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Transcript of Completed IT Sourcing and Projects
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RISK’S AND REWARD’S OF IS/IT INSOURCING AND IS/IT
OUTSOURCING A Literature Review and Presentation of
Findings
Abstract: Objective: To identify the most commons risks
and rewards associated with Insourcing and
Outsourcing.
Method: Online search engine and cross-
referencing articles identified relevant studies.
Findings:
• The Risks associated with Insourcing
were found to be Cost and Expertise.
• The Risks associated with Outsourcing
were found to be Relationship and
Management.
• The Reward associated with Insourcing
was found to be Efficiency.
• The Reward associated with Outsourcing
was found to be Expertise.
Word Count:
1,63
Name: Del Kirwan
Student Number: 116222235
Course: MSc Information Systems for Business Performance
Module: IS6137: IT Sourcing & Projects
Lecturer: David Sammon
Table of Contents Introduction .............................................................................................................................. 1
Figure 1.1; Findings ............................................................................................................ 1
Main reasons for Insourcing and Outsourcing ....................................................................... 2
Figure 1.2; Reasons for Outsourcing .................................................................................. 2
Figure 1.3; Reasons for Insourcing ..................................................................................... 2
Discussion.................................................................................................................................. 3
Figure 2.1; Insourcing Risk’s/Reward’s ............................................................................. 3
Figure 2.2; Outsourcing Risk’s/Reward’s .......................................................................... 3
Insourcing Risk ........................................................................................................................ 4
Cost ................................................................................................................................. 4
Expertise ......................................................................................................................... 5
Chapter Graphic ..................................................................................................................... 5
Figure 3.1; Chapter Graphic ............................................................................................... 5
Outsourcing Risk ..................................................................................................................... 6
Relationship .................................................................................................................... 6
Management .................................................................................................................... 7
Chapter Graphic ..................................................................................................................... 7
Figure 4.1; Chapter Graphic ............................................................................................... 7
Insourcing Reward................................................................................................................... 8
Efficiency ........................................................................................................................ 8
Chapter Graphic ..................................................................................................................... 9
Figure 5.1; Chapter Graphic ............................................................................................... 9
Outsourcing Reward .............................................................................................................. 10
Expertise ....................................................................................................................... 10
Chapter Graphic ................................................................................................................... 11
Figure 6.1; Chapter Graphic ............................................................................................. 11
Conclusion .............................................................................................................................. 12
References ............................................................................................................................... 13
Appendix ................................................................................................................................. 14
Tables of Interest .................................................................................................................. 14
Table 1.1 Real world examples of contract issues, a major outsourcing risk. .................. 14
Table 1.2 Stage Model of IT/IS Outsourcing ................................................................... 14
Table 1.3 Insourcing Archetypes and Classification ........................................................ 15
Table 1.4 Benefits of Outsourcing .................................................................................... 15
Table 1.5 Selecting an Appropriate Contract ................................................................... 16
Methodology ........................................................................................................................... 17
Process Development ........................................................................................................... 17
Cross-Sectional Review of Literature ........................................................................... 17
Planning Process ........................................................................................................... 17
1
Introduction
As current day dependence on technology within organisations is rapidly growing, the need
for efficient and dependable IS/IT support is growing with it. Choosing the correct methods
for sourcing IS/IT support becomes more significant.
Two approaches exist Insourcing and Outsourcing. Insourcing is an internal operational
performance whereas Outsourcing enlists non-affiliated organisations to complete specific
tasks (Dhar, 2012). This literature review will investigate the risks and rewards associated
with Insourcing and Outsourcing, through investigation and reporting findings in previous
studies. This paper aims to identify the most commons risks and rewards incurred by
organisations when implementing these methods.
IT Outsourcing, which has been defined as the organisation arranging for an external firm to
run/maintain their IT services, IT Insourcing is defined as the organisation which relies on an
internal IT department to run/maintain their IT services (Qu et al., 2010)
The below visual table shows the most commonly found risks and rewards this investigation
has yielded.
Cost/Expertise
Relationship/Management
Efficiency Expertise
Reward Risk
IS/IT
Inso
urci
ng
Out
sour
cing
Figure 1.1; Findings
2
Main reasons for Insourcing and Outsourcing
During the cross-referencing on relevant studies in the area of IS/IT some highlighted reasons
why Insourcing and Outsourcing are chosen became evident, these reasons have been
highlighted below;
Reasons for
Insourcing IS/IT
Competitve edge/
advantage
IT outsourcing failures in the
industry
They are an Inovation company
Union Pressure to
not Outsource
Reasons for Outsourcing
IS/IT
Economic / Financial Pressures
Precieved Cost
efficiency of IT
IT part of their main functions
Does not create
Innovations or profits
Figure 1.2; Reasons for Outsourcing
Figure 1.3; Reasons for Insourcing
3
Discussion
There are many reasons why a company may choose to insource or outsource their IS/IT
services highlighting the dominant factors for outsourcing risks/rewards (Figure 2.1) and
insourcing risks/rewards (Figure 2.2) found during cross-referencing multiple articles. This
section will provide evidence for the individually selected risk and rewards components for
IS/IT.
Main Insourcing Risks and Rewards found;
Main Outsourcing Risk and Rewards Found;
Risks Rewards
Figure 2.1; Insourcing Risk’s/Reward’s
Risks Rewards
Figure 2.2; Outsourcing Risk’s/Reward’s
4
Insourcing Risk
Through cross-referencing articles, risks with insourcing became noticeable. The below will
discuss the two most prominent issue which arose, Cost of insourcing and lack of Expertise
within the current organisation1.
Cost
The information supplied from the articles found the
significant risk of insourcing was the financial cost. This can
be down to training of current employee's (Kishore et al.,
2003) and improvements to existing infrastructure including
the available technologies (Pinnington & Woolcock, 1997).
The need for the organisation to stay current with
technologies and employee knowledge can financially cost
them in the long run, in comparison to an outsourced vendor
who specialises in the area (Dhar, 2012). The need for house
services the organisation may need to physically grow and build, compared to an outsourced
vendor who is already established (Pinnington & Woolcock, 1997). The lack of knowledge
while insourcing can cost the organisation if a manager makes an incorrect decision on a
project it can financially cost the organisation and damage the reputation (Lacity et al., 1996).
To summarise the main costs;
• Training
• Development
• Lack of Performance
• Infrastructure
• Technology
1 See Table of Interest 1.3
5
Expertise
As discussed above the lack of expertise can cost an
organisation greatly in both the financial sense and
reputation (Lacityet al., 1996). Internal departments of an
organisation may struggle to find and develop expertise
with the technology due to external vendors possessing
both existing expertise but in some cases technology
(Dibbern et al., 2004). The lack of in-house expertise can
lead to issues for the organisation one most notable as
security (Hirschheim & Lacity, 2000). Poor insourcing
expertise can lead to security issue for the IS/IT sector of the organisation which in turn can
corrupt the entire sector (Hirschheim & Lacity, 2000).
Outsourcing firms are experts in the IS/IT sector which make them viable for an organisation
lowering the risks but gaining knowledge.
To summarise main Expertise risks;
• Development
• Security
• Knowledge
Chapter Graphic
High Cost
LowExpertise
Figure 3.1; Chapter Graphic
6
Outsourcing Risk
Through cross-referencing articles, the risks of outsourcing became noticeable. The below
will discuss the two most prominent issue which arose, Relationships between the
organisation and the vendor when outsourcing and how the management of from the
organisation to the vendor can be a risk when outsourcing2.
Relationship
The vendor of the IS/IT outsourcing may not take full
responsibility for outcomes, there can be breakdowns
which lead to significant disagreements in the services
provided (Kishore et al., 2003). The project may seem
simple to the organisation, but the vendor may over/under
appreciate it leading to contractual issues (Peak et
al.,2002). The development of knowledge between the
organisation and the vendor can lead to a breakdown in
process transparency hampering overall performance; this
is also true for the vendor developing knowledge through a relationship with the organisation
(Qu et al., 2010). If this relationship is poor, the add on effect is poor service/product
outcome, this will leading to a poor customer relationship with the organisation, not the
vendor (Earl, 1996).
To summaries, main Relationship risks;
• Contractual Issues3
• Performance
• Knowledge Development
• Customer Relationship
2 See Table of Interest 1.2 3 See Table of Interest 1.1
7
Management
If management processes between the organisation and the
vendor are poor there can be high risks of issues arising
with IS/IT services, the vendor's resources may be poorly
directed and managed to lead to issues (Dhar, 2012).
Overlooked assumptions by the organisation can empower
the vendor to innovate, but this may not be what the
organisation need leading to conflict between the
organisation and vendor (Earl, 1996).
Management may intend to change the way the business
works through outsourcing IS/IT to vendors, but stakeholders may not see the vision causing
internal conflict (Hirschheim & Lacity, 2000). Poor or management which does not
communicate effectively can have detrimental effects on an organisations outsourcing of
IS/IT services (Peak et al.,2002)
To summaries, main Management risks;
• Direction
• Assumptions
• Communication
• Stakeholders
Chapter Graphic
ManagementIssues
Relationship Issues
OutssourcingRisks
Figure 4.1; Chapter Graphic
8
Insourcing Reward
Efficiency
Internal IS/IT services give the organisation higher levels
of efficiency, as the process takes place in-house means the
lines of communication and management overview are
shortened (Dibbern et al., 2004). Keeping IS/IT services in-
house gives the organisation an edge over competitors, all
the innovation/design is in-house meaning competitors do
not have access to the people or technology giving the
organisation developmentally advantages (Quinn, 1999).
Keeping IS/IT services in-house can lead to enhanced
coordination between departments for extended periods of time, this coordination is
spearheaded by communication, a vital asset within any efficient business to thrive (Qu et al.,
2010). Qu et al. (2010) & Dibbern et al. (2004) both have highlighted that insourcing leads to
efficient performance through improving internal processes, including customer service,
product development and the supply chain operations leading to an overall efficiency
stability.
The company gains a competitive edge but keep all R&D in-house, making the organisation
more innovative. This innovation is promoted in an insourcing environment and can translate
into other sectors. This could not happen if IS/IT was outsourced as the innovation would be
sourced out of house, giving competitors access in some circumstances (Quinn, 1999) (Lacity
et al., 1996) (Peak et al., 2002)
The use of in-house IS/IT services leads to overall sector development, keeping key resources
such as knowledge and adaptability in-house increases efficiency with a roll on effect to
solving customer issues (Qu et al.,2010). These factors lead to in overall insourcing value
creation and performance (Lacity et al., 1996). Once management has adequately identified
the strategic value of IS/IT to the organisation, as most see the functions of IS/IT as non-core
activities means that the potential efficiency of the organisation may be hampered
(Hirschheim & Lacity, 2000).
9
To summarise the main Efficiency rewards;
• Lines of Communication
• Management Direction
• Customer Satisfaction
• Performance
• Value Creation
Chapter Graphic
Figure 5.1; Chapter Graphic
CompetitiveEdge
Performance
Managment
InsourcingEfficiency
10
Outsourcing Reward
Expertise
Through outsourcing of IS/IT sectors4 organisations tend
to offer contracts to experts in the industries they wish to
grow and improve in, this gives them access to expert
insights which would be difficult to insource5 (Quinn,
1999). The time frame for projects to be completed greatly
increase when outsourced as the expert vendors are
accustomed to such situations meaning deadlines are
reached (Dhar, 2012).
Outsourced firms have the knowledge and access to specialised software/technology which
for the organisation to implement may cost more than the outsourcing contract. Through the
outsourcing relationship, the organisational employee can gain knowledge from the vendor
experts which can be beneficial if the organisation choose to insource in the future (Dibbern
et al.,2004). Through using outsourced experts stakeholders/management in the business
become confident in the functions and stability of the organisation, in turn, this can lead to
more innovation through backing from the stakeholders involved (Peak at al., 2002).
Innovations combined with expertise can help to organisations grow and develop through
means that if insourced may be reached but with a longer period of trial and error with the
lack of expertise which vendors supply (Qu et al., 2010).
The use of expert vendors means the outcome of the project will be done to a higher standard,
this is helped through the sharing of information and risk. The burden of risk is shared with
the vendor, the inhouse services lack of expertise when in comparison to the vendor (Quinn,
1999). These experts maybe in a different time zone meaning the organisation can operate
24/7 with no downturn in performance as the vendors are experts in the area outsourced to
them (Peak et al., 2002). The overall expertise gained and utilised through outsourcing to an
expert vendor give the organisation multiple rewards which cannot be overlooked in the
decision process, these rewards translate into multiple sectors and levels of the organisation
(Dibbern et al., 2004).
4 See Table of Interest 1.4 5 See Table of Interest 1.5
11
To summarise main Expertise rewards;
• Experience • Deadlines • Knowledge Transfer • Confidence
Chapter Graphic
Figure 6.1; Chapter Graphic
12
Conclusion
In conclusion, this cross referencing literature reviews gives an in-depth understanding of the
author's findings of the common risks and rewards found with outsourcing and insourcing.
As Kishore et al. (2003) discussed the need for an organisation to evaluate the options for
insourcing and outsourcing effectively is a key component in making a choice for which
option is most desirable for them as seen in this review both harbour risks and rewards. This
review has highlighted the author's findings through cross-referencing articles on what the
main risks/rewards of insourcing and outsourcing which an organisation needs to understand
when evaluating which option best suits them. Not every organisation have the same needs
meaning that following the trend of competitors can be disastrous (Hirschheim & Lacity,
2000).
The above discussion has highlighted the risks and rewards of IS/IT insourcing and
outsourcing. It reviews literature in the area through cross-referencing articles focusing on the
negative and positive findings.
13
References
1. Dhar, S. (2012). From outsourcing to Cloud computing: evolution of IT services. Management Research Review, 35(8), 664-675.
2. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: a survey and analysis of the literature. ACM Sigmis Database, 35(4), 6-102.
3. Earl, M. J. (1996). The risks of outsourcing IT. MIT Sloan Management Review, 37(3), 26-32.
4. Hirschheim, R., & Lacity, M. (2000). The myths and realities of information technology insourcing. Communications of the ACM, 43(2), 99-107.
5. Kishore, R., Rao, H. R., Nam, K., Rajagopalan, S., & Chaudhury, A. (2003). A relationship perspective on IT outsourcing. Communications of the ACM, 46(12), 86-92.
6. Lacity, M. C., Willcocks, L. P., & Feeny, D. F. (1996). The value of selective IT sourcing. MIT Sloan Management Review, 37(3), 13-25.
7. Peak, D. A., Windsor, J. C., & Conover, J. (2002). Risks and effects of IS/IT outsourcing: a securities market assessment. Journal of Information Technology Case and Application Research, 4(1), 6-13.
8. Pinnington, A., & Woolcock, P. (1997). The role of vendor companies in IS/IT outsourcing. International Journal of Information Management, 17(3), 199-210.
9. Qu, W. G., Oh, W., & Pinsonneault, A. (2010). The strategic value of IT insourcing: an IT-enabled business process perspective. The Journal of Strategic Information Systems, 19(2), 96-108.
10. Quinn, J. B. (1999). Strategic outsourcing: leveraging knowledge capabilities. MIT Sloan Management Review, 40(4), 9-21.
14
Appendix
Tables of Interest
Table 1.1 Real world examples of contract issues, a major outsourcing risk.
(Qu et al., 2010)
Table 1.2 Stage Model of IT/IS Outsourcing
(Dibbern et al., 2004)
15
Table 1.3 Insourcing Archetypes and Classification
(Hirschheim & Lacity, 2000)
Table 1.4 Benefits of Outsourcing
(Dhar, 2012)
17
Methodology
Process Development
Cross-Sectional Review of Literature
This image highlights the key components of insourcing and outsourcing risk and rewards the author found.
Planning Process
This image highlights the plan and outcome of the author completing this review showing the need for change and development.