Industry has been greatly changed in the current technology world, and companies have built new and innovative ways to handle their activities. The need for separate departments in large organizations has profoundly influenced the way companies operate. This is to allow some of its activities to be handled externally by hired firms specializing in it. The word outsourcing has been coined by this need (Lederer, 2008). Today, companies hire contractors to work on their customer care systems and other projects, e.g. in their operations side of information technology. In this paper IT related outsourcing shall be dealt with in relation to various pros and cons that it has on a big company.
Pros of Outsourcing IT
Proponents of this mode of operations have put forth quite a number of the advantages that befall a major company. They have argued that for contemporary management the question should not be on whether to outsource or not but how much to outsource as IT related functions are many and some may pose huge challenge or more security risk than others. The following are some of the major advantages that a major company will face.
A large company’s IT department is usually huge and having many projects to run. At times these departments are regarded as contributing to the organisation less than they consume. Huge IT departments are cumbersome to operate and outsourcing will ensure that the company is able to operate in a better way than before as argued by Frank (2009). Outsourcing firms also offer consultancy on how to best handle internal controls and in this case in relation to IT related operations thereby in the end ensuring that the company is in a better position to control its IT functions.
Cost Saving, Efficiency and Quality Enhancement
Outsourcing in many cases acts as a cost cutting measure and with the current trend for many large companies to go the downsizing way, it has become a popular avenue. Outsourcing leads to a company needing less staff, less space and time says Tho (2005). This in totality brings efficiency in the general operations of the company. A large firm will most likely refer its IT functions to a highly competent vendor thereby ensuring high quality IT services. This high quality is coupled with lower costs as bulk contracts attract better contractual deals.
State-of-the-Art Technology Access
The IT sector is one that is quite volatile and as time passes new technologies emerge. These advancements at times can be quite rapid that the company may not be in a position to adopt it as fast. This may be related to financial constrains or lack of expertise to execute new systems. Outsourcing firms on the other hand specialise in one field and are most aware of the emerging trends therefore they are better positioned to incorporate this hi-tech systems and programs into the company’s IT system at low cost or none at all.
Companies in the current business environment are being faced with ever changing demands. Failure to meet these demands may stand between the company and profitability or chances of market dominance. Vendors on the other hand are able to consolidate both resources and skills to meet these demands. A company is therefore able to have a flexible external arm i.e. the outsourcing firm at relatively lower cost.
Focus on Core Activities
When a company outsources some of its functions it is almost automatic that it is able to give more time and resources to the ones still under its full control. According to More (2003) IT department in a large organisation is at times resource intensive in terms of cost of running and maintaining the system, IT staff remuneration and benefits, space allocated to the department etc. all these are eliminated after this functions are outsourced. The space may be done away with altogether or used to host other key departments like accounting. Better remuneration may be awarded to staff from other departments as well. In totality a big company will be able to lay focus and address the needs of other areas of operations better when some are not under its direct focus.
Develop Internal Staff
As earlier stipulated outsourcing firms are better placed to keep up with the emerging trends in the ever evolving IT industry. As a result there is a high chance that their employees possess more knowledge and expertise than those of the big company. The management of the big company should allow it employees to interact with those of the vendor company in order for them to learn what needs to be learnt at that particular time. This will increase the staff skills and competence to handle internal IT affairs better while integrating their knowledge with that learnt from the other firm.
Cons of Outsourcing IT
There are a number of disadvantages that exist while a company is planning or is outsourcing its IT functions. A number of them will be discussed in this section.
Complexity of Outsourcing IT
Unlike other company functions it is not easy to have IT functions effectively outsourced. Considering this is a large firm most of its operations are IT dependent and therefore interrelated. This in itself poses a challenge on what to outsource and to what extent. IT in this respect is seen to have fully permeated other departments meaning that other functions that may be sensitive to external scrutiny may be accessible by the vendor.
Loss of Control
This is one of the major disadvantages that the company will experience while outsourcing IT. Those opposed to this trend argue that an in-house function is better placed to act according to the wishes of the management that in turn acts to the best interest of the shareholders (Lederer, 2008). Outsourcing automatically breaks this link as the employees of the vendor are not accountable to the hiring company’s management. This turns to be a risk that extends to making the outsourcing field be exposed to confidentiality doubts. This is in relation to data and other strategic initiatives and policies of the company as IT functions carry with them a great deal of information quite hazardous if it falls on wrong hands e.g. competitors.
Outsourcing costs and the foregone costs in the long run may prove to have been miscalculated. For a big company cost savings is seen as one of the biggest advantages of outsourcing. The current cost of outsourcing may be cheaper than maybe owning a mainframe. However, this latter avenue may become cheaper with time while the outsourcing cost remains constant if not higher. An example is the cost of a mainframe which goes for around $30,000 whereby in the next 5 – 10 yrs it may be half that price (Frank, 2009). A company may need therefore to make better decisions on outsourcing bids as well as the time frame the contracts should run.
Poor Employee Morale
As earlier mentioned a company seeking to outsource has one of the motives being to downsize which results in layoffs. If this is not the case employees are shifted to the vendor company without their wish. This generally demoralises these workers and the expected productivity may drop leading to inefficiency or even sabotage.
High Switching Cost
The current trend with companies is mergers and acquisitions making it inevitable for firms to adopt a single vendor under any of this transformation. This in turn calls for more costs especially when making a switch as most of the times this result in contractual obligations of redress in cases of contract termination (More, 2003). Big companies are more vulnerable to mergers and acquisitions, making it a significant consideration when considering outsourcing.
The above points from either side of the divide exhibit some of the most common benefits and shortcomings of outsourcing IT functions. It is therefore the onus of the management to decide the best way of dealing with their IT department. In case they decide outsourcing is the better option then other considerations as to what to or not to outsource need to be looked into.
- Frank, R. (2009). Pros and cons of outsourcing IT services. Retrieved 24 Sept. 2010. http://www.suite101.com/content/pros-and-cons-of-outsourcing-your-it-services-a141393
- Lederer, A. Y. (2008). The pros and cons of IT outsourcing. Journal of Accountancy. pp. 1-8.
- More, L. (2003). IT outsourcing: Management and technical considerations. Institute of Chartered Accountants in England & Wales, Faculty of Information Technology,
- Tho, I. (2005). Managing the risks of IT outsourcing. Butterworth-Heinemann.