Outsourcing Information Technology: Assessing Your Options
Hormozi, Amir, Hostetler, Erin, Middleton, Cynthia, SAM Advanced Management Journal
Although the term outsourcing may be relatively new to business, the practice of it is not. Historically, numerous businesses have enlisted the help of outside experts to assist with tasks too cumbersome to complete in-house. Legal and financial experts, along with countless other specialists, have long been called on to assist businesses in areas outside their core competencies. Jones (2000) notes that outsourcing has been a common business term for approximately 20 years. Krajewski and Ritzman (2002) define outsourcing as "allotting work to suppliers and distributors to provide needed services and materials and to perform those processes that the organization does not perform itself." While such a definition is easy to comprehend, knowing when and how to outsource is much more complex. When thinking about outsourcing, modern businesses must consider not only functions traditionally outsourced but also their rapidly evolving information technology (IT) requirements.
Just how does a business determine if it should outsource its IT needs? Unfortunately, there is no "one size fits all" approach. A small company with limited resources may feel comfortable outsourcing all of its IT needs while a larger company with its own IT department may outsource only carefully selected functions. Regardless of where an organization lies in the outsourcing spectrum, the following are typical IT goals: to focus on core business strategy, to reduce or control costs while improving functionality, to improve competitiveness, to provide better management control, to improve IT flexibility, to free up resources for core functions, to gain access to world-class capabilities, and to provide better IT service ("IT Solutions ...", 2003; Lacity, 2000). The ability to meet these goals requires careful analysis of the organization's IT requirements, capabilities, and expectations, along with the vendor's ability to meet them. Accordingly, this research suggests three guidelines for businesses to consider when making IT outsourcing decisions.
Current Issues in IT Outsourcing
Although outsourcing has been practiced for hundreds of years, the history of outsourcing information technology is relatively brief. Companies have been outsourcing payroll and accounting functions for years, but only recently have they discovered the benefits of relinquishing control over their IT departments. Specifically, Yost and Harmon (2002) identify Enrol Corporation's 1989 $750 million contract as the first important IT outsourcing arrangement, while Benamati and Rajkumar (2002) credit Kodak similarly, noting its 1989 landmark move to outsource IT needs. To keep pace with the information technology advances of the last decade, many large organizations have chosen to outsource the departments that handle their information systems and network services. Companies embracing IT outsourcing have benefited from the expertise and technological capabilities of their vendors, but they have had to deal with decreased control as well. For example, four case studies presented by Peled (2000) demonstrate the highly influential role IT vendors can play in the development of public projects. Rather than merely working to meet the needs of the bureaucrats employing them, these vendors incorporated elements of their own political agendas into their work.
In spite of concerns about decreased control, more and more companies today are moving toward outsourcing departmental functions to save time and money. According to a 1999 Strategic Outsourcing study, one-third of executives' budgets were externally sourced, and companies with growth rates greater than 10% were more likely to be using external options to meet their needs, especially selective outsourcing and strategic alliances (Corbett, 2002). In many cases, such external sourcing choices include information technology.
Outsourcing IT can provide major cost and time saving advantages over a range of projects from small things such as repair of hardware or network maintenance to ongoing management of all IT issues for multiple sites and users. …