The Outsourcing Dilemma

The Outsourcing Dilemma

Arvid Nass

CMGT/578 CIS Strategic Planning

Robert Whale

July 2, 2007

Introduction

To outsource or not to outsource, that is the question. It is indeed a question that a CIO, CEO, or IT manager is likely to encounter. It is not a simple question, nor is the answer simple, and there is not a one size fits all solution. As with any decision, it is good to face it with facts and without prejudice. This work shall discuss factors that help determine the answer, risks, benefits, cost analysis, and implications to the business.

Prevalence of outsourcing

How prevalent is outsourcing of IT function? Is it true that outsourcing in US companies primarily sends work to foreign countries? According to a Culpepper Compensation and Benefit Survey of 68 science and technology companies, 81 percent of companies surveyed outsource some IT function, while none of the companies did everything in-house and only 5 percent outsourced all IT function (Culpepper, 2007). The following table from the survey results shows the amount of domestic and foreign outsourcing (Culpepper).

This survey clearly indicates that outsourcing is prevalent, with prevalence to outsource to domestic service providers. The Gartner Group estimates that outsourcing will be a 50 billion dollar industry by the end of 2007 (Singh, 2006).

Outsourcing options

There are a variety of different outsourcing options available. Among these are software development, software support, hardware support, complete provision of an application and database environment, provision of server functionality only, provision of specific application capability, provision of business continuity functions, and provision of data backup and recovery functions. To further define outsourcing of software development, Nigel Atkinson of NeoWorks divides relationships between the provider and client into categories of "traditional" and "partnership" (Atkinson, 2005). The traditional relationship would suit the client that knows exactly what the solution will look like and do, whereas the partnership relationship would suit the client that only knows the functionality that is needed but does not know how the solution would look. The options being offered are constantly changing as outsourcing providers attempt to predict the needs of future clients and respond to needs of present clients. Outsourcing is a broad topic and this work will address it in a general rather than a specific manner, differentiating only where the options are completely distinct.

Strategic implications

At the surface, it may appear that outsourcing would limit the control that the company would have over the IT function and resources, but is that really so? This question begs another one. Does the company have control now, or is the IT function already out of control? Can the company devote the kind of resource necessary to manage its own IT resources? Is it strategically a sound decision to have a department in the company that specializes in IT support, or would it be better to obtain service from a company that specializes in IT support? One thing is clear, a company must focus on its strategic mission. It cannot be fragmented from that mission by other areas of focus. This type of focus can happen with internal IT support if the IT department can perceive ownership of the company strategic mission and turn that perception into action. Too often there are political differences between business departments and the IT department that detract from the mission. Worse yet, the departments may be so disconnected that they don't even know that they have differences. Outsourcing could certainly help solve these types of problems.

Risks

Outsourcing can be a risky business because it is generally an implicit alliance between the business, hereafter known as the client, and the outsourcing provider, hereafter referred to as the provider. It is unlike hiring an electrician to do some electrical work, it is more like a lease agreement for a facility. Damage resulting from either outsourcing or leasing is likely to be irreversible because resulting problems are likely to widely affect the business. Because of this, it is essential to know key information regarding the provider before entering into an agreement. The most important information to obtain is the financial well being of the provider. The last thing that the client will want is to have service terminated because of a provider funding problem. One of the key benefits in outsourcing is that a provider with robust resources could respond quickly to client needs, directly linked to the financial well being of the provider. Other key information items are the physical locations of the provider, the outsource assets of the provider, existing customers for references. The obvious risks are likely not the real ones. For example, it is probably less likely that the provider will divulge confidential corporate data than a disgruntled or greedy employee. Specific to outsourcing software development come risks that many businesses would shy from, yet they can be managed if recognized and dealt with from the beginning. Anil Singh of Hanu Software has identified the following five risks (Singh, 2006).

Risks when Outsourcing Software Development

o Communication/cultural barriers

o Misunderstanding of requirements

o Quality assurance

o Concerns about intellectual property security

o Differences in company infrastructure and processes

Added to these risks is also the risk associated with long term support of the application that has been developed. It can be said with certainty that outsourcing does not absolve the client of attentiveness to specification of the application, nor does it reduce the amount of attention and work that will be required to introduce the application into the environment at the client site.

Benefits

Outsourcing can indeed yield significant benefits to an organization. The primary benefit is that management of an IT department is not present to distract the business