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.