Information Technology Outsourcing Management

What is IT outsourcing?
IT outsourcing is an arrangement in which a company subcontracts its information technology related activities to be executed by a different company. In the past several decades, as the role of information technology grew in the performance of a company, the fixed cost of maintaining up and running IT facilities and staffs was increasing as well. Therefore outsourcing solution was derived from companies’ need to achieve superior performance of IT functions with minimum amount of cost. Major classifications of IT functions that companies outsource are infrastructure and applications. Infrastructure outsourcing refers to a company resolving its entire IT activities handled by a contracted vendor company on the company’s behalf. Application outsourcing stands for a company subcontracting only its core IT applications such as ERP systems, document management systems or Business intelligence applications with service provider.
Benefits and Risks
Although it is obvious that primary cause of increasing trend of outsourcing is a cost factor, many other benefits come along with outsourcing. Outsourcing allows companies to shift their whole attention on the quality of their core activities without facing the vulnerability of poor level of IT performance. Because no matter what industry a company is in, cost and pressure of having in-house IT solutions require the company to be an expert in IT industry which is difficult to achieve for any size organizations especially for entrepreneurs and small businesses, slowing down their productivity as well as slowing down the economy. Subcontracting IT activities to a specialized vendor company is indeed a win-win situation for the both end, enabling the organization to upgrade its IT performance and providing business to the vendor company. Moreover, with outsourcing, organizations can get access to variable IT skills and knowledge which potentially can improve their efficiency, and outsourcing makes accommodating any new IT innovations or changes in any industry easier to handle for organizations. Needless to mention the benefits of savings on investments in IT related infrastructure which can be spent towards organizations’ business expansion or something equally important.
The benefits mentioned above can be substantial only if outsourcing is practiced carefully with good management. Otherwise, oversights of important issues can bring significant complications to the organizations. Based on the stories of unsuccessful outsourcing practices, the most considerable problems the organizations encounter are the lack of integration between vendor and client, hidden costs of training, miscalculation of proficiency of the vendor company, and sometimes differentiation of the client company can be compromised since the vendor company could be serving the competitor company as well.
In terms of a company outsourcing its entire IT department from a service provider company, implementation of good collaboration and communication with each other often requires some time and patience from both sides due to the differences of cultural, geographical and preferred business practices. The fact that knowledge transfer is the most important term in IT outsourcing implies the integration process of vendor and client companies is more virtual than physical. That is why the people problems such as different interpretations of the contract, conflicts of two cultures and lack of preparation for integrated operation occur very often and if ignored, they could result negative impacts on both companies.
Legal, economic, geographical and political environments of the country in which the client company outsources its IT activities are the most important but often ignored factors. When the host countries face civil war or natural disaster happens, the recovery costs the companies encounter are usually incalculable.
IT outsourcing best practices Through weighting the positive and negative impacts of outsourcing carefully and planning the shifting process step by step, companies can successfully implement outsourcing to its daily business practices and convert it to one of its competitive advantages easily. Recommended best practices of IT outsourcing usually focus on good management and good assessment of choosing the partner.
Maintaining good communication with your service provider before and after signing on the contract is also an essential part of setting up a sustainable IT solution for any company. Every company and every project has its own uniqueness therefore the service provider understands the detailed requirement is necessary. And the difficulties both side face due to the cultural and geographical differences can be resolved by committing to good communication. For example leaders of both sides should agree on set, clear objectives and stay committed to them when circumstances change.
Although the cost reduction is the primary motive of outsourcing, overdoing it can compromise the organizations’ core activities. In today’s globalizing world, importance of maintaining good IT performance is greater than ever to the organizations’ wellbeing so that pursuing the lowest cost can have its own price. The reason why is that the vendor companies are also business institutions depending on their profits therefore in order to meet the client’s cost requirement they sometimes cut corners such as hiring under qualified staffs which consequently affect the quality of the client companies’ operation.
In order to make the integration process easier, the outsourcers should put effort into finding compatible service providers. It is important to make sure that your service provider has organization cultures and preferred business practices similar to yours since they will become a part of the organization. Another essential outsourcing practice is to consider the service providers’ experience and capacities to assess whether they are skilled enough to maintain your company’s operation at all times. In terms of choosing their partner, organizations also should consider any expected future changes in the market and their future expansion plans as well as their competitors’ IT performance level.
Political and social environments of the countries in which the vendor companies operate, should not be out of concern. Outsourcers should always be aware of the political situation of their host countries as well as social factors that could influence the quality of employees’ job performance.
It is recommended to outsourcers to keep presence of representative on-site as a middle man so that they can have some kind of coordination over the execution of the IT activities. Representatives also work as a communication bridge between partners making sure each side understand their roles and responsibilities. Legal aspects Legal aspects of IT outsourcing might be the most complicated issues the enterprises encounter since it involves various types of laws such as international and domestic. International common laws such as Intellectual Property, Copyrights, Patent, Trade Secret, Privacy and Information security all need to be considered when a company makes an outsourcing related decision.
Any outsourcing contract addresses the tangible and intangible issues and their legal implications as well as procedures in order to avoid lack of clarity. For example pricing is very important aspect of IT outsourcing contract and any possible uncertainty related to the pricing of service should be stated on the contract. Inflation, delays, manpower and material shortages and insolvency all must be concerned and put on the contract to regulate when situations mentioned above happens. Also outsourcing contract should be flexible to adjust any changes in performance, quality, and suitable to host country’s tax law, pension laws to solve staff related matters.
Intangible issues on the other hand should be carefully thought through because they pose the highest risks on the organizations’ domestic and international operation. When companies outsource their entire or partial IT function, the risk of their customers’ valuable information such as social security numbers, medical history, credit card information to be exposed gets higher as well as their own internal secret information. A company must do risk assessment of the host country’s security environment by measuring how effective the laws referred to intellectual property, copyright, digital hacking and violation of privacy are. Unfortunately laws pertaining to privacy protection are not so effective in today’s most popular IT service provider countries such as China, India and Philippine. Therefore offshore IT centers and outsourcing companies must establish strong system together to protect themselves as well as their customers.
Intellectual Property and Patent laws have strong presence in USA and European countries but they differ in host countries. Illegal use of one’s IT innovation such as software, source and know-how are not the front line concerns of governments of foreign countries right now, so outsourcers usually face tremendous risk of their intellectual property stolen and used against their products in the market.
US companies’ trade secrets are also totally dependent on mutual trust and written agreements between two parts. There is no law enforcement system in the host countries to back up such written agreements.
Basically, US companies pursuing offshore outsourcing as an IT strategy must consider domestic and international laws extremely and craft their outsourcing contracts focused on to minimize any risks they may encounter in unfamiliar legal environment.

Sources: http://www.infoworld.com/d/adventures-in-it/13-best-practices-it-outsourcing-034?page=0,0 http://blog.everythingcu.com/2006/02/12/the-many-downsides-of-outsourcing/ http://www.cio.com/article/40380/Outsourcing_Definition_and_Solutions A Legal Perspective on Outsourcing and Offshoring, Sam Ramanujan; Sandhya Jane
Journal of American Academy of Business, Cambridge; Mar 2006; 8, 2; ABI/INFORM Global
Outsourcing best practices
Outsourcing and Offshoring: The New IS Paradigm? , William R King
Journal of Global Information Technology Management; 2005; 8, 2; ABI/INFORM Global
www.wikipedia.com