Information System Outsourcing Trends, Benefits, and Risks (MITS4001)

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MITS4001
Business Information Systems
Research Study

Abstract
Information System Outsourcing
Information System Outsourcing is the
process of hiring external parties to
perform information technology and
system functionality. High budget and
evolution in the day to day changes has put
the organisation in peer pressure which has
led in adopting the IT Outsourcing
mechanism. Outsourcing helps the
organisation by reducing the cost of labour
and focus on its core functionality of the
organisation. It has supported the
organization financially and operationally.
Outsourcing has become very [1] common
in the last decade. Many companies and
organization have exponentially benefitted
from Outsourcing process. It increases the
flexibility and saves time which can be
utilised in their core task.
Types of Outsourcing
Onshore Outsourcing: - Also known with
the name Homeshoring, hiring of an
external party to perform task occurs
within the country’s boundary.
Offshore Outsourcing: - Offshore
outsourcing includes outsourcing at a very
distant place. It is generally done to take of
specialised experts present in that region.
Near Shore Outsourcing: - Near shore
outsourcing occurs within the locality of
the organisation. It helps in efficient
communication due to same work culture
and ethics.
Multi-Sourcing: -Multi-sourcing is done
when an [2] organisation outsource its task
to various external vendors. It helps to
reduce operational risk.
Reasons for Outsourcing
Organisations have every reason to adopt
outsourcing but the key reasons are listed
below.
 Reduction in the cost of labour
 Optimisation and utilisation of internal
resources
 Efficiency and growth in business
 Increase in the customer focus
 Improvement in services
Benefits of Outsourcing
 Improve Flexibility
 Reduction in the cost
 Accelerate business 24*7
 Provide agility
 Better Management [2] of risk
 Helps in saving time
 Focus on core functionality
 Give competitive support to business
 Access to skilled expertise
 Access to new technology
 Focus on customer Relationship
 Access to global sources
Outsourcing Model
The outsourcing model is categorised on
the basis of Tactical and strategic. The
model will depend on the requirement of
the project.
 Staff augmentation: - This
outsourcing model is used when there
is a need for special expertise for the
short term rather than [3] appointing as
full time. It saves both cost and time of
the recruiting organisation.
 Project-based: - This Outsourcing
model is approached when the task is
based on the core activity of the
organization but it lacks the specialised
expertise of the activity.
 Dedicated Development Centre
(DDC): - The model comes into play
when the organisation outsources the
task into another country to take
advantage of low-cost labour but
maintains the control in its own hand.
 AHP: - Analytic Hierarchy Process
helps to outline the problem faced
during outsourcing. It helps to analyse
the data in a systematic manner. It

follows three steps: - Hierarchy
construction, Setting of priority and
consistency.
 Electre III method: - It is a
mathematical function to identify the
final ranking of the external vendor
and deciding weightage criteria.
Dynamics trends of Outsourcing
 Business Process Outsourcing: - It is
the main component of Outsourcing
involving Operation contract, payroll
and accounting. BPO hires an external
vendor to handle the task. It has two
subcategories; Back office Outsourcing
and Front Office Outsourcing
 Knowledge Process Outsourcing: -
They [1] require a high source of
analytical and technical skills. This
outsourcing is concerned with
information based activities.
 Legal Process Outsourcing: - LPO
helps in providing legal support to the
organisation. The processes include in
this are Required Outsourcing, Direct
Contract, and Managed to outsource.
LPO gives a great advantage of cost
saving.
 Recruitment Process Outsourcing: -
This trend is applied for the selection
and appointment of the right candidate
for a particular task. It includes Job
analysis, Sourcing and Screening
process.
Challenges and Risk
Innumerable companies are adopting
Outsourcing technology. With the increase
in its use and benefits, it is prone to
various risks.
 Operational risk: - It encounters with
increasing cost, degrading of the
service quality and wrong selection of
a vendor.
 Strategic Risk: - It includes inefficient
use of new technology [2] and the
threat of theft of sensitive data.
 Political Risk: -Political difference
between two countries will also lead to
risk in outsourcing.
 Legal Risk: -Risk which may arise due
to lack of contractual policy, a dispute
regarding cost.
 Loss of control: - It loses control of the
particular task which may lead to
desecrating quality of service.
 Increase in dependency: -It increases
the dependency of the organization on
the external party for completion of
work which may result in service
problem.
 The difference in time zone and culture
ethics may also lead to risk
 Privacy and Security of data are also
not maintained [3] as sensitive
information is outsourced.
Degree of risk and efficiency
The efficiency of Outsource depends on
the degree of risk and the effectiveness of
the system.
 Strategic Outsourcing: - In this type
of Outsourcing, the degree of risk and
effectiveness from the external
outsource dare expected to be high.
 Desired Outsourcing: - Desired
Outsourcing where the organizations
get the desired result. In this case, the
degree of risk is less but efficiency is
high.
 Temporary Outsourcing: - This
sourcing is only suitable for the short
term because in such cases, the degree
of risk from the external vendor is very
high but efficiency is very low.
 Nominal Outsourcing: -This type of
outsourcing carries low risk and low
benefits from outsourcing agent [1].
Reference
[1] Iqbal, Z. and Dad, A.M., 2013.
Outsourcing: A review of trends, winners
& losers and future

directions. International Journal of
Business and Social Science, 2013, 4(8).
[2] Wang, J.J., Lin, Z.K. and Huang, H., A
decision model for information systems
outsourcing: using a multicriteria
method. Journal of Service Science and
Management, 2008 1(01), p.1.
[3] Ensslin, L., Mussi, C.C., Chaves, L.C.
and Demetrio, S.N., IT outsourcing
management: The state of the art
recognition by a constructivist research
process and bibliometrics. JISTEM-
Journal of Information Systems and
Technology Management, 2015, 12(2),
pp.371-392.