Risks of Offshore Outsourcing in IT

Question: Discuss about theRisks of Offshore Outsourcing in IT. Answer: Introduction: Offshore outsourcing has proved to be a danger to the profession of IT and there is need to enforce restriction to recover the viability of the operation. The onset of 21st century has witnessed the chaos brought about by recession in the economy. Conglomerates started outsourcing their IT operations from the very beginning of global financial crisis to recover their sinking ships due to market saturation (Chang and Gurbaxani 2012). The smaller companies have ever since started to follow their footsteps and have neither stopped and nor are showing any indication of stopping in the near future. This trans-global trend might have shown rapid success in the beginning but the scenario has changed drastically in the last decade (Tayauova 2012). Offshore outsourcing can be defined as the process of hiring a third party provider from foreign base to perform any business activity or operation (Dolgui and Proth 2013). Apart from IT services, other commonly outsourced business practices include delivery and distribution, human resource, procurement, marketing, finance and accounting and lastly the popular concept of customer care services. The idea of offshore outsourcing gained massive popularity due to its clear advantages that include elevated productivity, reduced expense and widespread target market (Chang and Gurbaxani 2012). Despite these striking benefits, there are a myriad of factors that influence successful operation of outsourcing and that can seriously outweigh the benefits of the outsourcing procedure (Dolgui and Proth 2013). This report discusses dangers associated with offshore outsourcing in the field of information technology and attempts to string together recommendations to overcome the risks. Dangers of IT Outsourcing: One of the most major issues in the IT industry is the problem of offshore outsourcing. This issue is a major one to the professionals as well as the economy of the country. With the rise of the IT professionals as well as the IT world, outsourcing has been increasing at a major rate in the recent past years. According to Koppman et al. (2016, p. 830), outsourcing mainly refers to the process of hiring external suppliers to do various tasks. Outsourcing had been started since the work was a lot and employees were few. However, with the advent of the new era in the IT, the process of outsourcing became a dangerous one for the professionals as well as the economy of the country. The various risks of outsourcing are as follows: Cost Reduction: As mentioned by Schniederjans et al. (2015, p.65), one of the main reasons of offshore outsourcing is the expectation of cost reduction. The IT companies engage in the process of off source outsourcing in the expectation that the production cost would be reduced. The outsourcing cost in reality does not reduce the cost of production in reality. Thus, the overall cost of the production is increased and this is a potential risk to the IT industry. This is a threat to the economy of the IT industry as the process of outsourcing increases the overall budget of the project. The process of offshore outsourcing does not achieve cost reduction. Instead, the cost is increased. Hence, this might prove to be dangerous for the employees as well as the economy. Security of the Data: The IT organizations have been dealing with confidential data and hence privacy plays an essential role. According to Kotlarsky et al. 2014, p.610), the clients of the IT companies also are particular about the privacy of data and the information being shared. Hence, the data security and protection of the data provided by the clients. Hence, offshore outsourcing might be a potential risk to the security of the data provided by the clients. Moreover, unreliable outsourcing might also lead to the misuse of the data of the client. The sensitive data could be misused resulting in the wrong use of the information. CMM Level 5: The Capability Maturity Model is another major issue in the adaptation of the offshore outsourcing. As opined by Mankiw and Swagel (2016, p.1029), the offshore vendors often require standardized models with CMM level 5. Many IT companies does not meet the CMM level 5 characteristics. Hence, offshore outsourcing becomes an overhead to align the business with the CMM level 5 in order to initial offshore outsourcing. Business Knowledge Loss: As opined by Wibisono et al. (2016, p.1781), in case of most of the IT companies, the business knowledge is usually confined within small groups of developers and programmers. Hence, offshore outsourcing might result in loss of business knowledge, thus hampering the professionals as well as the business of the IT companies. The loss of business knowledge could also result in the loss of the competitive advantage of the IT companies. Failure to Deliver: Offshore outsourcing in the IT Companies might result in the failure to deliver the products to the vendors. As mentioned by Djavanshir (2005, p.35), the outsourcing company might fail to meet the deadlines and hence, the products remain undelivered from the side of the IT Company. Thus, in a long term project, the goodwill of the IT Company is at stake, due to the failure in the delivery of the outsourced company. Unemployment: One of the major issues faced by the IT companies in case of offshore outsourcing is unemployment. Offshore outsourcing might also lead to unemployment of the employees. Offshore outsourcing of a huge amount of work might lead to ,unemployment of a huge number of local employees. This might have an adverse effect on the economy of the country as the majority of the money would be transferred to the offshore countries. The lack of job stability of the people of the IT industry might also lead the potential workers refraining from relying on the IT industry. Hence, the credibility of this industry might be lost. Demanding GovernmentLegislation: Information technology is a business operation that is utilized in each and every professional sector starting from finance to health and social care services. There are government legislations that impose a threat to the smooth operating business in financial and health or social care sectors (Gonzalez, Llopi and Gasco 2013). The burden of government oversight often interferes with the growth of the industry and offshore outsourcing increases the risk of government interference multiple folds. Different nations have different legislations and complying with all of them becomes a task for the organization. Often the offshore vendor is not aware of the regulations and requirements that meet the industry specific benchmark (Dolgui and Proth 2013). The underlying reason to this blunder is the fault of advisory team that negotiates the regulatory terms, often they fail to notify overseas vendor of the necessary terms and the company has face the consequences. Cultural Setbacks: Modern professional structure relies on team working to accomplish business operation involving multidisciplinary approach. Cultural differences can become a serious setback to the productivity and efficiency of the team (Han and Mithas 2013). The risk of cultural predicament becomes unavoidable in case of offshore outsourcing, language and accent being the vital element to it. The only method to overcome this issue is the cultural education programs that many conglomerates have taken up in order to eradicate such issues (Tayauova 2012). However, the major restriction to this strategy is the cost increase that might seem irrelevant to smaller industries. Instable Productivity: The majority of IT organizations face initial setbacks in their internal operations in the first couple of years as a result of the time spent in transferring technical and operational knowledge to the vendors (Gonzalez, Llopi and Gasco 2013). It has to be considered that the basic purpose of outsourcing was to reduce the company cost; however, the cost saved by offshore outsourcing is often countered by the additional expense of personnel layoffs demanded by the client organization. Layoffs are known to cause significant morality issues in the in-house employees and often lead to customer dissatisfaction and diminished productivity (Han and Mithas 2013). Inflated Turnover Rates: The global inflation in the rate of offshore outsourcing has resulted in a dynamic labor market and that has drastically heightened the turnover rates in the vendor markets. Higher turnover rates can have an adverse impact on the client organization by forcing it to elevate the time spent in training and transfer to new vendor locations (Tayauova 2012). Benefits: Despite having an alarming list of risks that can potentially weigh down the efficacy of the process, offshore outsourcing has some distinct advantages that cannot be overlooked Outsourcing Ensures Focused Core Performance: The back-office operations expand significantly as a business undergoes rapid growth periods and that can significantly consume both human and financial resources of a company. Outsourcing can allow the company an window in negligible cost which will facilitate the company to refocus on the core activities of the business (Ali and Gran 2012). Cost Saving: Offshore outsourcing has been designed to cut overboard expenses n the first place, and it continues to be the one of the major advantages for business organizations (Willcocks and Cullen 2013). Small-scale companies have started to incorporate offshore outsourcing to survive market demands on a low budget. Operational Control: Offshore outsourcing is an effective tool in reviving operational control when they go haywire in rapid growth seasons. It can serve as the ultimate aid in managing departments that might have evolved with poor management (Hirschheim, Heinzl and Dibbern 2013). For example, if an IT department has more projects than it can handle with lack of man-power and budget the company cannot meet the needs of the clients regardless of the optimum contribution of the staff (Ali and Gran 2012). An outsourcing agreement can serve as an excellent alternative that can allow the management to prioritize core functions and bring operational control back in the scenario. Risk Management: It is ironical that a venture as saturated with risks as outsourcing can aid in risk management, there are risks that even outsourcing can eliminate (Hirschheim, Heinzl and Dibbern 2013). Elevated employee turnover rate can add lack of certainty and consistency in the business operations and IT outsourcing can significantly reduce the employee turnover rate, which will aid in reviving continuity in the business. The dangers to IT outsourcing might have clouded the future of information technology in the market now but the benefits to the system are irresistible. With some strategic and well-planned recommendation, this golden goose can be optimally utilized. Conclusion: Finally, it could be concluded that the offshore outsourcing has various advantages as well as disadvantages in the IT industry. However as seen from the above issues, it is seen that major outsourcing might result in loss of employment of the people, failure to deliver on time, CMM level 5 non-compliance, loss of business knowledge. However, if offshore outsourcing could be applied tactfully, it might result increase of the efficiency of the IT industry as well as the quality of the work being produced by the IT industry. Hence, instead of tagging offshore outsourcing as dangerous, it could be used efficiently to enhance the work of the IT industry. Recommendations: Offshore outsourcing is an essential and important activity in the IT industry. However, due to its negative effects it has been considered as dangerous. According to Ahmed et al. (2014, p.280), few recommendations could be suggested such that the offshore outsourcing could be used in an effective way, without hampering the employers as well as the economy. The offshore outsourcing could be done for some of the tasks and projects such that the loss of business knowledge could be avoided. Moreover, as mentioned by Teo and Bhattacherjee (2014, p.180). the issue of failure to deliver on time could also be solved by giving the tasks with a prolonged deadline for offshore outsourcing. Moreover, the issue of unemployment of the local people due to the offshore outsourcing could be solved by outsourcing limited amount of jobs that would not result in unemployment. Moreover, as mentioned by Kumar, et al. (2014, p.102), the issue of data security could be solved by giving less important jobs for offshore outsourcing. Thus following these few recommendations might result in the efficient use of the process of offshore outsourcing. Moreover, the IT industry could also use the method of offshore outsourcing to smaller companies, such that the fear of loss of business knowledge and loss of competitive advantage is not faced. 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