Outsourcing is a practice commonly used in the IT industry. Despite its controversial reputation, the growth in demand has stimulated significant improvements in the sector. As a result, some of the issues and benefits associated with it became obsolete while others were introduced or modified. The current paper critically examines the current state of the practice of outsourcing in order to outline the reasons behind its popularity among the organizations, identify the key issues associated with management of the outsourced relationships, and determine their relevance depending on the characteristics of the business.
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Reasons for Outsourcing
The outcomes of outsourcing depend on several factors, such as the size of the organization in question, the type of products and services being outsourced, the availability of resources, the diversity of operations, and the specificities of a business environment. The following section provides an overview of the most common reasons for outsourcing IT and/or e-commerce applications for the majority of the organizations, specifies their relevance depending on the characteristics of business entities, and provides highlights notable examples of outsourcing in order to substantiate the claims.
The practice of outsourcing yields numerous benefits to organizations. However, the direct economic advantages of the practice are among the most widely recognized factors and, arguably, one of the primary reasons behind the decision in the majority of cases. A report by Ernst and Young (2009) presented the results of a survey that explored the motivation of the company executives to engage in outsourcing activities.
The overwhelming majority of the respondents (94%) cited more than one expected advantage associated with the practice. However, the disaggregation of responses revealed that almost half of the participants (49%) considered cost savings a reason, followed by better quality (33%) improved strategic alignment (28%) and flexibility (25%) (Ernst & Young 2009). At this point, it is important to understand that the cost reduction originated primarily in the possibility to reach out to countries with more affordable labor markets. As such, the developing countries historically served the main source of the workforce.
India is arguably the most often cited example of such a market, with an average salary of a software engineer being a fraction of the respective U.S. specialists. At the same time, the region provides a formidable level of quality to its customers and is able to maintain it consistently due to the availability of a stable IT infrastructure, a modern corporate mindset and organizational culture, and improved service capabilities (Ali et al. 2014). Currently, the market provides specialists in a wide array of fields, such as R&D, testing, application development, high-end engineering, and remote management (NashTech 2014).
The rapidly increasing demand for the described services and growing global awareness of the advantages provided by the Indian market has facilitated a consistent improvement and modernization of education and training process to the point where the graduates are able to compete in the US and UK markets. Simply put, India currently serves as a mature market that is able to offer high-quality services and is regulated on a sufficient level to ensure the consistency of results.
Finally, it should be mentioned that the country’s unstable socioeconomic landscape results in the devaluation of the local currency and, by extension, the persistently low cost of the services. In addition, the fierce competition between major Indian IT companies ensures the relatively low overall cost – approximately 60 to 75 percent of that in the U.S. (NashTech 2014).
It should be understood that while India has long been a leader in providing outsourcing services, it would be reasonable to expect the situation to change in the nearest future. The rapid development of the IT industry prompted the emergence of competing markets in China and, more recently, Mexico. The Chinese IT segment has recently enjoyed the support of the government in the form of recognition of the intellectual property. Combined with the stable infrastructure, a relatively low debt-to-GDP ratio, and a strong educational basis, such a setting has created a strong competitor to India in terms of cost-efficiency.
Mexico, on the other hand, provides a workforce that is more culturally similar and, by extension, attractive, to the U.S. companies. The relatively low language barrier also contributes to risk reduction and encourages organizations from developed countries to outsource IT operations to Mexican specialists. It should also be pointed out that both countries have interest rates and corporate taxes at lower levels than in India, and enjoy the recognition of the IT industry on the governmental level (Ali et al. 2014). Both factors contribute to the cost advantages and sustain the high demand for outsourcing.
Pace of Change
As was explained above, the low labor cost is the most well-recognized cause of outsourcing. Nevertheless, it has since lost its priority to the less intuitive yet more relevant advantage – the ability to sustain competitive advantage by adopting the latest changes in the field. This reason is mostly pertinent to the IT segment which showed an extraordinary growth rate in the latest decade. Both the software solutions and the hardware requirements have increased in complexity, in some cases rendering the existing assets obsolete (Sayre et al. 2012). Even more importantly, the skill sets of IT specialists employed by the organizations require an overhaul or at least an update.
In most cases, the said overhaul is economically unreasonable, especially for medium- and small-scale organizations that do not have major e-commerce involvement. In such a scenario, outsourcing IT operations is the most feasible option. The companies that provide outsourcing services are able to maintain the level of proficiency of their workers at the highest level due to the narrow focus of the operations. As was mentioned above, this factor is especially evident when the IT component of the business does not correspond to the specialization of the organization. The easiest example is customer support.
The rapid increase in global connectivity coupled with affordable and accessible means of instantaneous communication has greatly increased the customers’ expectations of the organizations’ responsiveness. At the same time, the growing popularity of the customer activism movement creates a feasible risk of a major compromise of corporate reputation in response to the event as little as a single dissatisfied customer (Camilleri 2017). While the current state of technology allows for the satisfaction of this need, it is mostly achieved through means of significant complexity. As a result, many non-specialized organizations possess neither the proficiency nor resources sufficient for running their customer support service. For the large-scale organizations, it is certainly possible to introduce in-house department responsible for the function.
However, small and medium enterprises will probably face severe financial and operational barriers while attempting to do it. Besides, e-commerce business models often require multifaceted customer services that include text messaging, chats, voice calls, and social media presence. Finally, once the scope of the organization’s operations reaches a certain level, the 24/7 presence becomes a practical necessity. At this point, it is important to mention that at least some of these functions can be provided by the automated and highly-efficient software solutions available to the buyers, most of which are affordable even for small-scale businesses. However, their management and effective usage also require a specialized team of professionals.
As can be seen, the combination of factors described above can be effectively addressed by outsourcing the services to an external provider. A third-party service is a narrowly-focused organization that employs the latest software solutions and keeps track of the changes in the field. It also ensures the relevance of skills of its workforce and conducts regular training sessions to ensure the highest level of resource utilization. Finally, in most cases the organization offering the services is able to provide timely and comprehensive coverage of activities in consumer networks such as social media websites, and, by extension, increase customer satisfaction (Lihong 2012). Admittedly, some of the described effects are only relevant within the domain of customer service. Nevertheless, the general principle of a focused entity that provides the latest developments in a given IT field can be observed in the overwhelming majority of cases and remains among the most evident reasons for outsourcing IT by the companies.
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IT is a concept that includes a broad range of activities, with a significant proportion finding application in business. While such diversity provides additional space for strategic decisions that improve performance, it also creates challenges for organizations willing to implement them. In addition, the pace of change described in the previous section increases the complexity of the implementation with each newly introduced area. Simply put, the organizations that require analytics, customer support, and high level of automation will require three additional in-house areas introduced into their business model and, depending on the scale of operations, will face expenses that do not necessarily result in respective revenues (Acora 2012).
At this point, it is important to note that many of the IT-based improvements yield measurable economic benefits and are thus not only desirable but required in many industries due to the increasing competition and dynamics pertinent to the fields (Acora 2012). Therefore, it would be natural to expect the inclusion of IT-based enhancements in organizational strategic planning. However, unless the company’s specialization lies within the area of information technology, the described diversity will likely dilute its focus and draw a significant proportion of efforts from the direction identified in the vision.
The easiest example would be the analysis of customer behavior patterns. The recent influx of data available for collection through a variety of means coupled with the computation capacity of the hardware made it possible to detect the trends in the decision-making of an audience of interest and track the responses to various changes in corporate strategies (Chaffey & Smith 2012). The utilization of such knowledge provides significant economic advancements in the form of increased revenues and long-term improvements in customer loyalty, satisfaction, and commitment (Krug 2013).
However, the complexity of the analysis necessary to reach a definitive conclusion as well as the cost of the equipment effectively prohibits the use of big data analysis to most small and medium enterprises. The emergence of firms offering analytical services for an affordable fee eliminates both issues and enables the companies that engage in customer interactions to better understand their target audiences.
In this case, outsourcing requires only the allocation of financial resources in order to get access to the desired information. The management receives the findings in an accessible format and is able to integrate the results into the strategic outlook of the organization without the need to provide time-consuming training and assigning a responsible party. As a result, the organization remains aligned with the initial vision and values at a fraction of the cost of the service.
The idea of outsourcing is mostly associated with the practice of hiring more cost-effective labor. In this scenario, the tasks are essentially relocated to other employees. However, as is evident from the previous example, the effectiveness of the equipment is an equally pressing concern and, predictably, results in respective demand on the market. The surge in the capability of computers to perform routine tasks with greater speed and effectiveness without the decline in quality prompted many industry segments to pay closer attention to the opportunities offered by the development. It is important to understand that such automation is only applicable to certain processes and workflows that do not rely on creativity and flexibility provided by human employees.
Nevertheless, its scope of implementation grows as the code of the algorithm is upgraded and the difference between computational power and the price of the hardware goes down (Thinbodeau 2016). Currently, the robotic process automation (RPA) offers an efficient substitution to the most basic activities that previously remained the prerogative of employees. In addition to industry-specific, highly complex tasks that can only be used as an integral part of the internal chain of operations, RPA has recently found limited use in the customer interaction domain.
One of the most well-recognized examples is a host of personal assistants introduced by major software developers, such as Siri from Apple, Cortana from Microsoft, and Alexa from Amazon. While not among the most intuitive instances of outsourcing, each of the mentioned software solutions is an attempt to upgrade the automated online-based inquiry to the level where it becomes close to the service offered by a human consultant, accompanied by the appropriate perception of personality. In other words, this is an attempt to outsource the personal assistant’s services to a computer algorithm.
The success of the initiative is partially confirmed by the emergence of similar offers from other flagship companies, such as Google Assistant, and the obvious embrace of the technology by the public. A similar trend can be observed among companies that provide consultancy services. According to the report issued by Infosys, the adoption of automation services has provided the opportunity to optimize the workflow of the company so that more than 4000 employees could be allocated to more suitable positions (Infosys 2015). Since the identified direction is in a relatively early stage of development, it is hard to make a definitive conclusion. However, it is evident that more effective resource management offered by automation of operations has the potential to overcome the cost of labor in importance when it comes to the reasons behind the adoption of outsourcing by the organizations.
One of the less evident benefits of outsourcing is its opportunity to reduce risks. Such an advantage is associated primarily with the organized nature of the process. The growing popularity of the practice among both large multinational companies and small-scale entities greatly diversified the range of offers present at the market. Simultaneously, the fierce competition characteristic for the growing economies of the developing countries created the need for players to retain competitive advantage by upholding high standards of quality. As a result, the current outsourcing landscape is comprised primarily of highly-efficient and responsible providers that deliver services of a predictable level of quality. Such consistency allows for more reliable planning of business outcomes and eliminates expenses associated with the mitigation of overlooked barriers.
The turnover of employees is the most apparent example of such risk reduction. The phenomenon compromises the consistency of quality of the products and services offered by the organization and prompts additional expenses due to the need for staff training and restoration of synchronization between the departments. On the other hand, the use of professional employees available through outsourcing companies greatly reduces the possibility of any of the above. For the reasons detailed above, the improvement does not require additional expenses since it can be delivered at a fraction of the cost necessary for hiring the domestic employees.
The recent acceptance of outsourcing business models by the governments of the source countries offers an additional layer of risk reduction through the protection of intellectual property. Another important point is the availability of flexible service plans offered by most of the organizations that make it possible to outsource only non-core tasks. The combination of the said factors minimizes the possibility of leakage of sensitive information and loss of competitive advantage secured by the legal agreements that can be enforced by all parties.
To sum up, the reasons for companies to turn to the outsourcing of IT and e-commerce are changing with the development of the field. While affordable labor was the primary reason for adopting the practice early in the course of development, the increase in quality and the need to retain competitive advantage created several other benefits such as automation of services, the ability to keep up with the pace of change in IT segment, the opportunity to focus on core operations of the business, and risk reduction.
Despite the host of advantages offered by outsourcing, the practice is not without its drawbacks. Some of these have been significantly reduced as the field developed while others remain a feasible barrier to the adoption of the practice for some organizations. The following section lists the most apparent issues that complicate the management of the practice and clarifies their feasibility for different types of organizations.
One of the issues that remain relevant despite the improvements in the industry is the differences in cultural background. The lack of language proficiency is the most obvious aspect of the issue as it complicates communication and, by extension, compromises the effectiveness of management. As was noted above, this particular side of the issue has been promptly addressed by most of the major players as soon as the market showed significant interest. Currently, the flagship companies from India and China already consider English proficiency one of the necessary components of high-quality service (Ali et al. 2014).
However, due to the dynamic nature of the practice new players from various parts of the world, including Asia, Eastern Europe, and Africa, enter the market on an annual basis. Such influx dilutes the overall level of language proficiency, and while it is reasonable to expect the situation to improve in the long run, currently there is a significant risk of experiencing the gaps in communication.
It is also important to understand that language is neither the only nor the most significant source of the possible cultural issues. Religion, social standards, ethics, and mode of communication can introduce additional challenges to the management process. Admittedly, the magnitude of the resulting impact depends on the amount of interaction necessary for outsourcing to take place. Thus, on many occasions, the adverse effects will be negligible. However, the combined effect of several minor factors can aggregate into a significant outcome that, when left unaddressed, will transpire into loss of revenues. Therefore, the influence of such issues should be estimated and incorporated into the risk aversion strategies of the organization.
Compliance with Regulations
Currently, the principles of operation of most of the entities that provide outsourcing services are based upon and compatible with the modern standards of commerce accepted worldwide (Nduwimfura & Zheng 2015). However, the growing scope of application has significantly increased the number of involved jurisdictions as well as the number of regulations required for compliance. In addition, the outsourcing has been successfully adopted by many non-profit entities such as government agencies and NGOs, some of which do not operate under the same principles as business organizations (the initial target audience).
As a result, it is possible to encounter a situation where the services outsourced to an external party do not meet the requirements of a controlling body. It should also be pointed out that some fields demonstrate a relatively dynamic development process. For example, the improvements in understanding the environmental effects of some industrial activities have led to the rapid development of environmental regulations and the adoption of laws. The policymakers of the developing countries have since followed suit and have since managed to improve the industrial performance indicators.
Nevertheless, a significant difference remains between the environmental standards accepted in the developed and the developing countries. As a result, a scenario is possible where the product introduced as a result of outsourcing is incompatible with the requirements of the country’s legislature. Alternatively, the offshore vendor can be compliant with the requirements of the organization’s expectations but may lack the means of proving its compliance to the auditors if whenever such necessity arises.
Finally, it should be acknowledged that the environmental issues are a trendy topic among consumers and have the capacity to trigger a massive outcry in response to even a relatively minor concern, including a misinterpreted one (Camilleri 2017). Therefore, the non-compliance can result not only in legal complications and financial sanctions but also a disrupted corporate image and loss of customer base. It is thus necessary to identify the possible areas of incompatibility and negotiate the most desirable course of action early in the course of the outsourcing process in order to avoid the identified issue.
The information handled by a software platform is understandably vulnerable to the technology-specific security issues, including the irreversible loss of data or the compromised sensitive information as a result of malicious activities. Despite the significant improvements in cyber-security, significant security breaches are constantly reported by major companies. In this regard, outsourcing remains a significant contributor to the likelihood of the event.
The rapid growth in the acceptance of informational technologies has created a pressing demand for both the businesses and the governments to seek the cost-effective ways of utilizing the capacity of the technology and increasing their online presence (Moon et al. 2016).
In many cases, the organizations in question do not possess resources necessary for either the development or the management of the means of protection internally. In combination with the budgetary constraints, the decision is often made in favor of outsourcing the task to a third party. As a result, the client can receive a product that is either protected with outdated technology or lacks the security options completely. In rare cases, despite the best efforts of the company that provided the outsourcing services, unexpected gaps remain that allow obtaining sensitive personal information. The easiest example is the electronic health records that are commonly used in various clinical trials.
While the data retrieved from such records are being properly deidentified before processing, in some instances the remaining demographic data can be used to establish the identities of the participants (Cezar, Cavusoglu & Raghunathan 2013). Naturally, such concerns can be addressed through additional verification and testing. However, the additional expenses associated with these precautions will most likely eliminate the cost-effectiveness of the entire project.
Another option would be to identify the most likely risks early in the course of the procedure (ideally – before the negotiations with the outsourcing services provider) and include them in the requirements. However, relying on such an option entirely would be unreasonable due to the immense amount of existing and possible threats. It should also be pointed out that the communication with the provider can be limited due to the issues outlined above.
Aside from the vulnerabilities embedded in the final product, a possibility exists that the breach will occur during the development process rather than after the completion. For instance, the equipment of the company can be inadequately protected, which can result in the loss of proprietary information provided to the developers. Admittedly, the likelihood of the described scenarios is inversely related to the quality and responsibility of the service provider.
In other words, it is far less likely to happen today than a decade ago since the majority of the companies are maintaining a good reputation by updating the level of security required by the internationally accepted standards (NashTech 2014). Therefore, such an issue is only relevant for organizations that seek the cheapest solutions without considering security risks and can be avoided relatively easily in most cases.
Loss of Intellectual Property
The process of outsourcing requires the transfer of at least some of the assets to a third party that qualifies as an intellectual property (IP). Depending on the organization and the task being outsourced, IP may take several forms, including patents, trademarks, copyright, and trade secrets (Buss & Peukert 2015). The existence of security issues described in the previous section is at least partially applicable to the situation as the inadequately protected vendor can result in the loss of valuable information. However, an arguably greater cause for concern is the possibility of a deliberate leak of the information in an attempt to profit from the act.
The issue is widely known primarily due to the IP infringements in the domain of consumer electronics committed by Chinese manufacturers. It should be mentioned that the situation has since been improved dramatically, with Chinese authorities introducing regulations intended to discourage the trademark infringement. However, the risk of losing one’s intellectual property as a result of misconduct has not been eliminated completely. One reason for this is the relatively complex nature of many of the informational technology. The IT products in most cases are highly specialized and require close inspection in order to determine the presence of the proprietary elements. In most cases, such an assessment does not necessarily occur, which creates a situation where the product is released without being identified as violating the rights.
Another aspect that should be considered is the legal differences involved. While the governments of many countries have introduced laws prohibiting unfair practices as well as the ways of enforcing them, the said laws can be significantly different from those in use in the country of a client. The issue is further complicated if more than one type of intellectual property is involved in the outsourcing process and some of them are categorized differently in the country where the vendor is operating. Finally, it is possible that the client organization decides to outsource a product partially to different vendors, in which case the complexity of necessary management increases dramatically. As can be seen, the recognition of the issue does minimize the risk but does not necessarily make the entire process more reliable or accessible.
Admittedly, the identified issues can be successfully addressed through responsible management. The process must begin with the identification of the involved IPs and its crucial characteristics, such as the process through which they can be controlled and the degree of vulnerability to the attack. Next, the process of outsourcing should be planned and responsibilities for the control of the property assigned with regard to the identified threats.
Finally, the capabilities of the chosen vendors need to be assessed as per their possibility to demonstrate the level of protection and the transparency of the operations as well as the reputation and appropriate culture. It would also be reasonable to consider partial outsourcing where different IPs are outsourced based on their value with the most valuable being withheld by the owner or distributed among the service providers in a manner that prevents their separate usage. As can be seen, the issue of IP loss can be mitigated relatively effectively once sufficient resources are allocated for management.
Loss of Control
The inability to retain full control of the process is a common organizational concern even for the in-house procedures. Predictably, outsourcing introduces an additional level of uncertainty and creates new barriers for establishing adequate means of communication and control. In addition to the internal organizational and logistical complexities, the geographical location of the service provider adds to the complexity. Next, the cultural and language barriers can hamper understanding and slow down the responsiveness of a significant degree. Finally, in some cases, the time zone differences can introduce a challenge to communication between the parties.
The identified issue has many forms and on many occasions can be addressed through traditional managerial approaches. For instance, the failure of a vendor to deliver the result at a specified time or in the necessary state can be mitigated through the establishment of tools for monitoring the working process such as issue trackers. In the case when the methodology suggested by the vendor does not align with the goals of the client, it is possible to request the necessary adjustments and verify the end result in order to ensure consistency.
The decline of quality commonly encountered in the first year of collaboration can be minimized through additional resources allocated for the transfer of necessary knowledge and communication. Finally, the introduction of additional costs can be avoided by the careful examination of the estimates suggested by the company during the negotiations, identification, and evaluation of the work not covered by the contract, and timely acknowledgment of expenses associated with the offshore-related operations (e.g. language barrier). In other words, the issue of loss of control can be mitigated through consistent planning and management.
The practice of outsourcing continues to rise in popularity and, as a result, demonstrates improvement at a steady pace. Introduced as a solution that capitalized on the availability and low cost of labor from the developing countries, it eventually upgraded to a formidable option both for businesses and governments. The surge in demand has led to fierce competition and, by extension, the need to retain a competitive advantage.
The current landscape of outsourcing companies is characterized by high levels of quality, security, and consistency of operations. Currently, the ability to keep up with the recent changes in the IT industry, the improved focus, and the automation of the operations are the primary reasons the organizations outsource IT and e-commerce. While the practice is still associated with many issues, such as loss of control, security breaches, and numerous legal complications, their amount and severity steadily decrease and can currently be minimized through responsible management and adequate allocation of resources.
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