Impacts on IT offshore outsourcing - Chances and risks in offshoring IT services

Munich University of Applied Sciences Department for Computer Science and Mathematics Matthias Stawinski Impacts on IT offshore outsourcing Chances and risks in offshoring IT services Abstract In the context of strategic IT management offshore outsourcing of IT services is discussed numerous in pretty every matter within client businesses, consulting firms and science. In relevant media many articles are to be found which deal this subject matter under specific aspects. This essay explains the term “IT offshore outsourcing” and shows which chances and risks are associated explicitly with IT offshoring. Concluding guidelines are given, as discussed before. Number of Words: 1041 Chances and risks in offshoring IT services 1 What does IT offshore outsourcing mean? “Outsourcing refers to having work for a company done by another organization. Offshoring refers to having this work done in another country, whether or not it is done by part of the same company.” I The phrase “IT offshore outsourcing” in special, means giving away IT functions and/or resources to an far-off service provider for long or middle term but not only for one project. It is used as a strategic IT management instrument and has to be embedded into the enterprises business strategy and organizational structure. Typical offshore nations are countries like India, Moldavia and other states of former USSR as well as China and the Middle East. 2 Chances in IT offshoring 2.1 Optimizing IT expenses Even today the opportunity to reduce IT`s expenses is one of the most important criterion within a make-or-buy decision. Shifting IT services to low-wage nations cuts costs for IT especially considering that personnel expenses could be lowered. Just in Germany as well as in the western (developed) countries, common salaries and wages for IT professionals are the major cost driver in systems development and IT operations. In many developing and far-off countries, like India and China, labor costs are several times lower than in these countries.II 2.2 Finding the best cost-benefit ratio Via a global sourcing strategy it is possible to find the best service provider in quality and cost-benefit ratio world-wide. That means that outsourcing IT services to offshore countries can help finding IT vendors with high quality standards and low costs. India for example is well known for its highly educated employees and well organized IT companies. E.g. Satyam, Cognizant and TATA are to be named in this context. These Indian IT vendors have implemented several norms and (industrial) standards such as ISO 9001, ITIL/ISO 20000 or CMM(I) for example and provide low-cost IT services.III 2.3 Developing foreign markets Another chance in outsourcing IT services to offshore is to enter new markets. Offshoring IT can also be used as a strategic marketing instrument for breaking into and developing new markets in subject to portfolio diversification. As a German IT consulting firm for example you could outsource your IT department to a subsidiary in offshore in accordance to vertical diversification. So the offshored IT department can assume new functions e.g. the data center may emerge as a platform and application service provider to lower its own IT operations cost and open its services to external customers at not yet entered markets. Matthias Stawinski 2 Chances and risks in offshoring IT services 3 Risks in IT offshoring 3.1 Intercultural problems While outsourcing IT services to foreign countries, intercultural conflicts may arise.IV If IT services are moved to countries far-off – for example to China – there are other cultural habits, business conducts and communication processes. Frequently it is reported, that customers not realizing the impacts of IT offshoring why communication problems and misconceptions often are to be underestimated. Therefore several contractual agreements permit a broad and ‘service provider friendly’ interpretation because of not considering the cultural differences and insufficient definitions. Again involving that agreed service levels or system requirements are not met and – in certain circumstances – important IT systems not available as expected. 3.2 Hidden costs Often costs which have not been paid attention at and not taken into consideration during make-or-buy decision emerge from offshoring IT services. Most common unnoticed expenses are coordination efforts. This includes a highly qualified engagement manager, travel and telecommunication costs, expenses for selecting a vendor and managing the transformation. But there are a little more hidden costs such as costs of laying off local employees (in Germany refer to §613a BGB) and of changing the organizational structure and behavior.V 3.3 Threats to property, process know-how and privacy Most developing countries – as typical offshoring nations – have “much less restrictive laws about privacy and security than most developed countries.” VI So when offshoring IT and related services the risks of intellectual property and process know-how theft as well as to individuals’ privacy are increasing. Nevertheless as German based company for example you are in charge of being compliant to the BDSG (privacy law) – even as outsourcing-client. But privacy is not only data that has to be protected. Likewise it is to assure that the outsourced stored data and process know-how – that often can be intellectual property or has to be dealt as it is – is secured by adequate practices. 4 Conclusion As offshore outsourcing is used as a strategic IT management instrument a decision should not only be made by obvious aspects. Abovementioned chances and risks point out an extract of important decision criteria to consider within a make-or-buy decision on offshoring IT services. Many others can be found in case of IT outsourcing itself and should also be anticipated. Furthermore to earn benefits from IT offshoring it is necessary to align any IT sourcing strategy with business’ goals. Matthias Stawinski 3 Chances and risks in offshoring IT services I Aspray, William. Mayadas, Frank. Vardi, Moshe Y. Globalization and Offshoring of Software: A Report of the ACM Job Migration Task Force. ACM. 2006. URL: http://www.acm.org/globalizationreport/pdf/fullfinal.pdf. Read on: 19.05.2008 II Overby, Stephanie. The Hidden Costs of Offshore Outsourcing: Moving IT work overseas can be a much more expensive proposition than you may think. URL: http://www.cio.com/article/29654/The_Hidden_Costs_of_Offshore_Outsourcing/1. Read on: 19.05.2008 III Selbach, Elmar P. CMM and SPICE as enterprises‘ benefit: Outsourcing to India by considering quality. URL: http://www.competence- site.de/offshore.nsf/f1b7ca69b19cbb26c12569180032a5cc/4474f835749861f0c1256f38003a882 9!OpenDocument. Read on: 19.05.2008 (in German); Glohr, Carsten. Offshore outsourcing: Retain control! In: IT Management. 6/2005. (in German) IV Davison, Dean. Top 10 Risks of Offshore Outsourcing. URL: http://techupdate.zdnet.com/techupdate/stories/main/Top_10_Risks_Offshore_Outsourcing.ht ml. Read on: 19.05.2008; Task Force “IT Outsourcing“. BITKOM Guideline Offshoring. BITKOM. 2005. URL: http://www.bitkom.org/de/themen_gremien/36129_29801.aspx. Read on: 19.05.2008 (in German) V Overby, Stephanie. The Hidden Costs of Offshore Outsourcing: Moving IT work overseas can be a much more expensive proposition than you may think. URL: http://www.cio.com/article/29654/The_Hidden_Costs_of_Offshore_Outsourcing/1. Read on: 19.05.2008 VI Aspray, William. Mayadas, Frank. Vardi, Moshe Y. Globalization and Offshoring of Software: A Report of the ACM Job Migration Task Force. ACM. 2006. URL: http://www.acm.org/globalizationreport/pdf/fullfinal.pdf. Read on: 19.05.2008 Matthias Stawinski 4