Outsourcing

Outsourcing

Introduction

The starting point is the definition of the terms IT outsourcing and offshore outsourcing. Outsourcing is defined as the "practice of turning over all or part of an organization's IT function to an IT vendor". Offshore outsourcing is the "movement of service-sector jobs from developed economies to offshore locations that are cheaper". Offshore outsourcing is outsourcing IT functions to another country's vendor. Normally, those vendors have been located in Asia (India or China), but offshore outsourcing can be to any country other than the organization's home country. According to Carmel (1999), 203 of the Fortune 500 are engaged in offshore outsourcing. The importance and size of IT outsourcing suggest a significant area for applied research. This paper is an attempt to explore the use of both outsourcing and offshore outsourcing. Of particular interest is whether these "out" actions have resulted in higher returns for organizations. Barthelemy (2001) suggests that cost reduction or productivity is not always achieved via outsourcing (Frajli et al, 2003).

Local and Off-shore Outsourcing

Local and off-shore outsourcing has been increasing significantly throughout the industrial economies of the world. Outsourcing is a handing over of accountability and authoritative power for manufacture and administration of a segment of a firm's business, usually activities for which the business has neither a strategic need or a singular capability, to an outside domestic vendor who can provide better service and potentially higher quality at a lower cost allowing the firm to concentrate resources and investments on basic competencies and high growth areas. Outsourcing should not be confused with offshoring; outsourcing agreements create continuing relationships between supplier and beneficiary, with a high degree of risk-sharing. Providers that are outside of the boundaries of the company, usually within the same country, deliver products or services on behalf of the company. Manning, Massini, and Lewin (2008) state that offshoring refers to the practice of sourcing and coordinating responsibilities and industrial roles across national borders, in simpler language the contracting out of work to other countries (Giao et al, 2008).

Globalization and Outsourcing

As the globalization of businesses rapidly increases outsourcing and offshoring of services particularly in the Information Technology (IT), Human Resources (HR), Science and Engineering (S&E), and Research and Development (R&D) departments may exist concurrently within any company and frequently they overlap in their functions. Manning points out that for much of the last 50 years outsourcing has steadily increased; just a few of the reasons for this increase are the rapid change and convergence of technology, price competition, skills shortage, finite resources, and a worldwide recession. The reality that outsourcing is an integral part of the business model in the U.S needs to be understood and analyzed.

Ramachandran, et al (2004) affirm that before becoming a part of the outsourcing process vendors must consider four points. The first point is an evaluation of the rational decision-making process at the customers' end. Secondly, a clear communication of their proposition to the customer must be made. Third, a self-evaluation must be made to determine if they have sufficient internal ability ...