8/26/2012

SOUTHERN NEW HAMPSHIRE UNIVERSITY

INTERNATIONAL IT ISSUES

Outsourcing threats and Risks. Amen Mukhlis

Introduction

Outsourcing: Outsourcing is contracting with another company or person to do a particular function. Almost every organization outsources in some way. (sourcingmag, 2012) Outsourcing in the IT industry has been around for at least two decades where companies outsource part or whole of their business to other countries especially in India and china where they can achieve lots of benefits to the corporate Among those benefits (Subhankar Dhar, 2006) Lower costs. Improve productivity. Higher quality. Higher customer satisfaction. Ability to focus on core areas.

Companies elect to outsource to affect their bottom line in the first place as if we follow the TCT (transaction cost theory), Transaction costs are related to the effort, time, and costs associated with searching, creating, negotiating, monitoring, and enforcing a service contract between buyers and suppliers. (Subhankar Dhar, 2006) Cutting cost in those steps saves the company a lot of money where it adds up to the savings from the big gap in employees pay between IT consultants in the US and those in countries like India, Russia and China. Threats and Risks The threats and risks associated with the Outsourcing include (Pete Engardio, 2006) (Subhankar Dhar, 2006): 1) Communication, coordination and managing the vendors: the cost of coordination will simply increase when a firm outsources a business to an outside vendor; the vendors might be hard to manage and might cause a headache to the company and more cost, in addition to the reality of higher prices and changing terms depending on the competition in the market. 2) Uncertainty is another factor that affects the outsourcing as it increases the transactional cost, and the uncertainty drive the risk higher, the vendors might not produce at the time required or the quality required, companies has less control over out of country vendors than their own employees.

3) difference in regulation: the difference in regulation might pose a threat to the operations being outsources as well as raise the cost, in many countries the regulation are different and the company can risk losing business or losing customers due to failing in obeying the regulation here in the US or in the other country and those regulation might oppose each other! 4) Ethics: other risk factor is work ethics, as it is hard to manage the employees of the vendor and filter those employees and have a better understanding of their backgrounds as it might pose a threat to the company, or having different work ethics that can harm the original companies. 5) the authority of law: a vendor company might not be prosecuted before the US courts or it might mean nothing to them, which makes the employer in higher risk as the vendors follows mainly their countries law which might not be enforced in the same way laws are enforced in US. 6) Quality issues can be a risk as the quality standards might be different between the US Company and the vendor regardless of efforts of the company to standardize the quality. 7) Cultural difference: even though internet has changed the world and barriers are smaller these days but the cultural differences still exist and affect businesses and might be a risk associated with outsourcing. 8) Privacy issues: the company might have the risk of stealing valuable information or simply sharing that information. 9) the future with growing economies : companies might be forced to lose some lots of money when outsourcing start costing more as economies in china and India are growing fast raising the cost of living and thus salaries and the cost of operations where if stayed in the same rate would mean outsourcing won't be a cost saving measure and many companies will have a disadvantage in the local market at that point being an outsourcer. The social affect can be summarized by customer satisfaction, current consumer mode e.g Buy made in America, and the loss of jobs due to the outsource.

Summary: The process of outsourcing is a rewarding process for many companies that has already transformed lots of their businesses to other nations in order to achieve the benefits mentioned in this report, the risk is high which requires companies to invest heavily in analyzing the risk and making the change.

References
Pete Engardio, M. A. (2006, 01 16). The Future Of Outsourcing. http://www.businessweek.com/stories/2006-01-29/the-future-of-outsourcing . sourcingmag. (2012). sourcingmag.com/content/what_is_outsourcing.asp. Retrieved from www.sourcingmag.com: http://www.sourcingmag.com/content/what_is_outsourcing.asp Subhankar Dhar, B. B. (2006). Risks, Benefits, and Challenges in Global IT Outsourcing:Perspectives and Practices. Journal of Global Information Management , 14 (03).