Information Technology Outsourcing (ITO) will continue to have a major impact on all organizations and could over time more and more grow to be a crucial part of the organization’s strategy. Various elements within the metamorphosis of ITO might exist blanketed however now not always special.
Here is the article to explain, How to define Information Technology Outsourcing (ITO)?
ITO has to grow to be an international phenomenon. Globalization with a few distinct drivers in technology evolution has reshaped the marketplace and given an upward thrust to the arrival of the digital age. A sustainable competitive enterprise method will want to embody this opportunity and will want to are seeking enablers to exploit it. What are the advantages and disadvantages of Information Technology Outsourcing (ITO)? IT, by the internet and broadband communications, particularly, allows an organization to fulfill this need. Further lower prices of communication, the boom in broadband capability, and web collaborations boost the technique.
What does the meaning of Information technology (IT) outsourcing?
Information technology (IT) outsourcing is an organizational approach of hiring 1/3-party service vendors to address the IT-associated methods of your organization. IT features encompass software improvement, infrastructure answers, technical customer support guide, and facts analytics. Most companies outsource these obligations to lessen fees, access to higher skills, and simplify upscaling. IT outsourcing is the usage of external carrier vendors to successfully supply IT-enabled enterprise strategies, utility offerings, and infrastructure answers for business outcomes.
Outsourcing, which also includes software services, software programs as a service, and cloud-enabled outsourcing, allows clients to develop the proper sourcing techniques and vision, pick out the right IT service carriers, shape the first-class possible contracts, and govern deals for sustainable win-win relationships with outside companies. Outsourcing can enable firms to lessen costs, accelerate time to market, and take benefit of outside know-how, assets, and/or intellectual property.
Definitions of Information Technology Outsourcing (ITO);
Outsourcing has variously existed defined by scholars in the Information Systems (IS) literature as follows:
- “The significant contribution of external suppliers in the physical and/or human resources associated with the entire or specific component of the IT infrastructure in the user organization”.
- “Outsourcing occurs when third-party vendors are responsible for managing the Information Technology components on behalf of their clients. IT Outsourcing means handing over the management of some or all of an organization’s information technology (IT), systems (IS), and related services to a third party”.
- “…business practice in which a company contracts all or part of its information systems operations to one or more outside information service suppliers”
- “Outsourcing is the handover of an activity to an external supplier. It is an alternative to internal production”
- “IS sourcing” is the organizational arrangement instituted for obtaining IS services and the management of resources and activities required for producing these services.
Therefore outsourcing involves the transfer of the responsibility for carrying out an activity (previously carried on internally) to an external service provider against agreed service levels at an agreed charge.
Information Technology Outsourcing (ITO) History;
ITO has received great attention from scholars and researchers since the mid-1990; but, it’s been around for a while as per the examples below:
- 1963 – Electronic Data Systems (EDS under Ross Perot) signs an agreement with Blue Cross for the handling of its data processing services.
- In the mid-1980s – EDS signed contracts with Continental Airlines, First City Bank, and Enron.
- 1989 – Kodak outsources its IS function to IBM, DEC & Businessland (“Kodak Effect”) being the most notable example.
- More recent developments (Kern and Willcocks 2000, Ross and Westerman 2004, Kishore 2003, Kaiser 2004, Lander 2004, IBM 2004, Smith and McKeen 2004), suggest motivation is more strategic to improve the business’ competitive advantage.
- It’s clear that ITO is not quite a new phenomenon but is increasingly more prominent in this era where it is prevalent in almost every facet of the business. The industry evolved from a monolithic mainframe to pervasive computing.
- A survey of the London Stock Exchange FTSE Index over three years found a generally positive relationship between high levels of outsourcing and enhanced stock market performance.
Reasons for outsourcing;
Organizations adopt ITO for various reasons (Turban et al, 2006). The ever-dynamic evolution within the IT sector grants great opportunity to businesses. The following reasons were invariably most common as per numerous surveys done and researched globally:
This has been the foremost reason to outsource as senior executives only view the IT function as a non-core activity and a necessary cost to minimize. Economic pressures are also external factors that lead to the advent of ITO. Lacity and Willcocks explain that cost savings are no longer a major reason for outsourcing.
Focus on core competency;
Business deems IT as a cost center and excludes it from its core strategy. With increased shareholder demands organizations feel they need to refocus on broader business issues other than technology. Organizations place more focus on their “core competency” business.
Access to specialist expertise and technology;
Highly skilled labor comes at a cost and also technology is also not readily available. ITO is not only for cost savings but as a tool for utilizing state-of-the-art expertise and technology through their service providers.
However, of late, the companies with strong IT capabilities, such as IBM, Microsoft, and SUN, are also outsourcing some of their IT functions to concentrate on their core responsibilities and reduce costs to the economies of scale.
In the past, organizations used frameworks and models as guidelines for assessing their current state and determining future strategic actions. More organizations are considering ITO as part of their strategic thinking. Organizations use ITO as a method to reduce costs and achieve efficiency and flexibility; but, many don’t realize the benefits due to bad decision making.
ITO decision-making is a process and requires scrutiny before existing finalized. ITO decision-making process addresses a wide range of issues, such as economic (eg., financial feasibility), technological and political. This process starts with an in-house assessment of the IT capabilities which should highlight management activities that can potentially outsource.
SWOT (Strengths, Weaknesses, Opportunity, Threats) analysis could use to substantiate the need to whether ITO can use to negate those threats and weaknesses or whether it is all necessary to explore ITO. The facts gathered should include a baseline and evaluation of the current environment which should exist made available for executive management approval.
Knowledge within the strategic decision at this higher level can thus be descriptive (know-what), procedural (know-how), or reasoning (know-why). Case studies within surveys conducted by M.C.Lacity, L.P.Willcocks, and D.F.Feeny published in the Sloan Management Review summarize the ITO process. The abovementioned reasons were most common in their samples.
Scope of sourcing;
Sourcing exists often referred to in IT literature as outsourcing. The research delineates four categories of sourcing:
- Total outsourcing is where all IT activities including assets and management become the responsibility of a third-party vendor.
- Total insourcing refers to the in-house management of IT activities where external or internal staff stands used with the buying in of the vendor resources to meet a temporary need. Vendor resources exist only used to supplement the internally managed teams.
- Selective sourcing locates selected IT activities to vendors; while the customer remained responsible for delivering the result and will exist held accountable.
- De facto insourcing uses internal IT departments to provide products and services that arise from historical precedent; rather than from a reasoned evaluation of the IT service market.
Considerations of sourcing;
A critical review of the above categories found that the all-or-nothing approach ( total outsourcing) characterized by long-term (5 years or more) deals can lead to trouble after a few years as exemplified in the case studies due to:
- Senior Management approach ITO like any other make-or-buy decision where ubiquitous IT applications across business functions complicate matters.
- Lost alignment between business and IT strategies.
- Failed promises to access new technologies.
- Processing power cost depreciates at an average of 20 percent annually due to the IT capabilities evolvement.
- And contractual costs soared greater than market prices.
- Termination of such contracts was found to be prohibitively expensive.
- The research found that those who approach ITO in all-or-nothing terms either incur great risks or forego the potential benefits of selective sourcing.
Categories Information Technology Outsourcing (ITO);
Reasons for ITO can be categorized as two dimensional and based on:
- Purchasing style refers to contracts to either be once-off or an expectation of business for many years.
- Purchasing focus refers to companies buying resources from vendors; such as hardware, etc, and managing the delivery of IT themselves or vendors manage the IT activity and the organization expects the specified results.
- The result is four distinct categories will be representative of whether ITO is required as the figures represent. The figure also represents a decision matrix for business and a guide for an effective strategy.
- A decision in selecting what can be outsourced usually distinguish between the contribution that IT makes to the business operations and its impact on competitive advantage.
- ITO was primarily domestic but has now evolved due to globalization and can also be categorized now by the variance of service provider distance. The same reasons apply globally for ITO.
- On-shoring refers to the outsourcing vendor located in the same country as the customer.
- Near-shoring refers to the outsourcing vendor located geographically close but not in the same country.
- Off-shoring refers to the outsourcing vendor located offshore and possibly on a different continent and time zone.
How to Managing Information Technology Outsourcing (ITO)?
Once the scope and type have been identified; the vendor selection process will exist initiated by soliciting via Request for Proposal (RFP). Not all service providers are equal as all offer different types of services like:
- IS consultancies/solutions providers – services in all IS functions
- Systems houses – system integration
- Hardware vendors – hardware platform
- Ex-IS departments – industry-specific sourcing
- Development houses – develop software
- Generic outsourcers – manage functions, especially infrastructure