Outsourcing

With the power of telecommunications and internet connectivity, organizations today are able to create wide area networks (WANs) over vast distances – nationally and internationally. Using this technology, the organization is able to outsource any part of the organization’s information technology (IT) operation. This paper will discuss outsourcing – the benefits and costs.

Benefits and risks

Organizations may have any number of reasons for considering outsourcing – saving on labor costs, political alliances, new marketplaces, or lack of qualified local staff, just to name a few. The organization must also be aware of the pitfalls associated with this decision – quality of service, data security, insurance coverage, and legal liabilities. (Pozzi, S. 2006)

While many of these risks may be covered with a contract, unless all the potential risks involved are covered and the scope of the contract is clearly defined, the outsourced task may not result in a cost saving and when considering the language and social barriers as well as the time differences, the contract may become difficult to manage. The outsourcing organization must be carefully selected and researched and should the organization be located in another country, laws and regulations must be researched and followed. Pozzi (2006) states, “Outsourcing contractors must meet U.S. and foreign mandates relating to privacy legislation and public disclosure laws, such as the Sarbanes-Oxley Act.” Any loss of personal data through an outsourced company would result in a litigation aimed at the organization rather than the outsourced company. An outsourcing company might also be exposed to proprietary technology that could be in jeopardy. (Pozzi, 2006)

Insurance could be purchased to mitigate any losses through outsourcing, but not all losses are tangible. The organization must overcome any negative local attitudes towards outsourcing. Providing goods or services to a marketplace unwilling to accept the concept of outsourcing will jeopardize the organization’s existence. The organization must also ensure the outsourced tasks do not negatively impact the organization such as outsourcing a call center to a foreign location where language barriers might turn away customers. Outsourcing is a difficult and costly procedure, with the organization losing some control over the outsourced functions, however, as stated above, benefits for making this decision do exist.

According to an article by The McKinsey Quarterly (2003), in 2002 approximately three trillion dollars worth of business functions could be performed remotely. In the year 2002, only 32 billion dollars in offshore outsourcing was performed and the article estimated 100 billion worth of business functions would be offshored by 2008. Organizations are transferring jobs to countries where labor is relatively inexpensive. (Forbes.com, 2003)

Consideration must also be made regarding the reversal of outsourcing. Outsourcing is a time consuming, costly endeavor. Should the relationship not last, the cost to bring the job functions back in-house could be crippling. These costs are not only monetary – this could also include loss of confidence in the organization by the employees and investors. For example, in 2001, JP Morgan Chase (Overby, 2005) outsourced the major portion of their IT functions to IBM, costing JP Morgan Chase $5 million. Employees of the IT department had to re-apply to their jobs with IBM, losing benefits and income. In 2004, JP Morgan Chase merged with Bank One and back sourced the IT department. Once again, the IT staff was required to apply for their position. Not only was the company responsible monetarily for the early termination of the contract, the company lost the trust of the employees.