Outsourcing involves the transfer of ownership of a process from the buyer to the supplier. The major drivers to outsourcing prior to the 1990s were cost effectiveness in accessing computing skills, system development skills, access to IT skills and access to special functional capabilities. Production of IT hardware moved offshore in the 1990s that led to price reductions (Whitaker, Mithas, & Krishnan, 2010). This change in production dynamics resulted in reduction in prices, which bettered the availability of IT resources to small-scale businesses. Currently small and medium sized companies can afford technology solutions at lower costs. It is thus apparent that the growth in outsourcing has been driven by change in the technological environment and acceptance of strategic alliances (Babin, Briggs, & Nicholson, 2011).
Interdependence of activities that are required for the integration of new technology with internal processes influence the overall potential benefit associated with information technology outsourcing. Within organizations, interdependent activities need ongoing communication, mutual adjustments by the actors and knowledge exchange between the entities involved in the processes (Goo, Kishore, Rao, & Nam, 2009). Outsourcing in general is likely to be beneficial if the activities involves are characterized by low interdependence, are sequential in nature and can easily be divided into separate sub-activities. This is however not the case for information technology within the modern organizations. Due to the strategic and operational role of information and technology within the modern organization, IT is characterized by high levels of interdependence. The significant costs savings attained by Nike and Reebok when outsourcing their shoe manufacturing is attributed to the relatively low interdependence and sequential nature of the known process of shoe manufacture (Goo, Kishore, Rao, & Nam, 2009).
Potential Negative Effects of Outsourcing
Outsourcing may negatively affect the performance of a firm in the market. Outsourcing as a strategy is expected to have both positive and negative potential that are influenced by the need for outsourcing, company needs and the way outsourcing is planned and executed. For banks to realize the cost savings associated with internet banking, their customers need to use their internet knowledge. Tailoring the technology attributes and communication to the clients’ needs is dependent on a set of tacit, interdependent processes such as the collection of information from customers, processing the technology perception and acting upon the developed knowledge (Goo, Kishore, Rao, & Nam, 2009). Executing these tacit processes in an iterative manner such that learning about a new technology and obtaining customer feedback iterate is vital in fitting a new technology to the needs of the customers. However, large scale outsourcing for instance the outsourcing of entire processes reduces the extent to which firms gather and apply customer knowledge to fit the features offered by a technology. This factor negatively affects the rate of adoption of new technology by clients.
Variability in customers’ preferences, service level requests, the effort they are likely to direct to learning and the level of service quality they expect from technology services complicate the process of tailoring technology applications to clients’ tastes and expectations (Abu-Musa, 2011). This variability reduces the process of fitting technology to customers’ needs to successive approximation and trial and error learning.
Advance planning and standardization are some of the common challenges associated with such processes. As a result, increase in technology outsourcing results in frequents updates and renegotiation of contracts to fit new knowledge on customer preferences (Goo, Kishore, Rao, & Nam, 2009). Renegotiations are time consuming and may interfere with the adaptation of a technology to customers’ needs. Furthermore, the introduction of an extra party between the firms and its customers may reduce the extent to which customers’ needs are reflected in the technical applications (Wang, Gwebu, Wang, & Zhu, 2008). As a result, increased outsourcing of information technology is likely to results in decline in market performance.
The use of IT in the delivery of services is affected by service characteristics. Since customers interact with technology with the process of service delivery, they are a key input factor in the production process. This active role played by customers complicates the separation of service delivery into independent sub-activities that can be executed by different holders of technology and customer knowledge. To reduce service failures, firms must be close to their customers to learn how they interact with technology and develop clear definitions of the role of customers in the production process.
Abu-Musa, A. (2011). Exploring Information Systems/Technology Outsourcing in Saudi Organizations: An Empirical Study. Journal of Accounting, Business & Management, 18(2), 17-73.
Goo, J., Kishore, R., Rao, H. R., & Nam, K. (2009). The Role of Service Level Agreements in Relational Management of Information Technology Outsourcing: An Empirical Study. MIS Quarterly, 33(1), 119-145.
Wang, L., Gwebu, K.L., Wang, J., & Zhu, D.X. (2008). The Aftermath of Information Technology Outsourcing: An Empirical Study of Firm Performance Following Outsourcing Decisions. Journal of Information Systems, 22(1), 125-159.
Whitaker, J., Mithas, S., & Krishnan, M.S. (2010). Organizational Learning and Capabilities for Onshore and Offshore Business Process Outsourcing. Journal of Management Information Systems, 27(3), 11-42.