Global IT/IS outsourcing: expectations, considerations and implications.

ABSTRACT

This paper discusses the issues of global IT/IS outsourcing from four interrelated aspects: forming an appropriate global IT strategy, using proper global IT platforms, managing international data sharing, and surviving the cultural environment. It aims at providing a comprehensive framework for both the global outsourcing providers and clients to fully understand and evaluate the expectations, considerations and implications of global IT/IS outsourcing, so that they can form a successful long-term strategic alliance.

INTRODUCTION

Globalization has been a major driving force of world economy in the past decade. While the global market offers unprecedented opportunities for businesses to grow rapidly, it also presents more challenges to business managers. One of the challenges is "IT/IS outsourcing," which can be broadly defined as the practice of turning over part or all of an organization's IT/IS functions to external service providers. While "IT/IS outsourcing" has been widely addressed, the issue of "global IT/IS outsourcing" has not received the same research attention due to its unique quality of involving foreign vendors at remote geographic locations under largely different cultural settings. IT/IS development is extremely high-cost, labor-intensive, and skill-intensive. It also faces rapid changes of technology. This makes it even more difficult to find a truly competent and reliable foreign contractor. Global outsourcing firms must establish realistic expectations and recognize all constraints and risks so as to make wise decisions. On the other hand, in order to capture the outsourcing opportunities and maintain long-term relationships, foreign vendors also need to understand the global outsourcing expectations and the decision processes.

The purpose of this paper is to provide a comprehensive framework for both the global outsourcing firms and outsourcing providers to fully understand and evaluate the expectations, considerations, and implications of global IT/IS outsourcing, so that they can form a successful long-term strategic alliance.

Ives and Jarvenpaa (1991) proposed that global IT management has four primary dimensions, including (1) forming an appropriate global IT strategy, (2) using proper global IT platforms, (3) managing international data sharing, and (4) surviving the cultural environment. These four dimensions will become the frame of reference for our discussions in this paper.

GLOBAL IT/IS OUTSOURCING STRATEGY

Expectations. In the past, firms have mostly adopted a global strategy that gives foreign subsidiaries considerable autonomy. These autonomous units are easy to set up and maintain, but lack control of operational costs. There is also a severe problem of system compatibility and data redundancy. Recently, with the increasing power and speed of information technology, firms have started to pursue a globally integrative strategy that seeks to maximize global interconnectivity and data sharing global information systems (GIS) (Venkatraman, 1998). However, the implementation of GIS requires a very high degree of technical expertise and cultural awareness, thus many firms have decided to outsource part or all of its IT/IS function to foreign vendors.

One of the benefits of developing collaborations with foreign partners is the potential for the emergence of innovative opportunities. Dealing with a specialized vendor may create market opportunities or partnered join-ventures. Some outsourced products or service can be tailored and marketed locally (Lacity, Hirschheim and Willcocks, 1997). But to maintain a high level of system integration and to fully realize the GIS benefits, proper global outsourcing strategy and outsourcing partners have to be carefully considered.

Considerations. Case studies showed that firms most disappointed with outsourcing usually followed a total outsourcing strategy (e.g., outsource entire IT/IS functions at one shot), whereas firms most pleased with outsourcing generally pursued a more controllable selective or progressive outsourcing strategy (Wysocki and DeMichiell, 2001). Usually, decisions of global outsourcing involve a serious of studies of an enterprise's competitive strategy and relationships among its various activities performed. Some activities and products are eliminated immediately as candidates for outsourcing, either because the product cannot be contracted outside or because the enterprise must control the activity or the product to maintain its competitive position.

For those activities or products eligible for outsourcing, the key strategic factor is whether the enterprise can rely on the outsourced services or products on a level comparable with the best in the world. Reliability measurement can be used to capture these critical success factors for the availability, timeliness, flexibility, quality, and the cost reduction. Measures are then benchmarked against the results of analysis on potential outsourcers that offer similar services or products in the global marketplace. Failure to meet reliability measurement usually forces top management to find other ways of achieving reliability (Anderson, 1996). To reiterate, the outsourcing decision concentrates on the core services and products that are reliable to enhance their unique marketplace advantage.

Implications. Due to the nature of uncertainties and difficulties in global outsourcing business, it would be more practical for foreign outsourcing vendors to start bidding on outsourcing contracts at a lower level. For example, at the beginning to try to avoid those contracts that require extensive system analysis. Bidding on higher-level contracts can be easier once the credibility is established in terms of the quality, reliability and effectiveness of the lower level products. On-site development might also be the type of projects foreign contractors should first try when entering global market. It involves the transfer of skilled labors to work on the client site. The foreign contractor may gain better insight of management skills during on-site development (Byrd, Sankar, and McCreary, 1995). This way, both clients and contractors can have better control on the uncertainties during the development.

GLOBAL IT PLATFORM

Expectations. The concept of global IT platform not only involves important technical decisions on hardware and software selection, but also includes proper utilization of IT human resources. The common expectations of a successful global IT platform include:

Manpower and skill advantages: One common problem for many companies is the dearth of available professionals with key technical skills. According to a study by the Information Technology Association of America (ITAA), there are nearly 320,000 IT jobs standing vacant in U.S. companies, and the annual production of qualified IT graduates from U.S. colleges is less than 70,000 in recent years (Baker, 2000). Global outsourcing helps firms to deal with the shortage of skillful workers. As the result, a bidding war for IT professionals could eat into corporate earnings and stunt growth. The demand for skillful workers stems from the fact that IT/IS projects are high-cost, labor-intensive and are under vigorous time constraints. On the otherhand, the IT societies in Asia and East Europe, with thousands of well-trained professionals, are eager to step into the global IT/IS market.

Technical and cost advantages: Technology changes require continual retraining of IT/IS staff and it becomes increasingly difficult for companies to keep up with these changes when they try to focus on the core business. The fast progress of information technology has the effect of rapidly making IT/IS skills obsolete and creating a IT/IS skills shortage. IT/IS staffs of most companies, naturally limited in size and financial constraints, cannot keep up with rapidly changing IT fields. On the other hand, various IT outsourcers can provide a greater range and depth of trained personnel from global resources (Czepiec and Lander, 1999). Even in the case where inhouse personnel are capable of performing a given task, outsourcing often provides a more cost-effective means of performing that task. Statistics show that coding and installation costs usually have more competitive sources of labor and technical expertise. For the same project, a U.S. programmer will be likely paid six times more than an Indian programmer (Vijayan, 2000).

Considerations. Although a global IT platform can expect to achieve these wonderful benefits, the uncertainties and risks associated with it cannot be underestimated.

Government regulations and restrictions: This is very important because many foreign clients do not realize that some domains in a developing country are out of the question for foreign control. For example, even though joining the World Trade Organization (WTO) has further opened doors for foreign investors, the Chinese Ministry of Posts and Telecommunications (MPT) still disallows foreign firms from operating local telecommunication networks. Foreign involvement has been restricted to sales of IT/IS products or to joint ventures to manufacture these products in many industries. However, rapidly changing technologies have allowed some Western firms to nibble away at the edges of government-controlled monopoly (Zixiang, 2000).