IT/IS Offshore Outsourcing
Key risks and success factors
The enduring impact of the financial crisis forces more and more businesses to concentrate on their key competences because of dwindling sales. Nevertheless shareholders demand a reasonable reward for their investment in the business, customers expect an equal quality level and staff won’t accept salary cuts. One possible solution to satisfy at least the shareholders and customers is offshore outsourcing of IT/IS-services. Information technology (IT) and information systems (IS) are very complex topics in many cases and cause high costs. During the recession cost cutting is often the number one strategy to keep the business running and beyond the break-even.
Offshore outsourcing means delegating non-core operations or jobs to a service provider in a foreign country (cf. Herath, Kishore 2009, 312). Offshore outsourcing or the short form Offshoring is a combination of shifting work to another country (offshore) and shifting work to another company (outsourcing). When offshoring started in the 1990s, it was only a topic for the production and IT in big international companies. Driven by fast and cost-effective communication systems with secure date encryption even small and medium enterprises are able to sell or subcontract IT/IS services to suppliers located anywhere in the world. The primary reasons for most businesses nowadays are cost advantages compared to onshore outsourcing or internal-services. The majority of executives are satisfied with their outsourcing projects because many of them reach their financial goals (cf. Deloitte 2008, 2). But the Deloitte study admit further that one third of the questioned executives had the feeling that there could be more benefits in offshore outsourcing IT-Services than saving costs. The best possible result of the above-mentioned offshoring process is to reduce costs and focus on high value tasks while achieving better service quality, access to new technology expertise and an increase of flexibility (cf. McFarlan, Nolan 1995, 10).
Regarding the Deloitte study, the outsourcing reasons for more than 50% of all 300 questioned executives are cost savings, followed by the access to technology expertise. Especially the first and most important reason is very obvious, e.g. the salaries in India, the first choice when it comes to IT-offshoring for many executives, are 50% - 80% cheaper compared to salaries in the U.S. (cf. Alex 2008). But the financial view is a very short-term and shortsighted goal for an offshoring project because the salary-advantages have decreased in the last years and will decrease even more due to many reasons. One reason is the double-digit increase of the GDP in India and other developing countries which includes a higher living standard and also higher salaries for qualified employees. With more service demanding companies on the Indian IT-market, also recruiting, education and fluctuation of qualified staff are important factors that reduce the cost savings from offshoring an IT-service. Additional financial risks arise through incomplete contracts or unpredictable incidents in the foreign country. Such hidden costs are typical for outsourcing contracts with grouped services or unclear and complex cost structures (cf. Raisinghani et al. 2008, 77).
According to Raisinghani there is also an operational risk that effects the chance of unintended poor product- or service-quality due to communication problems resulting from the geographic distance between the two contracting parties and unclear documented tasks and results. In addition to the operational risk there is also a strategic risk. Strategic risks are the result of opportunistic behaviour by the agent in the foreign country. For example, the agent offers a service level but is not able to fulfill the tasks in the offered quality or quantity in time. For the client it is hard to judge if the agent delivers what he promised before signing the contract. Even during a service or with a final software product the measuring of the promised service level isn’t easy. Increasing monitoring activities decrease the risk but raise monitoring costs. In some cases, the monitoring and avoidance costs are equal or higher than the costs of the worst case and it would be better to take the risk than to avoid it at all costs. The interactions between clients and payed agents with incomplete and asynchronous information is widely documented in the Principal-Agent-Theory.
The next risk that Raisinghani has identified is the security risk. In case of offshoring, businesses transfer data like customer contacts, bills and other sensible information to the agent. The agent often has connections to third companies and could use the information abusively. Additionally, the data has to be transferred and stored by the agent in any way which could also be a problem concerning data privacy acts.