Literature Review: Outsourcing

Effects of Outsourcing Information Technology Jobs in Australia

Outsourcing has been defined as the idea of contracting of part of an organization’s business processes to an outside service provider with an aim of increasing the shareholding value. Others have considered outsourcing as the contracting of a company’s nonessential, nonrevenue producing activities to specialized providers. This practice differs from contracting because outsourcing is a strategic management tool that entails the restructuring of an organization to focus on its core competencies as what it does best. Analysis of different definitions of outsourcing reveals the features of an essential aspects of outsourcing which include; size and duration, transfer of assets, and the extent of the responsibilities. Outsourcing is the concept of specialization. In economics terms, outsourcing is considered as a utilitarian concept that is applicable in business and accounting. From an accounting perspective, outsourcing is considered as a transfer of an internal service functionality to an outside party.

IT outsourcing has been a common trend that was first introduced through timesharing in the 1950s. Development of IT outsourcing happened around 1980s with the development of the remote management services such as IBM. The services that were outsourced include customer’s systems, networks, and application which were monitored and managed remotely from a Network Operations Center. This was later followed by business process outsourcing that provided customers with an opportunity to managing their operational business processes. The concept of IT sourcing became more prominent around 1960s. 

Outsourcing has evolved to take a different form. Earlier versions of outsourcing involved the use of different computer platforms and systems that were incompatible. There was need have a platform that would place the client and the customers operating on the same platform to continue carrying out the business. The computer industry was characterized by a mainframe, and with low quality and expensive networking infrastructure. These factors contributed the development of outsourcing sector. This saw organizations engage in contract where service provide would be engaged with the firm, under the same environment as the firm and offer and offer service. The current conditions on the business world, there have been a connection of computer platforms and open architecture which have made it possible to outsource for IT functionality to allow the provider offering the service while being located in a different part of the world (Saini, Yen & Chou, 2014, p 402). This evolution can be attributed to the networking quality and speed has allowed fast transfer of data between the firm and the service provider. 

Globalization and Outsourcing

Globalization and outsourcing have been considered as playing a critical element in making the world become a high-tech global village. Globalization refers to the process through which regional economies and communities become integrated by means of communication, transportation, and trade. It has been noted there are different reasons propelling organizations to outsourcing include cost savings. Globalization has been known to create opportunities for outsourcing due to low wages, corporate tax advantage, and enhanced global market competition there seeking to acquire the service from the favorable places (Bulajic & Domazet, 2012, p 1323).

Effect of Information Technology Outsourcing on Profitability

It has been indicated that organizations in most cases outsource for IT services with an aim of reducing the administrative and coordination costs, or avoid the common management issues related with IT. This highlights one of the reasons that enhanced the growing popularity of outsourcing. This was pegged on the financial variable including the profit margin, return on equity and return on assets. South Australia’s government was noted to have saved more than $100 million through the outsourcing of every information processes in all seventy departments 10).

The service providers need to see the economic sense of this engagement. To achieve this, the service providers seeks to exploit the economies of scale. This is achieved through bringing together different knowledge, skills, and expertise from different client. This arrangement allows for the services provider to achieve economies of scale and economies of scope. These allows the service providers to improve their profit levels (Whiten, Ellis, & Casey, 2002, p. 10).

It has been revealed that some companies outsource with an aim of cost reduction, attain economies, or solve staffing issues, and offer an opportunity to concentrate on their core competencies. Outsourcing offers an organization of achieving strategic objectives. Through outsourcing of the non-core IT functions, the management of organizations are able to concentrate on their core competences. The profitability of these organizations is affected in case the organization disposes the IT assets. This has a positive effect on the cash flow of these organizations (Whiten, Ellis, & Casey, 2002, p. 11).    

IT Outsourcing in Australia

Organizations are known to categorize IT functionality regards these services as overhead cost. IT outsourcing is regarded as a classic make-or-buy decision. Economists indicated that offshore outsourcing of IT services matches the description of international trade in services. Outsourcing has been noted to be part of globalized Australian economy. The Australian Bureaus of Statistics highlighted that the total expenditure on information technology and telecommunication by the different government departments and organization was about AU$4.3 billion which was equivalent to 5% of total government operating expenditure. The information technology and telecommunication outsourcing expenses for 1999-2000 amounted to AU$1.168 which is equivalent to 27% of the total expenditure on IT by the government organizations. In 2006, the Australian IT outsourcing industry was approximately AU$17.4. 

The need to enhance efficiency and effectiveness has been highlighted as the main driving forces for the investment in IT outsourcing services. Factors favoring the adoption of offshore outsourcing include; decreasing cost, enhance excellence, globalization of the world economy, liberalization of the international trading system, technological advancements, and economies of 3.

An effect of IT outsourcing is on risks. Risks refers to the probabilities that an event will occur and adversely affect an organization. The risks associated with IT outsourcing include possibility of weak management, inexperienced staff, business uncertainty, outdated technology skills, endemic uncertainty, hidden cost, lack of organizational learning, loss of innovative capacity, dangers of an eternal triangle, technological indivisibility, and fuzzy focus (Lacity, Khan, Willcocks, 2009, p.135).

Determinants of IT Outsourcing

The determinants seeks to establish the type of firms are likely to engage in outsourcing of IT services. The firm’s attributes that are mainly considered in this case are financial attributes, size attributes, and industry attributes. The financial attributes that determine the firm engaging in outsourcing include firm profitability, return on assets, earning per share, operating expenses, and financial risks (Lacity, Khan, Willcocks, 2009, p.132). The attributes related to size of the firm include total revenues, size of the workforce, and nature of internal IT department. The industry attributes consider aspects such as private and public organizations and categories of industries such as manufacturing, finance, and healthcare industries (Lacity, Khan, Willcocks, 2009, p.132).   

References

Bulajic, A. and Domazet, D., 2012. Globalization and outsourcing and off shoring. Journal of Emerging Trends in Computing and Information Science. 3 (9).

Lacity, M.C., Khan, S.A. and Willcocks, L.P., 2009. A review of the IT outsourcing literature: Insights for practice. The Journal of Strategic Information Systems, 18(3), pp.130-146.

Saini, V., Yen, D.C. and Chou, D.C., 2005. Information Technology Outsourcing: Issues and Future Analyses.

Whitten, G.D., Ellis, T.S. and Casey, K.M., 2002. The impact of information technology outsourcing on firm profitability measures. Journal of International Information Management, 11(2), p.2.