Term Paper on "Information Technology Outsourcing and Effects to a Corporation's Shareholder Value"

Term Paper 20 pages (5382 words) Sources: 5 Style: APA

[EXCERPT] . . . .

It Outsourcing

What do Microsoft Corporation, Marks & Spencer and Mambo Graphics have in common? One thing that made them related with each other is that they were known in their own fields and achieved more than what they expected. This, they owe to the power of outsourcing. They did not rely on the skills and capabilities of their employees internally. They took time to explore new possibilities how to be more competitive with the market. They learned that outsourcing can be a very good tool in achieving one's goal.

Highly skilled operators, programmers, agents for a specific insurance company, or even call center agents are hired to provide a certain function that cannot be provided within the country or the state.

Lever (1997) defined outsourcing as a contracted services outside a company or even outside the country to do a specific job or function. "Outsourcing or contracting out work started in the manufacturing business in the early 1980s, primarily as a means of cutting back staff and saving on wages" (Ryans, 1996). They are commonly called the third-party providers or simply service providers.

There are many reasons why outsourcing or contracting out work is more preferred rather than developing in-house talents. First, it is seen as more cost-effective (Domberger, 1998)-for example, a contracted personnel from other countries require only smaller salary because of the certain standardized salary scheme within the country; second, to cut cost and refocus resources (Holt, Kennedy, Rehg & Ward, 2002). A large company with numerous personnel with no specific work is the same with a company with smaller personnel but with specified work. This was done through outsourcing of different functions from different sources. And third, lower investment in internal infrastructure (Reaser, 1996), it will be built instead to the outsourced country.

In India, the volume of work outsourced has increased to more than 50% since 2005 (Ahmed, 2006, BBC news). Skilled professionals of it and call center jobs are growing in India. When outsourcing from other countries started, India has been one of the countries most favored for this aim.

While some commended outsourcing is the best option to be more competitive in the market, some are anxious with what will be the result of all these in the workforce especially in the U.S. Other than India, China, Japan and the UK are also now outsourcing some of their workforce.

As of October 2006, the Bureau of Labor Statistics reported that the U.S. population continues to grow at 300,263,379. Although employment grew by 92,000 in October, the workforce is still apprehensive with might happen if companies continue to outsource personnel.

The Hira brothers's book cites a University of California Study that estimates 14 million U.S. white collar jobs - one in nine - are at risk. A 2004 report by Forrester research suggests that a total of 3.3 million U.S. white collar jobs will move overseas by 2015, with 830,000 jobs leaving by the end of 2005.

Other than it, outsourcing has extended to desk job employments and networking, and healthcare.

Although the data shows from the BLS that the unemployment rate has declined to 4.4With the presented data on the employment rate and unemployment rate of the America, it only suggests that too many outsourced jobs can affect the economy of the America. Based on the book written by the Hira's brothers, outsourcing can lead to the loss of workforce and decrease in economic capabilities of the country.

Some of the factors affecting the high increase of the outsourced jobs are the low enrollees in science and engineering courses in America (Holt, Kennedy, Rehg & Ward, 2002). These specializations are not given attention by the government and the schools. That is why some of the companies rely on the outside service providers who can serve with a minimum cost which is very beneficial to the contracting company.

This paper is aimed at analyzing the overall impact of information technology outsourcing to various industries, particularly to the corporations' shareholder value. Specifically, this is intended for:

reviewing the various factors why it outsourcing has been becoming a trend classifying the various approaches and strategies to effective outsourcing analyzing the impact of outsourcing which is prominent in most developing countries

Outsourcing Defined

Outsourcing may involve either a short-term or a long-term contractual relationship for business services from an external provider. Nowadays, these forms of relationships are becoming very popular particularly in wide variety of business activities. Firms widely outsource in areas once strictly considered internal domains, such as human resources (Spee, 1995).

Outsourcing adds value in the changing corporate environment, especially when used in combination with reengineering (Marinaccio, 1994) or a shared-services model. The trend toward outsourcing select HR activities is growing.

Outsourcing differs from other forms of contracting in several distinguishing ways. For these reasons, outsourcing is not a situation which firms enter lightly or want to renegotiate frequently (Quinn and Hilmer, 1994).

There are four phases to an outsourcing relationship. The discovery phase consists of benchmarking internal service levels, identifying future requirements, and issuing a request for proposals. During this phase, there is a short listing of probable vendors. The discovery period can result in a better understanding of the firm's current capabilities, and sometimes in a decision to reengineer rather than outsource.

A vendor is selected during the negotiation phase. On a general level, the decision rests largely on the operating philosophies of both parties and the vendor's approach to service. An outsourcing contract involves high levels of integration and coordination. It intertwines vendor and client. Working closely, both parties identify areas for service improvement and plan transition and service delivery" (Quinn and Hilmer, 1994).

After which, the transition phase follows. The ease with which transition occurs is dependent upon the amount of planning and preparation done beforehand. During this time, employees are transitioned to the vendor or to other positions, and computer applications are migrated to the vendor's systems. Most ofthen than not, the vendor simply takes over the client's systems (Quinn and Hilmer, 1994).

The third and final phase in executing an outsourcing arrangement is the assessment phase. At this point the vendor is already providing the service expected from him. Careful contract monitoring ensures using predefined metrics and benchmarks. Eventually, the contract is either re-negotiated for further use or ended (Quinn and Hilmer, 1994).

Every company who will be planning and/or deciding to do outsourcing should expect a dramatic change of the system. There is a procedural change that will be happening within the organization itself. The dramatic changes in the organization can be in the form of changes in the nature of work, control, and organizational design. The outsourcing process is sated with uncertainty for employees and in this sense similar to changes like mergers, restructurings, and downsizing. At even the mention of outsourcing, employees suspect their employment is jeopardized, often correctly. Resulting productivity losses may exasperate already unacceptable performance levels and inspire additional outsourcing (Bettis, Bradley, and Hamel, 1992).

Firms that proceed and contract for outsourcing services comes across different organizational change with serious implications for the status quo.

In true outsourcing relationships clients transfer day-to-day administrative responsibility and control for the outsourced activity to the vendor. Whole business activities are repurchased from the vendor without concern for productivity issues and component costs (which are now the responsibility of the vendor). Clients pay for a service, and pay a premium to avoid the difficulties of producing and delivering a particular service (Bettis, Bradley, and Hamel, 1992)."

Unloading the burden of administration is a great attraction to outsourcing. However, for the client's employees there is a sense of loss. Client employees lose such tangible signs of power and status as direct control over staff, budgets, and functions. For some, there is the real and acute loss of employment. On the positive side, some employees will receive greater control over resources and greater exposure to outside agents (Bettis, Bradley, and Hamel, 1992).

Outsourcing may also imply substituting vendor services for current internal capabilities. Outsourcing means replacement. It entails replacing business activities traditionally performed internally and eliminating the units that previously provided the services and either reassigning or releasing employees. Replacement distinguishes outsourcing from simple contracting precisely because the organizational implications are significant. The duplication is eliminated to realize the motivations that originally inspired outsourcing. Outsourcing is an inexact tool for organizational design, not simply a contract for acquiring goods and services (Bettis, Bradley, and Hamel, 1992).

Lastly, outsourcing represents a semi-irreversible organizational change. When employees are transferred or terminated their knowledge and skills, perhaps the result of decades of learning, leave with them. Unspoken understandings of the work and organizational particulars are difficult to rebuild if the outsourcing relationship fails. Moving the activity back into the firm as a result of a failed arrangement is a difficult process of shifting resources and rebuilding capabilities (Bettis, Bradley, and Hamel, 1992).

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