An Analysis of Outsourcing Strategies: IBM's Perspective

This report provides a detailed analysis of IBM's outsourcing strategies, exploring the benefits and challenges associated with transferring business functions to third-party providers. It examines the rationale behind outsourcing, focusing on cost savings, attention to core business, skill acquisition, and improved customer satisfaction. The report delves into the drawbacks of outsourcing, including easy replication by competitors, forfeiture of managerial control, hidden expenses, security risks, and potential language obstacles. The analysis considers the impact of outsourcing on IBM's operations, including the company's approach to IT services, data centers, and employee management. The report draws upon academic research and real-world examples to illustrate the advantages and disadvantages of outsourcing from IBM's perspective.

Running head: OUTSOURCING 0
Business Research

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Table of Contents
Introduction................................................................................................................................3
Project Objective........................................................................................................................4
Project Scope..............................................................................................................................4
Literature Review.......................................................................................................................5
Reasons for Outsourcing........................................................................................................5
Benefits......................................................................................................................................6
Cost Saving............................................................................................................................6
Attention to Core Business.....................................................................................................6
Skill Acquisition.....................................................................................................................6
Customer Satisfaction............................................................................................................7
Operational efficiency............................................................................................................7
Risk Sharing...........................................................................................................................7
Drawbacks..................................................................................................................................7
Easy Replication.....................................................................................................................8
Forfeiture of Managerial Control...........................................................................................8
Hidden Expenses....................................................................................................................8
Security and Confidentiality..................................................................................................8
Quality Risk...........................................................................................................................9
Language obstacles................................................................................................................9
Lay-offs..................................................................................................................................9
Impact of Outsourcing................................................................................................................9
Conclusion................................................................................................................................12
References................................................................................................................................13
Appendix..................................................................................................................................15

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List of Figures
Figure 1: Outsourcing Business Impact...................................................................................15
Figure 2: Relation between Agreement and Earning...............................................................15

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Introduction
Outsourcing is a procedure adopted by many organisations to decrease their expenses by
transferring parts of their business functions to third party suppliers, instead of performing it
internally in the organisation. This strategy is adopted by companies to reduce their operating
costs. It is a common procedure performed by technology companies and other industries.
Various business functions such as manufacturing parts, human resources, information
technology, legal, call centers, bookkeeping, business analysis, and marketing. There are
various large companies outsourcing their business to other organisations such as Staples,
IBM, Kingston, Hewlett Packard and much more. This report will discuss from the
perspective of IBM, regarding the benefits and drawbacks of outsourcing a particular
business function to another company.

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Project Objective
The aim of this report is to understand the benefits and challenges of outsourcing a business
function to the third party. IBM prefers to outsource their business to another company
because it reduces their cost of operations. But outsourcing a business has its difficulties as
well. The company outsourcing its business losses the control of management over such
function, they face the risk of a data leak, a decrease in customer’s satisfaction and other
labour issues. The object of this report is to understand both the advantages and
disadvantages of the outsourcing through the perspective of IBM.
Project Scope
This report will discuss the perspective of IBM and various other companies that have
succeeded and failed while outsourcing to understand the topic in depth. Further, it will
discuss benefits and drawbacks that a company faced while outsourcing. The outsourcing
strategies applied by IBM and other companies, and their ability to succeed will be discussed.
This report will analyse different theories of outsourcing given by various market experts to
determine its rewards and limitations.

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Literature Review
Outsourcing is a method of transferring business functions to third party organisations,
adopted by different companies to reduce the cost of operations and increase the efficiency of
the work. It is a significantly popular method for reducing the cost that is used by companies
worldwide, especially enterprises of developed companies (Gospel and Sako 2010).
IBM is an American international technology organisation, incorporated in 1911. The
company operates in computing, cloud programming, and information technology industry.
The firm outsourced their IT process to third party companies from Malaysia, India, and
Singapore, which allow them to focus on their core values. The organisation has more than
40 data center globally, engaged in providing IT services to their customers. IBM is known
for their expertise in technology outsourcing services (Pierce 2011).
Reasons for Outsourcing
Outsourcing is transferring of duties, work and authority to an outside organisation. It allows
companies to increase their attention to the core business and assist them to gain a
competitive advantage by reducing their cost of operations. Organisations have the option to
either outsource whole process or just a part of the process. For example, the paper of Dhar
(2012) provided that, IBM transfers the process of monitoring the management of an IT
system, but they perform end-user support process internally. This help in increasing the on-
site support for workers.
According to the research of Gorla and Somers (2014), outsourcing strategy of IBM is
focused on achieving improved consumer service quality and decreased operation cost. It
helps the enterprise in creating permanently or temporary provisions for employment, skilled
labour and improved products design. While formulating the strategies for outsourcing, an
organisation should evaluate the potential grounds and all the mechanisms to analyse which
part or function of business should be outsourced. Following are the popular business
functions that an organisation outsourced:
 Human Resource management
 Bookkeeping and accounting process
 Technical process
 Service management

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 Manufacturing components process
 Call centres
 Research facilities
 Legal procedures
Benefits
Outsourcing a function of a business can significantly benefit the business and help them gain
competitive advantage. In modern time, there are a large number of companies that have
adopted outsourcing as a key part of their business procedure. There are numerous
advantages enjoyed by IBM through outsourcing their business function.
Cost Saving
IBM reduce several of their operational costs by outsourcing their business function such as
employee salary expenses, workplace expenses and other expenses related to providing
workplace or manufacturing set-up to the employees. The cost of providing these facilities
are way cheaper in outside countries as compare to developed countries. It helps IBM in
gaining a cost advantage over its competitors (Mohr, Sengupta and Slater 2011).
Attention to Core Business
By outsourcing the remaining functions of operations, an organisation can focus on the key
elements of their business. The outsourcing allows IBM to implement all their resources in
core business activity and help improve their business functions. According to Han and
Mithas (2013), the company focus on manufacturing computer hardware in America and
transfer their information technology services to third party companies. This allows IBM to
enhance the quality and efficiency of their hardware since they are not disrupted by daily
activities of IT services.
Skill Acquisition
Organisations usually outsourced their business to companies who are specialised in the
particular field. The employees of the enterprise have skills, equipment’s and technical
knowledge to perform such task better than outsourcing company. This help company
performed their tasks with higher efficiency, less time and better quality. IBM gained the
same advantage by outsourcing their IT services to 40 of their data center worldwide.

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In the research of Zhang and Gu (2013), Tesco rather than teaching their employees
regarding the latest technology or hiring new employees, the company outsourced the work to
third parties. This helps the enterprise in reducing the time and expenses for the operations
and gained them a competitive advantage.
Customer Satisfaction
The benefit of outsourcing includes a high level of customer’s satisfaction since the
outsourced work is performed by experts. The contract of outsourcing bound the company to
perform their task and services with high level of quality. Therefore, if an employee gets sick,
the organisation is bound to find a substitute to complete their work.
IBM has more than 380,000 employees, and the majority of their employees are in their data
centers situated in Malaysia, India, and Singapore. This allows the company to provide 24-
hour service to their customers with high expertise. The organisation enjoys a high rate of
customer’s satisfaction due to the support from their data centers.
Operational efficiency
Outsourcing provides an organisation expertise of third parties that ensure more efficiency in
the workplace. This allows faster achievement of tasks while maintaining a high level of
quality. The outsourcing of remaining functions allows employees to focus on essential tasks
and completing them with efficiency. IBM has implemented an efficient structure in the
organisation, which allows them to focus on core objectives, instead of secondary tasks such
as daily supervision of data centers.
Risk Sharing
The agreement of outsourcing allows organisations to share their business risk with other
organisations. The contract of outsourcing forced the organisation to provide a high quality of
services. If they failed to do so, then outsourcing company can charge them for compensation
and sue them in court. This allows the organisation to share risks and it compels companies to
maintain a quality in their services. IBM implements this policy to ensure high quality of
services, and share their risk with other organisations (Hsuan and Mahnke 2011).

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Drawbacks
Along with numerous advantages, there are several disadvantages in the outsourcing process.
The popularity of outsourcing has created various new administrative problems that are faced
by organisations while outsourcing their business.
Easy Replication
The strategy of outsourcing is easy to replicate by organisations. One organisation can gain
competitive advantage through outsourcing by its competitors can apply the same strategy in
their business model. For example, IBM reduced its cost by outsourcing their IT services but
its competitor gained the same advantage as well such as Hewlett-Packard and Dell. The
outsourcing strategy also introduces new competition for organisations since it is applied by
most technology companies (Mourdoukoutas 2011).
Forfeiture of Managerial Control
After signing the outsourcing agreement, a company transfers its responsibilities, rights,
duties, and authority of performing tasks, in a particular division, to the third party. The
company owns the division but the managerial control gets transferred to another firm. The
outsourcing firm might not work according to the principle of the organisation, or they could
have several clients which reduce their focus on organisational tasks. IBM faced the same
problems since most of their data centers are situated in Malaysia, India, and Singapore,
therefore the application of proper managerial control over them is difficult for the company
(Gonzalez, Gasco and Llopis 2010).
Hidden Expenses
While outsourcing their business functions, a company deals with rules and regulations of
different organisations and countries. The contract of outsourcing specifies the charges of
services but the organisation could face various hidden expenses. There could be additional
legal charges for verifying the outsourcing agreement. The change in market regulation of
India can affect the cost of IBM since they have to follow new rules and implement them in
organisational structure (Jain, Hasija and Popescu 2013).
Security and Confidentiality
The information and data of a company are its essential elements and leakage of data could
affect the revenue of a business. According to Sparrow (2012), while outsourcing a business,
the company faces a threat on confidentiality of their data. The organisation has to share its

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data with another company, and their poor regulation can leak the data of a company. IBM
faces the same risk since they have to share confidential information of their clients with data
centers, to provide their services. Poor regulation of one data center can leak important
information of clients which could be detrimental for the organisation.
Quality Risk
According to Epstein (2012), outsourcing a business could reduce the reputation and standard
of quality of an organisation. For example, if a car gets damaged due to a faulty part
manufactured by the outsourced organisation, then the car company faced the burden of a
damaged reputation. The company could charge the outsourced company for the expenses but
the loss of reputation remains with the car company.
Language obstacles
According to Zirpoli and Becker (2011), if a company outsourced its business function of the
call center to an organisation of different country, then the difference in language barrier
could be dissatisfied for the consumer. The customer could get frustrated while dealing with
an operator with a strong accent. IBM outsourced its work to Malaysia, India, and Singapore,
and many people there have a thick accent which can be frustrating for IBM’s clients to
understand.
Lay-offs
The research of Willcocks and Cullen (2013), while outsourcing their business, a company
required to dismiss their employees. Unless the company clearly planned their process, the
layoffs are unavoidable. This is difficult for the organisation and if not managed properly it
could adversely affect other workers. A recent post from Economic times provided that, IBM
India may dismiss more than 5,000 employees in next few months (Dayama 2017). A
decision like this affects the reputation of the organisation and also affects the productivity of
employees.
Impact of Outsourcing
IBM has gained a huge advantage over its competitors through outsourcing their information
technology services to third party companies. The organisation is popular of their expertise
over the outsourcing process. In 2010, IBM announced, “Next-Generation BPO” which will

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provide their customers extended services and resources to make knowledgeable decisions
(Miozzo and Grimshaw 2011).
IBM conducted research through their scientists over more than 56 companies with 38 non-
IBM and 18 IBM clients. The study concluded that there is a relation between outsourcing of
IT services and improvement in main business functions for those companies. Outsourcing IT
services are a part of effective management strategy, which can be used by the organisation in
enhancing their business performance (IBM 2010).
According to the research, benefits of outsourcing impacted over following aspects of a
business (Figure 1):
 Selling, General, and Administrative Costs: The companies find a slow growth in rate
of selling, general and administrative cost because of outsourcing. The SG&A costs of
outsourcing organisation were less than 4.2 points compared to their competitors.
 The rate of Return on Assets: The rate of return on assets of companies has grown
rapidly. Their rate was 7.5 points lower than market standards but after implementing
outsourcing strategy the rate of return on assets raised 16.1 points.
 Income before Interest and Taxes: More than two third of researched companies seen
a growth in income as compared to their competitors. The outsourcing companies
recorded a growth of 11.8 points higher than their competitors, in their income.
 Future benefits: The length of outsourcing agreement also affect its benefits. A longer
outsourcing agreement is more likely to enhance the profits results of an organisation.
54 percent of research companies with less than one year of outsourcing contract did
not experience positive income growth, while around 71 percent of organisations with
more than one year of agreement seen a positive income rate for more than $100
million (Figure 2).
According to Ellyn (2005), the research proved the advantages of outsourcing the IT service
function of organisations. IBM has succeeded in the outsourcing business by introducing new
technology and strategies. The company keeps updating their policies according to the
marketing conditions of countries where they outsourced. The organisation focused on
providing a better working environment to its employees, to enhance their productivity. The
outsourcing strategy of IBM allows them to provide their customers a high quality of
services. The rate of customer’s satisfaction is significantly high in IBM, as compared to its
competitors.

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The research of Mclvor (2010) provided that, the strategy of outsourcing has been proven to
be successful in case of IBM and various other companies as well, such as Accenture,
Manulife, and Fluor. The president of Flour, Robert Taylor said that the flexibility provided
due to the outsourcing procedure has assisted their company in increasing their ventures sites.
Outsourcing is providing more benefits to an organisation than just cost reduction and
efficient working. The strategy allows IBM to enhance their capabilities globally and
achieves efficiency in business. The outsourcing strategy provides IBM flexibility and effect
that help in their sustainable development in the future (Savvas 2012).

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Conclusion
From the above report, it can be concluded that various organisations outsourced different
business function of their company. This provides them several advantages such as cost
reduction, customer service enhancement, flexibility and expertise over its business function.
But companies face different drawbacks such as easy replication, hidden costs, lay-offs, loss
of managerial control and quality risk. Various companies such as IBM have successfully
implemented an outsourcing strategy in their organisation that allows them to enhance the
quality of their customer services and increase their efficiency. Before outsourcing their
business functions, a company should establish clear and strong guidelines to assist them in
the process of outsourcing.

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References
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Times. Retrieved from < http://tech.economictimes.indiatimes.com/news/corporate/ibm-
india-may-sack-5000-employees-over-next-few-quarters/58698747 >
Dhar, S., 2012. From outsourcing to Cloud computing: evolution of IT services. Management
Research Review, 35(8), pp.664-675.
Ellyn, B., 2005. New IBM Research Quantifies the Long-Term Impact of IT Outsourcing on Three
Business Metrics. Outsourcing center. Retrieved from <
http://www.outsourcing-center.com/2005-12-new-ibm-research-quantifies-the-long-term-
impact-of-it-outsourcing-on-three-business-metrics-article-37692.html >
Epstein, W.N., 2012. Contract theory and the failures of public-private contracting. Cardozo
L. Rev., 34, p.2211.
Gonzalez, R., Gasco, J. and Llopis, J., 2010. Information systems outsourcing reasons and
risks: a new assessment. Industrial Management & Data Systems, 110(2), pp.284-303.
Gorla, N. and Somers, T.M., 2014. The impact of IT outsourcing on information systems
success. Information & Management, 51(3), pp.320-335.
Gospel, H. and Sako, M., 2010. The unbundling of corporate functions: the evolution of
shared services and outsourcing in human resource management. Industrial and Corporate
Change, 19(5), pp.1367-1396.
Han, K. and Mithas, S., 2013. Information technology outsourcing and non-IT operating
costs: An empirical investigation. Mis Quarterly, 37(1).
Hsuan, J. and Mahnke, V., 2011. Outsourcing R&D: a review, model, and research
agenda. R&d Management, 41(1), pp.1-7.
IBM., 2010. Business impact of outsourcing: a fact-based analysis. [PDF file]. IBM Global
Services. Retrieved from <
https://www-03.ibm.com/innovation/ca/en/pdf/business_impact_of_Outsourcing.pdf >

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Jain, N., Hasija, S. and Popescu, D.G., 2013. Optimal contracts for outsourcing of repair and
restoration services. Operations Research, 61(6), pp.1295-1311.
McIvor, R., 2010. Global services outsourcing. Cambridge University Press.
Miozzo, M. and Grimshaw, D., 2011. Capabilities of large services outsourcing firms: the
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Mohr, J.J., Sengupta, S. and Slater, S.F., 2011. Mapping the outsourcing landscape. Journal
of Business Strategy, 32(1), pp.42-50.
Mourdoukoutas, P., 2011. The Unintended Consequences of Outsourcing. Forbes. Retrieved
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Pierce, F., 2011. The Top 10 Outsourcing Companies in the World. Supply chain. Retrieved
from < http://www.supplychaindigital.com/scm/top-10-outsourcing-companies-world >
Savvas, A., 2012. La Caixa Banks on huge£ 1.7 bn IBM outsourcing deal. Computerworld.
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Willcocks, L. and Cullen, S., 2013. Intelligent IT outsourcing. Routledge.
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Zirpoli, F. and Becker, M., 2011. What happens when you outsource too much?. MIT Sloan
Management Review, 52(2), p.59.

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Appendix
Figure 1: Outsourcing Business Impact
(Source: IBM 2010)
Figure 2: Relation between Agreement and Earning
(Source: IBM 2010)