Examining IT Outsourcing: An Overview
Outsourcing has become one of the most controversial topics of the new century. To some, outsourcing is a strategy essential to remaining competitive in an age of international market integration. To others, it represents an important opportunity for economic advancement and entry into the global economy. For still others, outsourcing is a boogeyman topic associated with the relocation of jobs and the closing of local businesses. These varied opinions raise the questions “What is outsourcing?” and “What does one need to know to make informed choices about outsourcing practices?” This introduction examines these questions by providing a basic overview of outsourcing practices and trends. While the treatment presented here is by no means comprehensive, it can provide the foundational understanding needed to ask more focused questions or make more informed decisions related to outsourcing.
The practice of outsourcing is not new. In fact, outsourcing is perhaps as old as commerce itself and serves as the foundation for any relationship where one person performs an activity on behalf of another. What has made outsourcing such a charged topic in recent years is the kinds of activities others have been requested to perform and the scope or the scale of such requests. One area in which outsourcing-related tensions have perhaps run the highest is the information technology (IT) industry.
Historically, the IT sector has been dominated by companies located in industrialized nations. This dominance was driven primarily by factors of access and proximity. That is, organizations needed quick and ready access to highly trained workers in order to foster the creativity and have the flexibility needed to remain competitive in the rapidly changing world of IT. The importance of access made issues of location paramount, for an organization’s workforce needed to be in relatively close geographic proximity for the organization to have quick and ready access to it. Such were the early rules of the IT industry. All of these rules suddenly changed with the advent of online media.
Technologies such as the Internet and the World Wide Web flattened barriers of physical distance and allowed companies quick and easy access to workers located in virtually every region. As this online access spread to more parts of the globe, the pool of skilled labor available to organizations grew almost exponentially. Within this new paradigm, IT workers who once benefited from their physical proximity to a company now found themselves competing with skilled IT workers located half way around the world. These new competitors, moreover, could often offer the same level of skills for a fraction of the cost. As a result, an increasing number of organizations began to outsource a variety of skilled knowledge work –including a range of IT work – to employees located in other nations. Thus, the era of international IT outsourcing – or IT offshoring – began.
Today, outsourcing is worth some US$300 billion in value and represents over a million jobs worldwide (Ang & Inkpen, 2008; Shao & David, 2007). These numbers, however, are but a drop in the global bucket, for it is estimated that only 10% of the prospective global market for outsourcing has been tapped (Ang & Inkpen, 2008). Perhaps the largest area for growth is in various service sectors – particularly those associated with human resources, accounting, financial prep, and medical information processing – as well as in the IT products and services that support these sectors (Chan, 2007; Outsourcing, 2008). Effectively tapping this outsourcing market, however, is no easy task. Rather, a range of factors must be considered to ensure the outsourcing process is successful, for many outsourcing projects result in negative experiences (Barthelemy, 2003; Raisinghani et at., 2008). Individuals in the IT industry, therefore, need to develop an effective understanding of outsourcing if they wish to make the informed decisions essential to success in today’s global economy.
Fundamental Concepts and Theories of IT Outsourcing
In essence, outsourcing involves the transfer of responsibility (Barthelemy, 2003; Outsourcing, 2008; Weimer & Seuring, 2008). In an outsourcing relationship, one party (the client) asks another party (the vendor) to perform a given task. The outsourcing vendor then assumes the responsibility of completing that task according to the client’s guidelines and expectations. Thus, outsourcing is a common activity most persons take advantage of on an almost daily basis. Few individuals, for example, grow all of their own food (a task that is outsourced to farmers) or make all of their own clothes (a task that is outsourced to garment manufacturers).
Organizations and individuals also tend to use outsourcing for the same reasons – expertise and time. The idea is that no one organization or person is an expert in all tasks; rather, there are certain core areas in which a business tends to specialize and that an individual tends to enjoy (Barthelemy, 2003; Solli-Sather & Gottschalk, 2008). Pursuing such core activities, however, also requires organizations and individuals alike to engage in a range of ancillary but important activities – such as accounting functions related to the paying of taxes.
From an organizational perspective, time spent on such ancillary activities takes organizations away from those core activities they do best, and time spent on such ancillary activities is time that could be spent on improving a core functions (Barthelemy, 2003; Namasivayam, 2004; Rajabzadeh, Rostamy, & Hosseini, 2006). Moreover, such ancillary activities tend to be those tasks in which the organization is not a specialist. Such ancillary activities might thus be performed more efficiently and effectively by another entity – one that has made the activity its own core function and thus has the training and materials needed to operate as a specialist in that area (Chandrasekar, 2004/05; Duarte, Sackett, & Evans, 2004/05; Rajabzadeh, Rostamy, & Hosseini, 2006).
Within this context, if an organization outsources that ancillary activity to a specialist, then the organization suddenly has more time to dedicate to its core operations. The more time spent focusing on these core functions, the better the organization gets at these tasks, and the more competitive the organization can become in that core area. Conversely, as the organization was not an expert in a particular ancillary area, the organization might have lacked the base of skills, knowledge, or equipment needed to perform that task efficiently – let alone remain abreast of developments related to that task effectively. Thus, by outsourcing ancillary tasks to a specialist, an organization can save time and money (Barthelemy, 2003; Outsourcing, 2008; Shao & David, 2007).
According to this approach, organizations can benefit from both direct and indirect savings generated through outsourcing (Michael et al., 2005; Platz & Temponi, 2007; Rajabzadeh, Rostamy, & Hosseini, 2006). Direct savings are related to employee performance. As the outsourcing provider can perform a particular task more efficiently than the client can, the relative cost of performing that activity goes down as the quality improves. A trained accountant, for example, could likely complete a tax form more quickly and more effectively than could a computer programmer with no formal accounting training. Indirect savings are associated with those aspects related to maintaining on-site employees. These indirect factors include
- Benefits (e.g., health insurance, retirement, continuing education, etc.) associated with employing in-house workers to perform a non-core task
- Training needed to keep on-site employees current in non-core tasks
- Materials needed to perform non-core activities
- Infrastructure needed to house and accommodate on-site employees so they can perform a non-core activity (e.g., office space, heating and lighting costs, software licensing, etc.)
- Practices associated with hiring and administering employees involved in non-core functions
Individually, each of these items can consume substantial resources in terms of cost and time (e.g., time to set up a technology, coordinate a task, or perform a process). Collectively, they can create a substantial drain on the resources an organization can dedicate to improving its core business activities. Thus, the cost of outsourcing an activity might actually be less than the combination of directly and indirect expenses related to performing such tasks in house. In fact, outsourcing can reduce a variety of IT and other service-related costs by up to 60% in some instances (Rodgers, 2005). This process is driven by a concept known as leveraging advantage.
According to this perspective, the advantage is the core activity, or the task or range of tasks at the center of an organization’s business. Leveraging that advantage refers to taking every opportunity to focus on further developing and using that core activity to attract more business and to excel in the related marketplace. Accordingly, a successful use of outsourcing allows the client organization to channel the money and time saved through outsourcing back into developing its core activities vs. reporting this adjustment as savings or profit (Boguslauskas & Kvedaraviciene, 2008; Namasivayam, 2004). This allocation of savings allows organizations improve the chances they will remain competitive for the long term. Thus, outsourcing provides an organization with a mechanism for creating an advantage when competing with others in the same marketplace.
On the surface, this approach seems quite straightforward. There are, however, secondary cost factors organizations need to consider when contemplating outsourcing. One more-hidden factor is that of transaction costs, and if not accounted for, it can easily negate any savings associated with outsourcing. Transaction costs, moreover, must be identified and assessed before making the final decision to outsource a process. If not, losses could ensue.
In general, transactions costs involve interaction and compatibility (Bahli & Rivard, 2003; Gefen & Carmel, 2008; Solli-Saether & Gottschalk, 2008). The notion of interaction relates to the logistics of delivering a product or a service from the outsourcing vendor to the outsourcing client (Bahli & Rivard, 2003; Farrell, Puron, & Remes, 2005). In such situations, a vendor might be able to produce an item or perform a service more cheaply and efficiently offsite. The logistics related to delivering the product to the client or providing the service to the client or the client’s customers, however, might be so complicated or costly that they negate any savings associated with outsourcing that activity. Consider, for example, a vendor that can perform database maintenance for $10 per hour less than a client organization can on site. Interacting with that vendor, however, requires the client to convert its current operating system from one platform to another and purchasing new platform-specific software (Bahli & Rivard, 2003; Farrell, Puron, & Remes, 2005). In this scenario, the costs of making such a transition could outweigh the savings associated with outsourcing that service. For this reason, organizations must perform a preliminary analysis of transactions costs to determine if it is truly in that organization’s best interests to outsource the related process. Moreover, such a realization needs to be made before outsourcing contracts are signed and the client’s on-site abilities to perform the service are dismantled. If not, the results could be financially disastrous for the client.
In the case of compatibility, the outsourced product or service can be delivered quickly and cheaply – that is, interactions between client and vendor are not problematic. The problem is the outsourced product or service is provided in a format that cannot be quickly and easily integrated into the client’s core activities. As a result, the client needs to spend un-planned time and money revising the product or process in order to integrate it into the client’s core business practices. If, for example, customers are confused by the online troubleshooting advice provided by an outsourcing vendor, they might increasingly return merchandise to the client organization for servicing. In this case, the client could find itself dedicating unexpected additional time to addressing such returns vs. producing new products or developing new services. Thus, services that do not integrate easily into the clients’ practices or meet client expectations for those services can divert resources from the client organization’s core activities.
If these incompatibilities are not immediately noticed, use of that incompatible item or service could hurt the client’s core activities by affecting the quality of the products it produces or the services it provides. (This issue of compatibility was one of the major transactions cost problems that plagued early attempts at offshoring.) In this way, incompatibility can actually threaten the core business practices of an organization. Thus, the decision to outsource needs to involve an examination of transactions costs as well as the financial and strategic benefits of using outside vendors. Transaction costs thus bear risks an organization needs to consider when engaging in outsourcing.
The notion of risk in outsourcing generally relates to the control a client organization can exercise over a process once it has been sent to a vendor (Barthelemy, 2003). The desire to outsource, in turn, becomes a matter of assessing and anticipating all of the risks – or potential problems – that could arise once an activity has been assumed by a vendor. After such an assessment is made, the client organization can decide how likely such risk factors are, how such factors might be successfully addressed, and if the prospective of successful outsourcing – and related savings – outweigh the risks related to engaging in such practices (Barthelemy, 2003; Raisinghani, 2008)
In many cases, concerns related to risk become a matter of trust. That is, the more an outsourcing client trusts the vendor with which it interacts, the more likely that client is use the vendor in outsourcing operations and the greater/more important the tasks to be outsourced to that vendor. Such trust can be established via previous relations with a vendor, by reviewing a vendor’s previous relations with other clients, or through a careful vetting of prospective vendors. Within this framework, trust in a vendor can mitigate concerns related to risk and can result in the outsourcing of various IT production and service tasks (Jain, Kundu, & Niederman, 2008).
Aspects of core competencies, leveraging advantage, transactions costs, risk, and trust are but the foundational concepts of outsourcing. These concepts should not be treated lightly when making decisions related to outsourcing. Rather, there are different outsourcing practices and arrangements, as there are certain patterns for the rise of outsourcing’s prominence in a given area. For these reasons, organizations need to understand the dynamics of outsourcing development if they are to make informed decisions about how and when to engage in such practices. It is through informed decisions that organizations can effectively leverage their competitive advantage within a particular area.
IT Outsourcing Development and Design Methodologies
In the last half century, outsourcing has been adopted as a core business strategy by a number of industries. These applications include a variety of tasks and have recently expanded into a range of skilled activities related to a range of IT goods and services (e.g., chip manufacturing, customer support, and financial processing). While the tasks that are outsourced can vary, the outsourcing process tends to follow a relatively standard pattern across industries and activities.
In general, the process begins with a small set of businesses (sometimes called early adopters) testing outsourcing as an option to reduce costs and perhaps enhance competitiveness within a particular market (Shao & David, 2007). A hospital, for example, might test-run outsourcing by having limited healthcare processing services (e.g., transcription of medial documents) tasked to an external vendor. Usually, these initial tests are done on a small scale and involve a limited number of mechanical tasks. (These mechanical tasks are simple activities that can easily be performed repeatedly and effectively by a relatively wide range of workers.) Thus, the simplicity of the task generally means goods or services of acceptable quality can be produced with minimal oversight and limited specifications related to client expectations. The idea in this case is to assess areas of risk on a small scale that is easy to mange if problems arise. The better the vendor is at performing such tasks over time, the more trust the client develops toward that vendor, and the larger and more complex (or more risky) the task outsourced to that vendor become (Barthelemy, 2003; Jain, Kundu, & Niederman, 2008).
Over time, early adopters start to benefit from outsourcing by both reducing costs and allocating more time and money to enhancing their core activities. As a result, these early adopters begin to gain a competitive advantage in their areas. Soon, competing businesses in the same marketplace realize they are losing or are in danger of losing market share to competitors that use outsourcing. These late adopters then begin to examine outsourcing as a mechanism for remaining competitive within their fields. As these secondary adopters engage in outsourcing, they see their own competitive advantages increase (Shao & David, 2007). This process triggers a sort of arms race as each organization looks for new ways to maximize its competitive advantage through outsourcing. According to this progressions, it is only a matter of time before outsourcing is no longer an option to explore, but becomes a core business strategy organizations must use to remain competitive in their fields.
Until quite recently, the pursuit of outsourcing options to maximize competitive advantage was constrained by one crucial factor – access. The only vendors an organization could tap for its outsourcing objectives were those to which they had quick and easy access. The limitations created by access restricted the kinds of outsourcing activities in which an organization could engage. These restrictions also affected how far afield organizations could go to find prospective vendors for the outsourcing of IT tasks. Two major developments, however, radically changed this perspective. First, the global diffusion of online media made it increasingly easy to access an international pool of skilled labor – thus reducing physical barriers to outsourcing. Second, a range of international trade agreements – such as the General Agreement on Trade in Services (GATS) – reduced many of the legal restrictions that had limited the cross-border flow of goods and services (Gupta et al, 2008; Namasivayam, 2004; UNESCO, 2004). As more nations – particularly developing nations – gained online access and fell under these trade agreements, they provided organizations in industrialized nations with important outsourcing opportunities. Thus, a new age of international outsourcing – or offshoring – began.
From an IT perspective, many of these developing nations offered a range of advantages for interested clients. For example, a shortage of good-paying jobs, compared to the number of well-educated individuals seeking work meant many jobs that are offshored (e.g., IT customer support) tend to experience less employee turnover (Reuters, 2004). These overseas employees also offer organizations an additional benefit related to the costs of skilled labor.
In many developing nations, skilled technical workers make a fraction of the salaries earned by counterparts in industrialized nations (Jahns, Hartmann, & Bals, 2006; Shao & David, 2007). The average IT worker in the United States, for example, earns roughly US$75,000 per year, while the average IT worker in Argentina tends to earn US $9,500 per year (King, 2008). The same employee in India, moreover, earns just under US $8,000 per year to perform the same work (King, 2008). By using such international workers to perform IT tasks, a client organization can further reduce the costs of performing this non-core activity. This concept of using different pay scales to further reduce outsourcing costs is known as labor arbitrage, and it has prompted many organizations to engage in the international outsourcing/offshoring of a range of IT work (Gefen & Carmel, 2008).
These lower salaries also have important implications for the quality of offshored activities via changes in management structures. IT managers in the Philippines, for example, earn US$25,000 per year – almost a third of what the average IT worker in the US earns (Ho, 2007; King, 2008). As a result, organizations can easily afford to hire more on-site managers to supervise offshoring activities. For example, the ratio of mangers to employees tends to be 1 to 8 in Chinese outsourcing ventures vs. 1 to 20 for similar activities in the United States (Hagel, 2004). These additional managers can dedicate more time to employee training, process oversight, and quality control. The resulting environment is one that can improve the quality of the resulting product or service without incurring any major staffing costs. In this way, the addition of these managers can reduce risks associated with offshoring activities and improve levels of trust related to client-vendor relationships.
By itself, savings related to labor costs are not generally enough to prompt an organization to engage in offshoring (Hamm, 2008; Namasivayam, 2004; Reuters, 2004). Rather, different educational systems, professional practices, and cultural preferences could increase transactions costs in a way that would trump savings related to labor arbitrage (Barthelemy, 2003; Jain, Kundu, & Niederman, 2008; Qu & Brocklehurst, 2006). Many skilled IT service, for example, require a worker to follow a particular standard process that might be linked to the legal requirements of a particular nation or to the internal practices of a particular client. If an offshoring vendor did not perform an activity (e.g., software programming) according to such requirements, the resulting product might be difficult to integrate quickly into the client’s core business practices. In some cases, this factor has been addressed by providing vendors with effective training in the client organization’s practices for performing a given task (Raisinghani, 2008). Unfortunately, the costs associated with training offshore workers and the subsequent monitoring used to confirm practices are being correctly performed could be cost prohibitive (a major transaction cost). As a result, some form of standardization is often essential to make sure the quality or products and services resulting from offshoring services contributed to the client’s ability to leverage its advantages. The solution, in many cases, comes in the form of automation.
From an outsourcing perspective, automation means that technologies – particular computer programs – provide workers with a mechanism that allows them to perform a process in a standard manner (Namasivayam, 2004; Shao & David, 2007). In certain cases, the employee enters data into the program, and the program performs processes according to client-designed specifications. In other cases, the program reviews the employee’s work to confirm it matches client specifications before that work can be finalized. Such standardization of process means the resulting product or service would meet a client’s expectations for correctly completing a particular task (Namasivayam, 2004).
Automation also means client specifications related to effectively performing a task can be met without having to engage in more costly and time-consuming training practices. (Granted, some training in the use of the related software would be required.) Thus, automation keeps transactions costs low and allows organizations to maximize the cost benefits of labor arbitrage (Namasivayam, 2004). Automation can also reduce concerns of risk and increase trust based upon a kind of “built in” guarantee a process will be performed according to the client’s expectations. As a result of these factors, automation has created more demand for IT workers and drove much of the growth in international IT outsourcing (Shao & David, 2007). This combination of standardization via automation and labor arbitrage in particular have allowed outsourcing to develop rapidly into a global phenomenon.
All of these variables and approaches mean organizations need to be well informed when making outsourcing-related decisions. Fortunately, approaches to outsourcing are not as random as one might think. Rather, a series of somewhat regular best practices to outsourcing have arisen over time. Such approaches can serve as models organizations can use when trying to determine how to use outsourcing and apply outsourcing practices effectively.
Uses and Applications of IT Outsourcing Concepts
According to a model proposed by Duarte, Sackett, and Evans (2004) decisions involving what to outsource and how to engage in outsourcing tend to be governed by two central factors. The first of these factors is financial impact and refers to either the costs saved or the value added by the use of outsourcing in relation to a particular activity. The second factor is strategic importance and involves how important outsourcing is to helping an organization succeed in its core business area (Duarte, Sackett, & Evans, 2004). An organization’s decision to outsource is then based on how it weighs these two factors in relation to how they create a competitive advantage in terms of core business activities.
According to this two-part framework, most outsourcing clients – and most early outsourcing adopters – begin their foray into outsourcing by having a vendor perform a few, very basic (i.e., mechanical) tasks (Namasivayam, 2004; Shao & David, 2007). Such tasks, moreover, tend to be of relatively little financial or strategic import. This kind of outsourcing is generally referred to as functional outsourcing, and requires limited communication between outsourcing client and vendor in order to have the task performed effectively (Duarte, Sackett, & Evans, 2004). The basic nature of the task also means that completion of the related activity is often assessed according to relatively general and simple criteria (McLaughlin, 2003). Custodial or janitorial services, for example, are often activities subject to functional outsourcing.
Like all functional outsourcing activities, custodial and janitorial tasks need to be performed to permit the organization to operate in an effective manner on a day-to-day basis. The completion of these tasks, however, is not connected to an organization’s potential for earnings (low financial impact), nor does it shape the business strategy the organization uses to remain competitive in its field (low strategic importance). Yet functional outsourcing does reduce the indirect costs associated with having to hire in-house employees to perform basic, simple activities associated with daily operations. From an IT perspective, functional outsourcing is a mechanism organizations can use to dedicate more resources to developing and maintaining IT activities.
Leverage outsourcing, by contrast, relies on the concept of economies of scale to reduce cost (high financial impact). Such outsourcing, however, is not crucial to a company’s ability to perform its core activities (low strategic importance). Leverage outsourcing generally involves the production of particular goods or the use of somewhat specialized services (Duarte, Sackett, & Evans, 2004). In such outsourcing relationships, the outsourcing vendor not only specializes in producing a particular product or performing a certain task, but does so for a relatively large number of clients. This specialized production or performance of service on a large scale (high volume) means vendors can perform the activity more cheaply offsite than the client could on site (Michael et al., 2005).
Leverage outsourcing generally has a relatively high financial impact on a client’s core activities by reducing overall costs associated with those activities (e.g., providing server space and related maintenance for a wide range of clients). At the same time, a relatively large number of vendors tend to perform that same activity. Thus, the service provided by the vendor is not so specialized the client is dependent on the vendor to perform that service. In this way, such outsourcing relationships are of relatively low strategic importance to a client, for the client can turn to a range of vendors for this service (Duarte, Sackett, & Evans, 2004). Thus, leverage outsourcing allows organizations to outsource more standard and mundane IT tasks (e.g., basic server maintenance) and to focus more time and attention on IT activities related to the business’s specific core functions.
Strategic outsourcing marks a different situation in which there is a closer relationship between the outsourcing client and vendor. In such relationships, each party relies on the other for the successful completion of its core activities. Such relationships tend to develop around a vendor providing either a specific skill or a specific product. The activities performed by the vendor tend to be unique and involve technologically intense tasks or require specific technologies to perform (Duarte, Sackett, & Evans, 2004). From the client’s perspective, it would not be cost effective to try to perform such activities in house. In such relationships, the vendor provides the client with a service or item that is highly specialized for that client’s particular core business. The related levels of specification also mean there are relatively few vendors that perform the particular service or produce the specific product. Thus, the client is dependent on the vendor in order to engage in its core business activities – a very different case from leverage outsourcing (Duarte, Sackett, & Evans, 2004). For this reason, cost savings associated with the service or product is not a major concern. Rather, the vendor’s activities are considered an essential part of the client’s core business and thus have are of high strategic importance irrespective of costs. (Financial impact is therefore not a central factor in such outsourcing relationships.)
The relatively narrow nature of the vendor’s specialized business also means there are generally few clients to which the vendor can market its services. As a result, the vendor is highly dependent on the client’s business to remain financially solvent. Thus, the client’s business has a high level of strategic importance for the vendor’s marketplace success. An example of such IT outsourcing would be software firms that produce an application for only certain industries – such as pacemaker monitoring software designed for the medical device industry. The specialized character of the task also requires close and constant communication between vendor and client. This closeness allows the vendor to make adjustments and alterations that reflect the changing nature of the client’s business and the demands of the market in which that business operates.
The final and perhaps ultimate state of outsourcing development is known as critical outsourcing and involves an integration of client and vendor activities to the point that the two often seem to operate as a single entity (Duarte, Sackett, & Evans, 2004). In such relationships, the vendor is an expert in a specific intensive and important activity that is central to the success of the client’s core business. Such focused specialization allows the vendor to be more capable of remaining current with updates essential to success in the related area. Additionally, the nature of the outsourced work is usually highly complex and needs to be customized to the specific client’s core business practices. The work also tends to be highly susceptible to change based on the markets serviced by the client organization.
This particular combination of factors generally means that, in critical outsourcing, client and vendor need to have a close relationship based on trust and constant communication. In fact, it is not uncommon for the vendor to have an office within the client’s facilities and to participate in the client’s strategic meetings (Duarte, Sackett, & Evans, 2004). (Both parties need access to and involvement in such processes for each to engage effectively in its core practices.) The nature of such relationships, moreover, means they have a high level of financial impact for the client/are essential for the client to succeed in its core business area. Such activities are also closely linked to client success to the point that they are also a central part of its business strategy and thus are of high strategic importance to the organization.
As for the vendor, the highly customized nature of the activity usually means the vendor can only provide it to the individual client. Thus, the vendor’s core activities are, in many ways, depending on a short list of specific clients. Examples of such outsourcing relationships in IT would be those where the development and implementation of supply chain management databases and related software is outsourced to a vendor specializing in the creation of such software and its related services.
The effective adoption and use of these outsourcing models are no easy process. Rather, careful research, attention to detail, and an understanding of the involved variables are essential to success in each of these four major outsourcing approaches. Such outsourcing practices, moreover, are further complicated when done on an international level. This factor is particularly important in the new specialized kinds of outsourcing sectors that have emerged in recent years.
In the last decade, outsourcing has begun to evolve into a series of task-specific disciplines related to knowledge activities and IT work. The more common of these subdivisions include
- Business Process Outsourcing (BPO) – having a vendor perform a particular business service – generally a knowledge-based service (e.g., payroll processing) – for a client including a range of standard business services associated with worker maintenance (e.g., human resources processing, accounting, and financial administration) (BPO-Business process outsourcing, 2008; Weimer & Seuring, 2008)
- Application Outsourcing (AO) – the process of creating, deploying, and managing a software product designed to meet the needs of a specific client (Application outsourcing, 2007)
- Infrastructure Outsourcing (IO) – providing clients with the hardware, software, and often the support services needed for them to have a functioning information technology infrastructure for their organization (Murrain & Cohen, 2003)
- Knowledge Process Outsourcing (KPO) – having vendors perform skilled knowledge-based tasks that result in the production of a unique knowledge product (e.g., original text/content for a website or original research and development results) or that requires unique/situation-specific results related to a particular field (e.g., legal services or market analytics) (Sathe & Aradhana, 2008)
While all of these outsourcing areas have experienced growth – particularly international growth – in the last few years, it is KPO that seems poised to expand the most in the next few years and to do so on a global scale (Sathe & Aradhana, 2008). Also, these divisions reflect the aggregation of tasks currently assigned to outsourcing on a relatively large scale. As organizations continue to define their core activities and to look for additional ways to cut costs and increase competitiveness, new outsourcing divisions might emerge. These same forces could also result in the further subdivision of these current categories (e.g., actuarial outsourcing within BPO or even KPO). When considered with the fact that only 10% of the prospective global outsourcing market has been tapped and international outsourcing is predicted to grow by some 8% in 2008 alone, the prospects for growth in such specialty areas seems quite good (Ang & Inkpen, 2008; Heath, 2008).
Curiously, when considering the various options for international IT outsourcing, aspects of cost and automation are not exclusive factors used to make final vendor selections. In fact, some research notes that companies might actually select a more expensive international vendor due to the factor of cultural proximity. The importance of cultural proximity, in turn, results from lessons learned over a decade of offshoring experimentation.
Cultural proximity involves how similar or how different two cultures are (Ang & Inkpen, 2008; Gefen & Carmel, 2008). Cultures that are relatively similar have a high cultural proximity –are culturally very close in approaches and attitudes. Cultures that are quite different in terms of behaviors, attitudes, and expectations have a low cultural proximity (a great deal of difference separates them).
Earlier forays into offshoring revealed that cultural proximity related to job expectations, contractual obligations, communication styles, and even language can have a major effect on offshoring practices (Beizer, 1990; Kogut & Singh, 1988; Levina & Vaast, 2008). One 2004 study in IT research and development, for example, notes that cultural proximity can have important implications for transaction costs in offshoring. According to the study, when engineers worked together in virtual international projects, such as is characteristic of offshoring, half of their work hours were spent engaging international counterparts in ad hoc interactions. Over half (57%) of these interactions involved trying to come to a common understanding of what was expected of the involved parties (Ang & Inkpen, 2008; Cherry & Robillard, 2004). Just over 30% of that time was dedicated to dispute resolution and addressing problems, and 3% of that time was spent planning future interactions (Ang & Inkpen, 2008; Cherry & Robillard, 2004). (Surprisingly, only 8% of the time spent on such interactions involved the actual offshoring task of developing software (Cherry & Robillard, 2004).) In a different study of 200 US executives, 76% of the individuals surveyed cited cultural differences as a major aspect affecting the success of international outsourcing initiatives (McCue, 2006). All of these factors, in turn, act as transaction costs related to providing clients with products and services they can integrate into their operations (Ang & Inkpen, 2008; Levina & Vaast, 2008; Qu & Brocklehurst, 2003).
The items causing such problems seem to be the degree of difference between two cultures in relation to a particular topic – such as expectations related to a specific job title (Gefen & Carmel, 2008; Levina & Vaast, 2008). According to this perspective, the greater the similarities between the cultures interacting – or the greater the cultural proximity – the fewer problems tend to arise in offshoring situations. The more different the cultures interacting – or the smaller the cultural proximity/greater the cultural distance – the more communication- and transaction-related problems tend to occur (Ang & Inkpen, 2008; Gefen & Carmel, 2008; Jain, Kundu, & Niederman, 2008). The same situation seems to be the case with language. That is, groups that share a common tongue (e.g., English) tend to interact more effectively than groups that have to communication across a linguistic barrier (Gefen & Carmel, 2008; Levina & Vaast, 2008; Qu & Brocklehurst, 2003). These factors are further exacerbated by international time difference that affect how often, how quickly, and how directly offshoring clients and vendors can communicate in order to address miscommunications (St.Amant, 2008b).
The notion of cultural proximity has given rise to a gradated approach to international outsourcing. According to this approach, a company would use onshoring – outsourcing to a vendor in the same nation – for complex tasks that can’t be addressed by automation and that require constant, regular contact and communication (e.g., research and development of security software designed specifically for the client’s corporate intranet). A central factor behind such onshoring decisions is also legal jurisdiction. In such instances, an organization might not want to outsource an important activity to a nation where the client would have no mechanism for legal recourse should the vendor decide to disclose trade secrets or replicate copyrighted or patented materials (Lesk, Stytz, & Trope, 2005). (See the section “Critical Issues in Outsourcing” for a more in-depth discussion of problems involving jurisdiction and outsourcing.)
For tasks that involve less direct oversight and are more standardized, but still require regular contact, nearshoring – the process of outsourcing to a vendor located in the client’s same time zone – tends to be used. In the case of the United States, Mexico and Canada tend to be important nearshoring locations. For the EU, Central and Eastern Europe tend to be the primary nearshoring venues (Ang & Inkpen, 2008; Ferguson, 2006). While nearshoring generally means less cost savings via labor arbitrage (e.g., the average Mexican IT worker earns roughly US $18,000 per year while the average IT manager in Vietnam earns only about US $15,500), the need for constant and immediate contact trumps prospective wage-related savings (Ho, 2007; King, 2008). Engineering a particular RFID tracking system to be integrated into the clients overall computing services would be an example where an IT nearshoring relationship might be preferred.
Offshoring, represents the greatest geographical – and generally the greatest cultural and linguistic – distance between the outsourcing client and the related vendor (Jain, Kundu, & Niederman, 2008). Offshoring tasks are assigned to workers in far-away time zones or different hemispheres. Such practices tend to be reserved for highly standardized or automated processes where close oversight and constant, direct communication are not crucial to the success of the activity. Interestingly, many IT offshoring practices are also often outsourced to take advantage of international time differences that allow vendors to perform a task during the client’s “off hours” (McLaughlin, 2003). Activities such as IT customer service and even next-day newspaper editing are generally offshored to maximize such time differences. What often makes this kind of outsourcing successful is the use of same-language speakers (e.g., English speakers in India or the Philippines for US practices) to provide these services (Keong, 2007; Lakshman, 2008; Qu & Brocklehurst, 2003). Such services also tend to involve a relatively high degree of standardization and automation, such as using grammatical standards or editing software to proofread a newspaper article or a standardized script cataloged in a company’s database to offer technical support to callers.
In all of the outsourcing models noted here, communication plays a central role in project success. In the case of outsourcing IT products or services, the specialized nature of such tasks means clear and constant communication is essential to the success of such projects. Yet the speed with which IT practices can change creates challenges related to effective communication in outsourcing relationships. For these reasons, the tools essential to successful IT outsourcing become those that establish and maintain clear channels of communication throughout the outsourcing process. Such tools are also essential to addressing the key problem of transactions costs associated with various outsourcing activities.
IT Outsourcing Tools and Their Applications
While so much of outsourcing relies on technology for access and for operations (e.g., automation), perhaps the most important tools related to effective outsourcing are texts or documents that facilitate communication practices in outsourcing situations (Power, Desouza, & Bonifazi, 2005). As many researchers and commentators have noted, for outsourcing to be effective, client and vendor need to have a common understanding of
- What activities are being outsourced
- How those activities are to be performed
- What constitutes the completion of an activity
Similarly, client and vendor need to share a common understanding of what criteria will be used to assess the quality of the final product or process – a concept known as benchmarking (Platz & Temponi, 2007; Power, Desouza, & Bonifazi, 2005). Without such a shared understanding, vendors could produce items clients do not need or cannot use. Similarly, vendors could engage in processes that actually hurt a client’s core business (e.g., offering ineffective IT support to the client’s customers). Thus, the tools that help client and vendor come to a meeting of the minds on outsourcing projects are among the most valuable, yet they are also among the most overlooked (Platz & Temponi, 2007; Power, Desouza, & Bonifazi, 2005). Such communication tools, moreover, tend to apply to and affect almost all outsourcing practices and relationships. Additionally, many of the problems encountered in outsourcing – and particularly offshoring – situations involved inadequate communication (Barthelemy, 2003; Raisinghani, 2008).
The first and perhaps most important tool for creating mutual understanding is the contract. The contract between the client and the vendor establishes what activity will be outsourced, what conditions the vendor must follow in performing that activity, what final products will result from the activity, and what criteria will be used to assess the effectiveness of the activity. This foundational, paper document is referred to as the legal contract.
On the surface, the tenants of such a document seem self-obvious. Aspects of quality, however, are often a matter of internal organizational cultures. Over time, the internal culture of the client organization creates a series of criteria (benchmarks) that members of the organization use to determine when and if an activity is performed correctly (Ang & Inkpen, 2008; Bahli & Rivard, 2003; Power, Desouza, & Bonifazi, 2005). Such perspectives relate to how the members of that organization interpret certain words or conditions within a contract (e.g., meet minimum conditions for completion of a task). These implicit assumptions of how one is to carry out the conditions of a contract create a second kind of contract. This implicit contract –often called a psychological contract – exists within the framework created by the legal contract and serves as the client’s method for defining success (i.e., define its actual benchmarks).
What makes psychological contracts problematic is they are based upon tacit knowledge and upon common understandings, interpretations, or assumptions that have arisen over time. Thus, psychological contracts are an artifact created by the culture of the client organization (Ang & Inkpen, 2008; Barthelemy, 2003). As vendors are not a part of that organization’s culture, the vendor might associate very different assumptions and interpretations with the same legal contract. The result is the client and the vendor have two different psychological contracts they use to assess the efficacy with which the conditions of the legal contract are met (Ang & Inkpen, 2008; Levina & Vaast, 2008). Such differences can result in disputes among parties or even the creation of goods or the performance of services that do not match with the client’s expectations or needs. In this way, a mismatch between legal and psychological contracts can create risks that greatly increase transaction costs and mitigate the benefits associated with outsourcing (Bahli & Rivard, 2003; Barthelemy, 2003; Gefen & Carmel, 2008).
For these reasons, individuals engaged in IT outsourcing need to view contracts as a tool for clarifying the expectations between client and vendor. Clients need to view contracts as not just a mechanism for establishing responsibilities (i.e., legal contracts), but also as a vehicle for clarifying related expectations (Ang & Inkpen, 2008; Bahli & Rivard, 2003). Such expectations would include the conditions used for benchmarking or quality assessment purposes. Vendors, in turn, need to view contracts as an initial platform from which questions can be asked, clarification can be gained, and a common interpretation can be established.
This ability to clarify and to create a common interpretation is important not only for the initial success of the outsourcing agreement, but also for creating a sustained relationship between client and vendor over time. Research reveals the more client and vendor work together, the more they are able to understand and address each other’s expectations in a manner that helps the two parties better align their psychological contracts and operate more effectively. (In essence, a discussion of contracts can serve as a mechanism that increases the cultural proximity of the organizations.) It is perhaps for this reason that, when seeking a vendor to perform a service, client organizations tend to favor vendors they have worked with before over a vendor that offers a better price (Bahli & Rivard, 2003; Gefen & Carmel, 2008). In these cases, the more expensive vendor offers the key benefit of a shared or a common understanding of processes or assessment/benchmark standards. By viewing contracts as a tool for establishing a meeting of the minds, parties involved in outsourcing can more effectively establish a mutually recognized psychological contract and maximize benefits of the outsourcing relationship. Doing so reduces risk and increases trust across involved parties.
While the contract establishes the initial nature of the outsourcing relationship, other documents maintain the meeting of the minds at a variety of levels during the outsourcing process (Sakthivel, 2007). Specifications, for example, are essential tools a vendor needs in order to meet the client’s expectations (its benchmarks) for creating a quality, an effective, or a complete product (Namasivayam, 2004; Power, Desouza, & Bonifazi, 2005). In IT outsourcing, specifications provide client and vendor with a common measure for how a product should be configured (e.g., coding specifications for software) or how a service should be performed (McLaughlin, 2003). In this way, specifications provide a common foundation client and vendor use to establish if the results of an outsourcing project meet client expectations for that project.
Closely related to specifications are procedures. If specifications provide client and vendor with a common benchmark for assessing results, then procedures provide the mechanism for making sure those results were achieved (Namasivayam, 2004; Power, Desouza, & Bonifazi, 2005; Qu & Brocklehurst, 2003). That is, procedures tell outsourcing vendors how (through what actions or undertakings) the client expects them to achieve a particular end. Establishing common procedures is important, for the route through which a final product is developed or service is provided can reflect the client’s intended use for that product or application of that service.
In the case of IT outsourcing, specifications might require the vendor to address a particular goal through a given service (e.g., use help desk calls to market additional services). While the vendor can use those specifications to guide how to perform a task, the process through which that task is actually performed might reflect the client’s intended greater objective related to that service (e.g., to market a wider range of services to current customers). From a production perspective, a computer chip might need to be produced in a certain way in order to withstand the heat related to a certain kind of rapid processing. A final product designed according to a different procedure, however, might not meet those same client intentions for use. The mismatch of processes might result in a failure when the product is used as the client intended (e.g., the computer chip melts whenever the client tries to use it).
The same situation is the case for the outsourcing of service activities. Again, the vendor might meet the objectives of a contract (e.g., answering a caller’s question related to computer help). Failure to follow the client’s expected procedure in providing this service could, however, result in problems (e.g., answering calls in a manner that conflicts with the client’s approach to offering a service or offending customers). Outsourcing clients can improve the chances vendors will match their expectations if those clients
- Create a set of procedures that reflects how the client expects a process to be performed
- Explaining the reasons why the process must be performed that way
For clients and vendors to make effective use of such common tools, they must have access to them. Clients and vendors must also have access to each other so that information can be exchanged and questions can be asked in a manner that results in a successful outsourcing relationship. Central to this process is a mechanism or mechanisms that allow such communication and access to occur seamlessly. Thus, all parties can benefit from a project intranet site, or other related database, that allows clients and vendors to access needed contracts, specifications, or procedures. Such a system, in turn, needs to be designed so involved parties are alerted when updates to such items occur. The creation of centralized databases for outsourcing projects, thus, is an important IT tool for client organizations to develop. This kind of centralized repository of knowledge, moreover, becomes important if multiple vendors are working on the same project and the client needs to share information with these vendors.
Interfaces, or interface design, thus becomes an important factor in outsourcing. In essence, effective interface design allows clients and vendors to quickly and easily find the information each needs to make the outsourcing relationship a success (Ang & Inkpen, 2008; Sakthivel, 2007). For this reason, the design of interfaces through which outsourcing interactions occur cannot configured randomly. Rather, the interface must be designed in a way that makes it easy for all parties to find and to exchange information (Ang & Inkpen, 2008). This interface must also provide participants with a mechanism for tracking and for being alerted to any updates or alterations made to important materials (e.g., specifications) in the system. So, when considering the design and the architecture of outsourcing-related interfaces and databases, IT professionals need to remember the
- Central items to which all parties will need access
- Kinds of materials they will exchange
- Varieties of updates that might take place
By considering such factors, the related developer or designer can create an interface and an underlying architecture that engenders success in outsourcing interactions.
Equally important are the media client and vendor use to communicate. To begin, client and vendor alike need to select a common technology through which they will interact (Sakthivel, 2007). Such a technology might be an email software, a document sharing software, or a range of other IT options. In all cases, the client must be sure the vendor possesses both the same software (e.g., shareware) and the same versions of the software that the client does. If, for example the client uses In Design to create certain materials, but the vendor uses Quark to create similar kinds of materials, it might be difficult for client and vendor to review or make use of the items they are exchanging. Similarly, if client and vendor are using different versions of the same software (e.g., Microsoft Word 2007 vs. Microsoft Word 1995), then each party could have a problem using items provided by the other.
While such caveats seem rather self obvious, one needs to remember that automation – or the use of computer programs to perform certain functions – is a central component to effective outsourcing, and particularly to effective offshoring. For these reasons, client organizations need to be sure communication technologies are compatible between client and vendor to avoid unexpected transaction costs related to addressing such technology differences (Bahli & Rivard, 2003).
While these text and technology tools are central to successful outsourcing, they must also be used or applied effectively so all parties can work toward a common goal. For this reason, client organizations need to work regularly with vendors to make sure there is a commonality of understanding and of tool use that makes the overall process a success (Bahli & Rivard, 2003). Managers, in turn, can be a valuable asset when addressing these factors. Organizations interested in outsourcing thus need to re-consider both the skills individuals need in order to serve as managers and the activities such manager should undertake to facilitate effective outsourcing relationships.
Management in IT Outsourcing Environments
If effective communication is essential to successful outsourcing, then the successes of managers in outsourcing situations are directly linked to their skills as communicators as well as to their abilities to understand the organization’s business processes (Duarte, Sackett, & Evans, 2004/05; Levina & Vaast, 2008; Sakthivel, 2007). In fact, the primary objective of managers in outsourcing situations is to share their organization’s business goals and objectives with vendors. Vendors can then use this information to provide the goods or services that meet the objectives essential for the success of the client’s core business. In essence, the distributed organizations created by outsourcing make managers the central individuals who bind the different parts of the overall process together (McLaughlin, 2003). It is therefore imperative that managers of outsourcing arrangements be able to share a common vision across working groups. It is equally important managers are able to monitor projects (receive and assess communication) and provide guidance (communicate ideas) in order to help all parts of the decentralized process move toward a common goal (Solli-Saether & Gottschalk, 2008).
To achieve these objectives, managers must first have a solid grasp of the organization’s business practices, its strategies (both long- and short-term), and its overall goals or objectives (McLaughlin, 2003). This knowledge base is imperative, for such ideas are what the manager must continually communicate to vendors if the outsourcing project is to succeed (Levina & Vaast, 2008). This knowledge base is also closely tied to the idea of using specifications and procedures to reduce transactions costs and reaping the benefits associated with outsourcing. Managers who can continually convey these ideas to vendors will thus maximize the advantages outsourcing can offer their organizations.
As noted earlier, outsourcing relationships involve two different kinds of contracts – legal and psychological. The legal contract explains what the vendor is asked to do. If, however, the vendor is not familiar with the client’s expectations and practices, the vendor might not understand how specifically to perform a given activity or why an activity needs to be performed a certain way (Ang & Inkpen, 2008; Levina & Vaast, 2008). The role of the manager is to rectify such legal vs. psychological differences so vendors understand the client’s greater business objectives when performing work for that client. By communicating these concepts from the start, mangers can both educate/train vendors and monitor the quality of overall processes. If, however, a manager is not familiar with how the organization’s core business practices and objectives operate, that manager will have a difficult time communicating such ideas effectively to vendors (Levina & Vaast, 2008). Thus, an understanding of business concepts in general and the client’s core business in particular is essential to effective communication, and thus effective management in outsourcing situations.
To effectively communicate the client’s business strategies, managers also need to know what the vendor is doing and how those activities relate to the client’s business objectives. For this reason, managers must have a good understanding of the contracts, specifications, and procedures that govern an outsourcing relationship. As with client business strategies, the only way managers can communicate effectively when discussing such items is to be very familiar with them. For this reason, managers need know – or have written – these materials so they can communicate about them effectively with vendors. (That is, the information contained in these documents is what vendors will use when discussing the client’s project.) Knowledge of these items allows managers to speak the vendor’s language and quickly and efficiently assess communiqués from the vendors as well as convey information to those vendors. Should a client seek to outsource a project simultaneously to multiple vendors, those contracts, specifications, and procedures become the medium the manager uses to communicate effectively across multiple organizations in order to keep all of them on task.
As outsourcing practices become more international, new management skills in cross-cultural communication and project decision making become essential (Chandrasekar, 2004/2005). As noted earlier, the greater the difference between two cultures (low cultural proximity), the more difficult it can be to convey ideas and concepts across those cultures. For manages in international outsourcing/offshoring situations, this difficulty is important, for the success of outsourcing projects relies on clear, effective, constant, and often quick communication from client/manger to vendor. The more time spent having to clarify cultural differences in expectations (e.g., what a support technician is supposed to do) or culture-centered business practices (e.g., creating an IT accounting infrastructure that allows for an external audit), the more challenging the communication tasks of the manager become. Should translation also be needed to facilitate such communication, the more difficult the activities of the manager become. As Ang and Inkpen note in their 2004 study, in international collaborative projects – such as outsourcing situations – a relatively large amount of time is spent just addressing issues of miscommunication and creating common perceptions of tasks.
What further complicates this situation is how savings from offshoring can be used to address management issues in overseas operations. As previously discussed, one benefit of the labor arbitrage is that a client organization can hire more managers per operation to create smaller ratios of managers to employees. While such practices can contribute to better oversight and more on-the-job training, they also mean the individual managing an overall outsourcing operation has more on-site managers he or she needs to communicate with to keep operations focused on achieving the client’s business goals. More managers from other cultures mean more room for cross-cultural miscommunication and more room for error (McCue, 2006).
All of these factors do not mean offshoring situations are unmanageable. Rather, they mean mangers of offshoring projects need to develop a foundational knowledge of culture and communication factors (Ang & Inkpen, 2008). With this knowledge, managers can make better choices of how to interact with overseas vendors as well as when to interact (according to the vendor’s cultural expectations) to provide oversight, criticism, or updates. Managers can also use this knowledge to draft specifications, and procedures that might be better suited to the expectations of the overseas IT vendor. This same knowledge can also be used to form strategies on how to communicate the client’s business objectives when discussing the topic with vendors from other cultures.
Finally, such cultural knowledge can be used to help the client company make decisions of when to offshore IT functions, what IT practices to offshore, and to where such IT practices should be offshored (Shao & David, 2007). If, for example, the manager knows that daily, real-time interactions are needed for an offshoring project to operate effectively, that manager might suggest the client company rely on nearshoring vs. offshoring. If the manager knows an IT process requires a specific understanding of certain language – and that translation might affect such understanding – that manager could advocate working with a vendor whose employees speak the same language as the client. Thus, mangers with a foundation in cultural and communication can help a client organization succeed in terms of its daily IT operations and in making important choices related to selecting an international IT vendor.
More recently, offshoring situations have led organizations to value a new kind of skill for outsourcing management, and that skill is entrepreneurship. The idea is managers who are familiar with an outsourcing – and particularly an offshoring – process can look for new ways to make use of the savings resulting from offshoring (Ang & Inkpen, 2008). One example of such entrepreneurship is the development of new IT products. In industrialized nations, the cost of research and development can greatly limit what projects are approved for research. Research then becomes limited to projects that have the greatest potential returns on the original investment of resources.
In offshoring situations, lower labor costs mean that research and development in other nations is a less expensive undertaking. IT vendors in those nations can thus explore a wider range of research and development options than they might be able to in the client’s home nation (Wadhwa, 2007). The results can be new products that create additional value, but the client would not have developed in house due to cost factors. A good example of this entrepreneurial approach is how Ukrainian vendor MacKiev was able to develop low-cost Mac ports of Windows products – something that might not have been undertaken/been seen as too costly if not for offshoring (McLaughlin, 2003). Managers who can recognize such potential in offshoring situations will thus have a great deal to offer client companies in terms of to maximizing competitive advantage (Ang & Inkpen, 2008).
This ability to identify potential and maximize competitive advantage also relates to the international IT markets a client organization can access via offshoring. Certain product aspects, such as interface design and conditions of use, generally vary from country to country. These variations tend to be connected to cultural preferences (e.g., reading direction) and national situations (e.g., the reliability of local power grids). By viewing offshoring vendors as prospective customers, a client organization can work with those vendors and modify its products or services to meet the expectations of the related overseas consumer base (Amelio, 2008). According to this perspective, managers can use offshore IT vendors as a market for testing the client’s IT goods or services for the vendor’s culture. The result is using an existing relationship to gain access to larger international markets (Wadhwa, 2006).
The various opportunities outsourcing provides for managers and for client organizations are wide ranging. These opportunities, however, also often bring with them address elements of risk. To make effective outsourcing decisions and to manage outsourcing practice effectively, organizations and individuals need to understand issues and problem areas arising from outsourcing and offshoring approaches. Through such an understanding, managers and client organizations can make more effective decisions that can benefit client organizations in the short and the long term.
Critical Issues in IT Outsourcing
One crucial issue in IT outsourcing is the changing nature of intellectual property (IP). IP generally covers information-based products or processes developed by an organization. In most cases, such products represent the original application of an idea to create a new item or to develop a new procedure. Traditionally, the concept of IP has involved notions of copyright, patents, and trade secrets (Sakthivel, 2007). In such situations, information becomes an important commodity, for it is the information used to produce a product or perform a service that is valuable (provides an organization with a competitive advantage). Recent developments in offshoring, however, indicate current perceptions of IP need to be expanded to a range of data organizations collect and process. For these reasons, organizations need to understand various IP nuances to make effective decisions related to offshoring.
From an IP perspective, copyright and patent disputes are one of the main problem areas in almost any outsourcing situation. Essentially, the moment an organization allows any information-based product or process to move beyond its prevue, the organization has relinquished its ability to direct the modification, replication, or distribution of the related knowledge. In the case of onshore outsourcing, the organization can rely on common national and cultural traditions of contract law and IP law to establish guidelines for vendors to follow (Rosenthal, 2005; St.Amant, 2008a). These same commonalities provide the client with a legal mechanism to address misuses of its IP. Such mechanisms also act as a deterrent, for both client and vendor know the penalties that can result from the misuse of a client’s IP.
The rise and widespread adoption of offshoring, however, creates new legal dilemmas for outsourcing clients. The crux of these problems is jurisdiction – or the geopolitical limits to various legal traditions. In onshoring, client and vendor often exist in the same jurisdiction and operate according to the same legal framework (Lesk, Stytz, & Trope, 2005). Conversely, in offshoring, client and vendor are situated in different nations that could have vague – if not contradictory – legal mechanisms for identifying and addressing IP violations (Swire & Litan, 1998; Rosenthal, 2005; St.Amant, 2008a). In some cases, the laws related to IP protection might be weaker in the vendor’s nation. In other instances, the regulatory and oversight agencies in the vendor’s nation might simply not enforce such laws. At present, such differences have led to conflict involving a range of offshoring areas including pharmaceutical products, medical transcription, and software programming (Lakshman, 2008).
What makes this IP situation problematic is software-based automation used in many offshoring contexts. Equally problematic is the fact that more companies are offshoring the development of IP products and processes – such as software programming and server maintenance (Barthelemy, 2003; Heath, 2008). Further complicating this problem is some of the growing hotspots for IT offshoring are nations with records of repeated IP violations (Qu & Brocklehurst, 2003; Wadhwa, 2007). Certain research, for example, notes that Vietnam is a known international offenders in terms of software piracy (Lim, 2006). Yet Vietnam is emerging as a hub for IT offshoring and gaming development (Balfour, 2006). Organizations therefore need to carefully research both the vendor and the vendor’s related nation before deciding where to offshore certain tasks.
Curiously, the more recent problems related to IP and offshoring are not as much about software as they are about the data such software processes. The crux of this problem involves personal information – particularly the health records or the financial records of specific individuals. In the US, for example, the adoption of laws such as the Health Insurance Portability and Accountability Act (HIPAA) of 1996 and the Sarbanes-Oxley Act of 2002 have required organizations to take on a new range of data collection and data processing tasks (404 tonnes of paper, 2004; Goolsby, 2001a; Goolsby, 2001b).
The sheer scope of such activities has prompted a number of organizations to offshore activities such as medical transcription and financial accounting practices (Byrnes, 2005; Lesk, Stytz, & Trope, 2005; St.Amant, 2008a). Thus, large quantities of personal medical records and financial information are now sent abroad for processing. Such information is actually something that has value in relation to a range of legal (e.g., target marketing) and illegal (e.g., identity theft) activities (Michael et al., 2005; Ni & Bretschneider, 2007; St.Amant, 2008a). This information thus constitutes a new kind of intellectual – or information-based – product that can be owned (e.g., property). And, just like traditional IP, the legal context created by offshoring establishes an environment in which abuses can occur (St.Amant, 2008a). More recent examples misuses of personal data include identity theft of financial information and extortion related to the disclosure of medical records (Lazarus, 2004). These IP- and software-related situations mean organizations need to think carefully about the nature of their core activities. The re-assessment of such activities is essential undertaking, for this core should included those activities that could result in IP-related problems if offshored (Shao & David, 2007).
Another issue organizations will need to consider is the threat of cyberterrorism in IT outsourcing. The same oversight limitations affecting IP outsourcing – and particularly offshoring – also constitute potential problems in terms of international terrorism (Michael et al., 2005). From an IT perspective, such concerns can take two main forms. The first is the disclosure of sensitive information. In this case, an outsourcing vendor could share or sell details about the security protocols and IT systems of a client. This disclosure leaves the related system vulnerable to attacks from terrorists who can navigate through it, override its defenses, or use known glitches or limitations to wreak havoc on the related organization (Michael et al., 2005). What makes such situations particularly troublesome is the growing number of government agencies that use offshoring for some of their IT work (Ni & Bretschneider, 2007).
A related problem area involves the offshoring of software programming. In this case, the programmer could design a software product to contain certain weaknesses that terrorists could later exploit (Michael et al., 2005). Should the client distribute such software to a wide range of customers (e.g., tax preparation software), such purposeful flaws could cause widespread problems. Similarly, a programmer could design a software package to shut down or to create problems (e.g., distribute a virus) that could cause the collapse of the system in which it was used (Michael et al., 2005). (This approach to software as a sort of time-delayed weapon was actually employed successfully by the US against the Soviet Union during the Cold War (Michael et al., 2005).) Again, such areas of concern are related to oversight and what constitutes a core activity to outsource or offshore. For these reasons, organizations might consider
- How outsourcing will be used in the development of software products
- What kinds of software development will be outsourced
- How outsourced software products will be used by the client organization and its related customers
By reviewing these factors, the client organization can more carefully determine if and when outsourcing or offshoring are effective methods for addressing certain situations.
The concerns noted here represent the current context of IT outsourcing. They, however, are not the only aspects organizations need to consider when making decisions related to outsourcing. Rather, a number of emerging trends could also influence how client organizations effectively use outsourcing. Organizations must therefore familiarize themselves with such trends and consider approaches for addressing them (Lesk, Stytz, & Trope, 2005; Shao & David, 2007). Only through such foresight will clients to make effective use of outsourcing in future ventures.
Organizational Implications of IT Outsourcing
As noted earlier, current outsourcing practices mark only the tip of a potential global marketplace that remains to be tapped. It is perhaps for this reason that the most interesting emerging trends related to outsourcing involve the changes and potentials of markets in developing nations. Of these developments, perhaps the most interesting is the relatively recent move toward a new kind of outsourcing called worldsourcing. According to the worldsourcing approach, an organization does not just offshore activities to a single nation or to a few nations. Rather, clients now seek to re-distribute all non-core functions to overseas employees in several nations in order to take advantage of labor arbitrage on a truly large/global scale (Amelio, 2008; Ang & Inkpen, 2008; Jahns, Hartmann, & Bals, 2006). As a result, some of the company’s non-core functions, such as financial services, are performed in a particular location or locations, such as India or China. Other non-core functions, such as healthcare processing, are outsourced to Russia, and legal services are offshored to New Zealand (Sathe & Aradhana, 2008).
In some cases, one particular kind of IT or other work is sent to a single vendor or a group of vendors on one nation. In other cases, the same kind of work is distributed to a variety of vendors in multiple nations. Each vendor, in turn, completes a part of an overall specialized puzzle. In both cases, the objective is to re-locate any and all non-core functions to a range of overseas vendors and thus reduce labor costs on a large scale to maximize competitive advantage as much as is possible.
The rise of worldsourcing has led different nations to develop their expertise in and their reputation for performing a certain kind of knowledge-based function. Such nation-based specialization has become particularly popular in the realm of knowledge process outsourcing (KPO), and tentatively, certain countries have emerged as front-runners in the quest to create a global outsourcing brand for performing a particular service.
The rise of worldsourcing has also brought with it new perspectives of the multinational corporation. If, for example, a multinational outsources essentially all of its functions to other nations, does that organization need to have a true global headquarters? Could such an organization instead exist as a disembodied entity in which different regions performed a given function that contributed to the continued market success of the overall whole? While such an approach sounds futuristic, one organization – China’s Lenovo – has begun to examine this model of operation (A bigger world, 2008). According to this corporate framework, there is no such thing as offshoring – just different organizational functions being housed in various nations. Management from each of these divisions then meets at different regional functional location over the course of the year in order to coordinate activities and plan business strategies. This radical approach to worldsourcing means offshoring is no longer a strategy companies employ; rather, it serves as the structure of the overall company.
Emerging Trends and Societal Implications of IT Outsourcing
On a more modest level, the access offshoring provides to local markets has prompted a number of organizations to re-think where certain core activities—particularly research and development (R&D) – should take place. In terms of R&D, the idea has to do with how well designed products are for a larger global marketplace. According to this perspective, R&D conducted in industrialized nations leads to the development of products and services designed for consumers in those nations. From an IT perspective, such products, however, have been created to meet the income, infrastructure, and other high-tech needs of individuals in those nations. As a result, these products and services are often poorly suited for use in developing nations that lack the infrastructure and other technical aspects needed to operate the IT product or engage in the IT-related process (Farrell, Puron, & Remes, 2005). The company associated with the IT product or service must therefore ask a key question: is it easier or more cost effective to try to revise the existing product or service into a simpler format for consumers in developing nations or develop a completely new, simpler product or service for consumers in those countries? In many cases, neither of these options is cost effective.
More recently companies in emerging markets have used their own R&D to develop products, such as laptop computers, designed to meet the needs of consumers in those nations. The result has been a rapid growth in market share for those companies, such as China’s Lenovo, and the use of economies of scale to reap sizable profits (A bigger world, 2008). These developments have prompted a number of companies to consider re-locating R&D activities to developing nations. The idea is that offshoring R&D to such nations will result in products or services that would be basic, and designed for success in these regions. Thus, the related company could tap those markets. At the same time, the relatively basic nature of the resulting product or service would be easier to upgrade or revise to address the needs of consumers in industrialized nations. (In sum, it’s cheaper and easier to make a simple product more complex than to try to simplify an inherently complex item.) This reasoning, in combination with the rise of successful R&D activities in developing nations has prompted a number of organizations to consider outsourcing R&D to a number of locations. (At present, India, China, and Russia appear to be the hot locations for such R&D outsourcing in IT (Sathe & Aradhana, 2008).)
As noted earlier, effective management is essential to successful outsourcing, particularly international IT outsourcing. As worldsourcing gains in popularity, as more organizations become globally distributed, and as a new range of strategically important (if not core) IT functions is sent overseas, the need for effective managers becomes even greater. The problem is that many of the nations that have become centers for outsourcing activities lack formal programs in management education or have only fledgling programs in that area. As a result, the supply of trained managers in many nations might not be able to keep up with the growing demands created by increased offshoring.
One solution to this problem is the expansion of online programs in management education. At present, several institutions provide online instruction to internationally dispersed students. For example, Deakin University in Australia offers a range of Web-based classes and degree programs to students located throughout Asia (Offsite Learning Part I, 2002). Similarly, the Open University of Hong Kong, the Philippines-based Systems Technology Institute (STI), and the Singapore-based Informatics Group’s Center for Open Learning all provide online courses to a growing international student base (Offsite Learning Part I, 2002). At the same time, much of the earlier skepticism about online education has begun to disappear as more companies focus on the skills a student can demonstrate vs. the institution where those skills were acquired (Offsite Learning Pt. II, 2002; Online Degrees Gain Acceptance, 2005).
Within this new educational context, business – particularly business management – instruction has become a prominent area. The reason for such importance is capable online programs are able to deliver effective business and management instruction to workers in nations that have either limited or no formal instruction programs these fields (The MBA World Gets Smaller, 2001). These online programs also offer the added benefit of acculturation. That is, they actually prepare students for operating in the decentralized, distributed, and online environments at the center of IT outsourcing practices. Additionally, these programs provide students with initial exposure to working with international colleagues via online media. Such aspects have prompted a number of employers to recognize the advantages or online learning environments in relation to business education (Chassie, 2002; Offsite Learning Pt. I, 2002; Offsite Learning Part II, 2002). Thus, online instruction and the growth of international online programs – particularly in management education – could be driven by and help to address many of the demands created by outsourcing.
Managers, however, are not the only trained workers in short supply. By many accounts, the number of available and qualified IT workers in several nations is not enough to keep up with the growing demands created by offshoring (Ni & Bretschneider, 2007; Shao & David, 2007; Yeo, 2006). For example, a number of US companies continually claim there is a lack of trained IT workers in the US. These organizations also cite this shortage as the reason for which they continually search for overseas vendors to perform IT functions (Herbst, 2007). In fact, the high demand for IT offshoring workers has led to a market crunch in many overseas IT hubs (Yapp, 2007; Yeo, 2006).
This lack of trained IT workers has led to a variety of developments that will surely affect future practices in offshoring. To being, more IT offshoring vendors are beginning to emerge in nations such as Malaysia, Vietnam, and Sri Lanka in order to meet this demand (Augria, 2008; Birks et al., 2007; Ho, 2007; Mitchell, 2004). The result has led to a boom in the IT offshoring industry in those nations. The growing demand for IT workers has also caused the salaries of employees in offshoring hotspots like India to soar (Hamm, 2008; King, 2008). As a result, the cost savings associated to offshoring IT work to India is shrinking, and India itself has begun to offshore IT and other service activities to nations where such work can be performed more cheaply (Yapp, 2007). These secondary outsourcing nations include Mexico, Ecuador, and Colombia (King, 2008). And as supply and demand continue to create pressures in offshoring, organizations might see the same online educational models used to train managers used to train IT workers as well.
Conversely, in a number of industrialized nations, growing concerns over jobs lost to international outsourcing and prospective security threats have lead to a backlash against offshoring. In some cases, this backlash has taken the form of legislation designed to prevent jobs in certain areas from being offshored (Ni & Bretschneider, 2007; Shao & David, 2007). In 2002, for example, New Jersey state senator Shirley Turner introduced a bill that would keep state contracts for call center services in the US if possible (McLaughlin, 2003). In other cases, offshoring-related concerns have led a number of individuals to question the claims of a shortage of IT workers in nations such as the US. These instances have prompted numerous individuals and agencies to look into these practices and the claims of those organizations seeking to offshore IT and other kinds of technical work. The result is a kind of prospective political instability where outsourcing vendors might not be sure if they can or will be able to work with clients in the future. Such instability, in turn, could prompt organizations interested in de-centralizing their operations to actually avoid creating offices in certain regions.
Concluding Thoughts on IT Outsourcing
From an organizational perspective, the decision to outsource IT-related activities is no small matter. It requires a good understanding of what the organization’s core business is, what strategies the organization uses to achieve competitive advantage in relation to that core, and what benefits IT outsourcing would offer in terms of leveraging that advantage. Effective IT outsourcing can lead to organizational success and better access to the growing global marketplace. Poorly planned and poorly executed IT outsourcing approaches, however, can result in the loss of valuable IP, a decline in market share, and even the destabilization of a business’s core activities. Thus, the more an organization knows about IT outsourcing-related variables affecting IT – basic practices, common approaches, managerial aspects, organizational structures, and potential risks – the better prepared that organization can be to make decisions on if, when, and how to engage in outsourcing activities.
This introduction has provided an overview of the general areas and topics related to IT outsourcing practices. The other entries in this collection build upon and expand these ideas in a manner that provides focused insights on outsourcing practices and perspectives. These entries also present new perspectives on and approaches to IT outsourcing practices. While IT outsourcing decisions are often made on a case-by-case basis, these entries offer readers s range of ideas and approaches that can help clarify the conditions of a particular situation. By using the entries in this collection as a resource for outsourcing-related research, organizations can improve their understanding of the factors involved in IT outsourcing and develop business strategies and procedures that successfully address these aspects. In sum, effective outsourcing comes down to one simple concept – information is power, and the readings contained in this collection constitute a mechanism for achieving such empowerment.
East Carolina University, USA