competitive advantage because it is very
difficult to establish the competitive advantage. They have to monitor the influence of outsourcing
operations on different aspects of their business and they must stop the outsourcing operations
when they find that is negatively influencing the competitive advantage of the company.
Poor Integration
The organizations face the risk of poor integration if the outsourcing vendor has not provided the
services as per requirement. It usually happens when the organizations lack the clarity or they fail
to communicate the objectives of outsourcing operations. The communication problem may make
it difficult for the outsourcing vendor to understand what is expected as the product/service. This
situation very dangerous for both of the parties.
Mitigating this risk requires the organization to develop effective communication strategy through
which it can communicate the objective of outsourcing operations. The appropriate integration
requires formal meetings and communication of objectives in those meetings. It is also important
for the management of these companies to develop a strategy through which they can contribute
in the operations of the outsourcing vendors. The organization must take part in the outsourced
functions so that they can keep a check on the actions of the outsourcing vendors.
Conclusion
The purpose of this research is to highlight why organizations outsource IT operations, theoretical
perspectives on outsourcing operations, risks associated with outsourcing operations, and the
mitigation strategies. The research highlighted that most of the organizations outsource IT
operations because they do not have skills or expertise to perform these operations. The IT
operations are requirement in most of the companies now but they are not the part of core functions.
These organizations need to outsource the IT operations to fulfill their needs. Some other
companies use outsourcing option because the cost of outsourcing is less as compared to the cost
of producing. Some other companies adopt this option only because their competitors are doing
so. Outsourcing has some risks as well. For example, the companies face the risk of loss of privacy
and confidential information. Similarly, the companies face the serious risk of loss of control over
organizational operations and cost. The management needs to develop the mitigation strategies
according to the particular situation.
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