Term Paper on "Outsourcing it Relevant to it Acquisition"

Term Paper 14 pages (3895 words) Sources: 1+

[EXCERPT] . . . .

Outsourcing It

a management strategy that farms out non-core organizational activities to vendors who specialize in these activities in order to execute them more efficiently (Peled 2001)

Advantages

Cost Savings

Access to new skill sets

Access to cutting edge technology

Disadvantages

Loss of intellectual property

Poor Communication

High Costs

Limited Technologies

IT Outsourcing and acquisition

Acquisition of new skill sets

Business acquisitions

AT&T and IBM

CACI and American Management Systems

Systems Management Specialists (SMS) and the SMS business unit

IT Outsourcing has become a major phenomenon in the business world. Businesses have found that outsourcing reduces costs and allows for expansion. The purpose of this discussion is to investigate it outsourcing as it relates to acquisition. The discussion will include a review of the Advantages if it outsourcing such as; Cost Savings, Access to new skill sets and Access to cutting edge technology. In addition, the investigation will focus on the disadvantages of it outsourcing such as; Loss of intellectual property, Poor Communication, High Costs and Limited Technologies. The main focus of the discussion will be it Outsourcing and acquisition as it pertains to the Acquisition of new skill sets and business acquisitions. Management recommendation will also be provided. Let us begin this discussion with a definition of it Outsourcing.

Outsourcing it

The definition of outsourcing is rather uniform regardless of the industry. The journal, Public Personnel Management asserts that "outsourcing is a management strategy that farms out non-core organizational activities to vendors who specialize in these activities in order to execute them more efficiently (Peled 2001)." Antonucci (1998) asserts that it outsourcing generally is defined as contracting with outside vendors to do various it functions such as data entry, data center operations, application maintenance and development, disaster recovery and network management and operations. Vendors may be individual it professionals, consulting firms, employee leasing companies, fullservice providers and CPA firms (Antonucci, 1998)."

Peled (2001) also explains that it outsourcing involves the organization of information networks, the training and support of employees, the development of computer infrastructure and applications, and the management and operation of computer facilities (Peled 2001).

An article found in the Journal of Organizational Computing contends that the cost associated with in house it functions can be astronomical. The article explains that the cost associated with the it function enters the Information systems budget of the business (Alpar, and Saharia, 1995). The article asserts, "The IS budget will typically include the cost of hardware, software license, and facilities, as well as compensation to employees (Alpar, and Saharia, 1995)." The authors add that the cost associated with maintaining in house it functions is not realized until after the project is complete and in some cases, it is not realized at all because of conflicts between managers and it teams. The authors contend,

Evaluating work done by software development teams is ridden with uncertainties and presents problems of measurement. The value of a system is realized after the project is complete, and often the cost of maintaining the product during the operational stage of the life cycle is comparable to or exceeds development costs. Additionally, many software projects tend to see cost overruns and are often behind schedule (Alpar, and Saharia, 1995)."

According to the article found in the Journal of Accountancy, because businesses rely so heavily on information technology to conduct business, finding ways to reduce it cost is essential.

In their quest to reduce such costs businesses have begun to rely on outsourcing. The article reports that there are certain advantages and disadvantages to it Outsourcing.

Advantages

Those advantages include the access to modern technology. In addition, the most significant advantage of it outsourcing is Cost savings. The article explains that ferocious competition has led many corporations to reorganize and scale back staffs in an attempt to reduce costs (Antonucci, 1998). The Vendors that handle the it outsourcing are able to save money for several reasons (Antonucci, 1998). For instance, the vendors "have much tighter control of fringe benefits and run much leaner overhead structures (Antonucci, 1998)." Additionally the vendors are able to utilize low-cost labor pools more aggressively and, with the help of modern telecommunications, can move data centers to low-cost areas (Antonucci, 1998).

The vendors are also able to apply excellent standards to the company's present it staff (Antonucci, 1998). Outsourcing also as the following benefit, more efficient bulk purchasing and leasing agreements for software and hardware; vendors have more power over software licenses because they better negotiators and because contractual pressure forces vendors to meet deadlines (Antonucci, 1998).

The author also explains that businesses must be flexible enough to adapt to a business environment that changes constantly, which means their it functions have to react rapidly to shifting demands. One of the most essential demands came with the advent of the internet and e-business (Hormozi, Hostetler & Middleton, 2003). An article found in SAM Advanced Management Journal, asserts that "the growth of the Internet has created forces that are driving companies to outsource (Jones, 2000), including highly competitive global markets and the rise of e-business. These trends compel companies to reorganize and utilize more outsourcing to gain higher e-business capacity, make predictable cost forecasts and cost reductions, attain well-defined and consistent service levels, acquire needed skills and expertise, gain access to best practices, and focus on core competencies (Hormozi, Hostetler & Middleton, 2003)."

Vendors can be beneficial in dealing with such rapid change because they can utilize a wide range of skills, resources, and capacities while a businesses' internal it staff may have limited abilities (Antonucci, 1998). The article also reports that Job security for regular employees. Companies often hire outsourced staff with the understanding they'll be employed for a limited time. Thus, they can more easily drop or add people to the workforce without jeopardizing the company's reputation as a stable employer. More important, the use of outsourced workers buffers regular employees from fluctuations in demand and enables the company to establish a stronger relationship with its regular workforce than would otherwise be possible (Antonucci, 1998).

Antonucci (1998), concludes that many businesses believe that internal it functions lack the flexibility needed to compete in today's business worlds (Antonucci, 1998). For this reason, corporations are increasingly dependent upon outsourcing (Antonucci, 1998). However, there is evidence to suggest that it outsourcing doesn't necessarily mean a reduction in costs or higher technology flexibility (Antonucci, 1998).

Disadvantages

Although it outsourcing can be beneficial when it is implemented correctly, there are also some disadvantages associated with outsourcing. According to an article found in Business Perspectives, it outsourcing can be problematic (Frolick, 1992). The article asserts that the failure of it outsourcing has occurred in many cases. The author asserts that there are several reasons why it outsourcing can be problematic. These problems include the following;

Loss of important employees and intellectual property- in many cases the it professionals that worked in house are forced out when a company decides to outsource to a vender. This results in the loss of employees that played an important role in maintaining the in house information systems and possess skill sets that are not easily acquired (Frolick, 1992).

Poor Communication- it outsourcing often results in miscommunication between the business and the vendor; which results in wasted time because the vendors may not be ready available so that the situation can be remedied (Frolick, 1992).

Costs- disadvantages associated with costs occur when unexpected changes take place or when vendors bill companies for the licensing of software. These unexpected and costly charges can be counterproductive if the organization is attempting to reduce costs (Frolick, 1992).

Limited Technologies- in some instances the firm is limited to using the technologies (software and hardware) that the outsourcing vendor prefers to use.

This may be a disadvantage if competitors are utilizing more up-to-date, cutting edge technology (Frolick, 1992).

Inability to take it back in-house- the author argues that this is the single largest risk that organizations take when they decide to outsource information technology (Frolick, 1992). The article explains that "An organization can try outsourcing for a limited period of time and revert to an in-house operation if it is only a small portion of the total IS function. Otherwise, it simply takes too long and costs too much to rebuild the systems in-house (Frolick, 1992)."

The previous paragraphs demonstrate why the need for it outsourcing exists. In addition, it illustrates that managers must carefully deliberate upon the strategy of the business and the business goals to determine if it outsourcing is needed. Failure to do so can result in costly payouts to outsource vendors. Now that we have a succinct definition of it outsourcing let us discuss it Outsourcing as it relates to acquisition.

Acquisition and it Outsourcing

Acquisition of New Skill Sets

As was mentioned in previous paragraphs, it outsourcing allows for the acquisition of skill sets. The Public Manager explains that acquisition has become particularly significant in the face of an aging workforce. The article asserts, "smaller, aging workforce is dealing with the reality of keeping… READ MORE

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