Outsourcing and Offshoring
In the past 20 years, many businesses have noted that it has become difficult to terminate or lay off employees. In MIS, it has also been expensive for firms to hire the best people. Consequently, many firms have chosen to outsource various aspects of their MIS functions. The basic premise is that specialized firms can offer more efficient service at better prices. For example, EDS runs huge data centers, and it is relatively easy to add more clients with only minor increases in costs. Similarly, Amazon, Google, and Microsoft run data centers and lease out virtual computer on an hourly basis. As a huge MIS organization, EDS also hires and trains thousands of workers.
Outsourcing also is attractive to firms as a temporary measure. For example, firms might outsource their old accounting systems while designing and installing a new ERP system. The old system will continue to function and be ably supported by an expert company. The internal employees can focus on designing and installing the new system.
Outsourcing can take many forms. Firms might sell their entire computer center to an outsource specialist—and all of the data, software, and employees would move to the new company. Other firms might contract out other MIS functions such as network management, PC repair, training, security, or development. Some functions, particularly programming, can even be outsourced to companies
based in other countries. India has several companies, led by Tata, that specialize in writing programs for American and European firms. Using these firms in other countries to handle MIS (and other tasks) is known as offshoring. Two of the leading service providers are Electronic Data Systems (now owned by Hewlett-Packard) and Global Services, the IBM subsidiary.
Initially, this trend was partly due to the desire to cut costs, the inability to hire IT workers, the increasing standardization of IT services, and the need to focus on core business management. In 1998, Computerworld reported that an average of 20 percent of IS budgets was spent on outsourcing. Generally, a company signs an agreement to use the services of the outsourcing firm for a fixed number of years. Depending on the agreement, the outsourcing firm can be responsible for anything from machine operation and maintenance, to development of new systems, to telecommunication services.
Even without the revenue from the smaller firms, the trend is clear. Business organizations are increasingly relying on these outside specialists to develop software and handle other MIS tasks. Throw in software-as-a-service where companies can lease Web-based software, and it is clear that business organizations are interested in having someone else deal with the hassles of running an MIS department.
Outsourcing was initially used to decrease operating costs and to let experts hire and manage the technical workers required. These factors are still relevant, but the main issue today is fixed versus variable costs. Outsourcing, particularly cloud-based virtual machines, enables a company to convert almost all IT costs into variable costs that are paid each month. The server-farm experts have almost fully automated the operations of large-scale facilities. Power, data backup, hardware replacement, even software configuration can all be automated; enabling a facility with 50,000 or more servers to be operated by a tiny number of workers.
The facilities have high-speed Internet connections, typically from two sources to maintain access even if one provider line fails. As more software tasks move to Web-based servers, it becomes possible to put almost all operations into these server farms. Companies can purchase just the level of service needed with almost no upfront costs. As business needs grow, it is straightforward to expand onto more servers, just increasing the monthly fees. Even most software can now be licensed for monthly fees. When a company runs its own operations, it has to purchase hardware (buying more than is currently needed to plan ahead), pay for software, configure a room or building, obtain Internet connections to the premises, and hire several people to manage everything. The basic upfront costs could easily run to millions of dollars even for a relatively small firm.
Competitive pressures are also leading many managers to consider outsourcing their information systems. As technology continues to change, it becomes increasingly difficult for general business managers to keep up with the technology. Each change brings requests for new hardware and software, and the need to reevaluate the use of technology within the firm. Changing technology also requires continual retraining of the information systems staff. At the same time, middle-level management positions are being cut, and managers are asked to take on more tasks. In these circumstances, companies decide to transfer IS management to an expert through outsourcing.
Outsourcing has many drawbacks, and several studies have reported that the majority of companies that sign long-term contracts cancel those contracts within a few years. First, there might be a slight increase in security risk because the MIS employees have weaker ties to the original company. On the other hand, outsourcing providers are likely to have stricter security provisions than an average firm does. A bigger question is the issue of who is responsible for identifying solutions and new uses of technology for the firm. If MIS workers are employed by an external firm, will it be their job to search for new applications? If not, who will?
In the past few years, some firms have begun to reconsider the costs of outsourcing. The hosting firm has little incentive to strive to reduce its prices or improve its services. Moreover, it can be difficult to control the decisions of the outsourcing firm. Consequently, some firms have become more selective over which items are outsourced. Before you consider outsourcing, make sure you understand the answer to three critical questions: (1) How will you ensure adequate service? (2) How will you control costs? (3) Will it provide the flexibility you need if strategies change? Most contracts establish base costs, but additional requests are charged at higher rates.
Consultants and contract programmers are a simpler version of outsourcing. If you have a one-time task that requires workers you do not have on staff, you can simply hire them for the one job. The cost per hour might seem high, but you only pay for the specific job and you do not have to worry about firing anyone when the job is finished. One of the biggest issues with contractors is to ensure that your organization will be able to use and maintain the tools after the contractor leaves. You might need to arrange for access to the source code or for training sessions.
Managing contractors and outsourced operations are difficult tasks. It is not like buying a piece of software or hardware. You cannot simply assume that paying a fee will get you exactly what you want. Communication is critical. First, you must precisely define exactly what you want. Particularly when dealing with workers from a different country, it is likely that they have different interpretations of basic concepts. Second, you must build in progress monitoring and feedback to verify that everyone has the same interpretation of the concepts. Third, do not expect creativity, or even insight into your business operations.
