A Glimpse Into The Future

“A Glimpse into the Future: The Implications of Offshore Outsourcing of Information Systems Development”

Abstract: The offshore outsourcing of information systems has become a most important characteristic of the international IS field. This paper presents some basic concepts of costs and benefits of offshore outsourcing and difficulties and risks of offshore outsourcing. This paper also focuses on the findings from an ongoing research study on future implication of offshore outsourcing of Information system development.

Introduction: Outsourcing defined as the relocation of performance and processes which were earlier perform internally to an exterior party. Nowadays Outsourcings are done by both way domestically and internationally. If outsourcing done by internationally, it is referred as offshore outsourcing. Basically it involves transfer of process, ownership and location of the operations across national borders. (Hagel and Brown, 2005). Firms’ primarily need to be offshore outsourcing is highly skilled professionals and significant cost savings with decrease software development time. Outsourcing has become an essential approach of the IS field and has practised a significant growth in recent years and will continue in the near future. The decision to offshore relates more to ownership considerations than the location considerations. For example, whether to outsource or not to outsource involves consideration of ownership and where to outsource from, this involves considerations of appropriate locations (Chadee and Raman, 2009). Offshore outsourcing offers intentional advantages and cost benefits IS/IT development. Outsourcing relationships also involve risks for clients and service provider as well. The object of this essay is to explain the advantages and risks and future practice of offshore outsourcing in IS development.

Advantages of Offshore outsourcing: One key cause for offshore outsourcing is lake of enough talent in the own country. Some organisation wants to outsource only from own country, but sometimes the workforce available for particular tasks does not have the satisfactory qualifications. Whereas, countries like India have programmers with the right qualifications, e.g. JAVA and other Internet related skills. According to Amoribieta et al (2001) the most important motivation for offshore IT work is to lesser operating cost. Although local outsourcing to software firms may be possible in the US or UK but firms can expand a strategic advantage from the minor wages and benefits existing in countries such as India, where hourly rates are 40 to 60% below those in the United States. As the ranges of applications are achieved at a low cost, this will help generate revenue, offer new and better services.

Pfannenstein and Tsai (2004) identified another benefit includes improved flexibility, 24/7 operating hours, and reduced time to complete work. Even though some of these savings are offset by the costs incurred to manage outsourcing arrangements, most companies still experience substantial cost reductions. Because of those paying lower costs for production of IT products and services have a direct effect on prices for consumers can reduce fixed R&D costs. Erber and Sayed-Ahmed (2005) stated that the replacement of inconsistent costs for fixed costs gives greater flexibility in allocating its capital to the outsourcing company. IT budget can automatically cut by as much as 50 percent after cutting costs, which can provide new market services faster to the company, by optimising its process chain and improving customer perception. Quality is another important factor for offshore outsourcing. The ideal outsourcing country should provide high-quality work and IT infrastructure at low prices and guarantees international quality standards. Offshore outsourcing is not only beneficial for cost benefits from lower salaries, but companies can focus more on their core competences and activities in their fast paced domestic and international markets by outsourcing to a highly skilled, readily available labour force overseas. Khan et al (2003) focuses on the different perspective of offshore outsourcing which is round the clock service. Time saving is one more reason for outsourcing some of the in-house IS work to offshore outsourcers. Sometimes supplier is in another time zone to the client. This situation gives the possibility of programming around 24 hrs a day in US and 18 hrs a day for UK. Due to this time zone difference, if an error occurs in the system it can be fixed overnight and the system can be fully available on the next day. These can only happens if the supplier and customer have a good telecommunications and infrastructure.

Risks of Offshore outsourcing: All is not glowing in offshore outsourcing. There are some hidden risks and disadvantages of outsourcing. Offshore outsourcing can lower some costs (mainly IT wages), it creates new up-front expenses including vendor selection costs, legal/contract costs, and the cost to transition work to outsourcing providers. According to Khan et al 2003, unexpected cost may arise because of a failure to analyse service and cost, making a poor estimate of the initial contract price. Usually it is seen when contracting services to the offshore outsourcer; they tend to bid as low as possible to attract more clients this becomes a very high investment when supplier fails to produce the work and then it needs to start from zero. In offshore outsourcing trust and security concern is major risk factor. As the organisation relays, supplier may need to maintain confidentiality in terms of critical information, trust & security. Because of that Indian government has laws on software piracy and data privacy which are rarely implemented.(Khan et al,2003 and King 2008) Firm level risks in IT outsourcing have also been studied using strategic theories. Therefore, based on the choices made, offshoring decisions on issues like IT service lines, location, partners, number of partners, contract type, etc., result in differing degrees of risks (Graf and Mudambi, 2005).

Pfannenstein and Tsai (2004) identify some certain areas of risks such as Loss of future talent, Loss of intellectual assets and Loss of organizational performance. The loss of critical awareness is the major cause of workforce-related risk in outsourcing. There are some generic risks as well in IT outsourcing which is compared to performing activities within the firm. There is a rising responsiveness of the difficulties inborn in offshoring which are hidden structural, cultural, legal and financial risks and hidden costs. According to King (2008), long-term performance risks play important role in offshore outsourcing. It includes “Price creep” and a low rate of vendor improvement. Because of that vendors obtain monopoly power after getting contract, which may lead to shirking or opportunistic contract renegotiation. Clearly, the contract must provide an escape clause should these sorts of behaviours occurs. Bhagaya(2007) stated that poor communication is a major cause for offshore project failures. For a successful offshore engagement language neutral or culturally neutral requirement specifications are required. Another factors that obstruct offshore outsourcing include cultural differences, logistics of remote resource management, slow change management processes, need for client access to essential activities like testing and integration.

Future of Offshore outsourcing: The economic and business logic suggests that the offshoring of IS activities will continue to expand in future for years and years. Similar outsourcing needs to occur in other fields of business as well. These changes will follow and increase the recent trends in manufacturing and in IS. HR activities may outsource more frequently than IS activities in future. This is interesting because the technological advantage of HR vendor is usually important to firms who outsource to them. Gilley and Rasheed, (2000), Mol et al., (2004) and Quélin and Duhamel, (2003) stated that Performance with regard to outsourcing and the effects of outsourcing on firm performance have one of the issues that still call for further investigation. So, in future organisation needs to put more emphasis on performance criteria in outsourcing. A fundamental problem in addressing outsourcing performance is that the question of how success in outsourcing should be evaluated has not been examined thoroughly. As the performance can be evaluated against various different criteria, it would be important in future to find out which ones are the most relevant and what issues should be taken into consideration when selecting the performance criteria in offshore outsourcing. By all accounts outsourcing appears to be here to stay. According to Traylor (2003) offshore outsourcing of traditional IT work will grow 20 percent to 25 percent each year in the next few years and 68% of the more than 100 executives believe that contract would increase an average of 18.7% in nearer future. The number of IT jobs sent overseas will continue rise from 27,000 to almost 109,000. It shows there will be a wave of jobs moving offshore over the next few years. But Erber and Sayed-Ahmed (2004) argued that from a macroeconomic perspective, that IT job losses are not remain same for some particular countries. Income generated abroad and a new international division of labour will sooner or later lead to an increase in export demand for products and services where the country of origin still holds comparative advantage. Countries like Germany might generate jobs through enlarged exports compensating for job losses in the IT industry or IT services. Therefore the numbers of job losses are not the net effect on the whole economy.

Overly(2003) stated some future prediction with comments by Doug Busch,CIO of Intel, Larry Picckett, CIO of Purdue Pharma, and Nancy Markle, President of the Society for Information Management. They suggests that U.S. IT staffing levels will never reach to their previous position. U.S. companies will keep business with close contact. IT will become a core competency and economic engine and because of that it will become more important to the business. Firms will continue to offshore application development, programming, system development, legacy maintenance, call centre operations and the like. In future higher-level IT positions will require new skills such as IT person has to be good technologies as well as savvy businessperson, hybrid and versatile person. Issues of infrastructure, security, communication, privacy, legacy and project management needs to be solve in future for offshore outsourcing. Indeed, various predictions indicate continued increases of offshore outsourcing in almost every developed country.

Conclusion: Offshore outsourcing can be seen as a main strength in the recent post-dotcom period of the global IT industry. It has totally altering all business models of IT-companies. The outsourcing of IS/IT is the result of visible shifts in the strategy of multinational firms from the diversification of production activities. Outsourcing is become more viable for a larger number of firms because of widespread availability and use of more affordable advanced information and communication technologies. Outsourcing of professional services sets new trade in world economy. The gains from trade that take place over the Internet or telephone lines are no different than the gains from trade in physical goods transported by ship or plane. Now mostly all firms knows the benefits of offshore outsourcing with simple logic which is, when a good or service is produced at lower costs in another country, it is better to import it rather than to produce it domestically. Even in future offshore outsourcing of IS/IT is growing because of major advantages, firms will continue with offshore outsourcing to other countries.

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