completed it sourcing and projects

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RISK’S AND REWARD’S OF IS/IT INSOURCING AND IS/IT

OUTSOURCING A Literature Review and Presentation of

Findings

Abstract: Objective: To identify the most commons risks

and rewards associated with Insourcing and

Outsourcing.

Method: Online search engine and cross-

referencing articles identified relevant studies.

Findings:

• The Risks associated with Insourcing

were found to be Cost and Expertise.

• The Risks associated with Outsourcing

were found to be Relationship and

Management.

• The Reward associated with Insourcing

was found to be Efficiency.

• The Reward associated with Outsourcing

was found to be Expertise.

Word Count:

1,63

Name: Del Kirwan

Student Number: 116222235

Course: MSc Information Systems for Business Performance

Module: IS6137: IT Sourcing & Projects

Lecturer: David Sammon

Table of Contents Introduction .............................................................................................................................. 1

Figure 1.1; Findings ............................................................................................................ 1

Main reasons for Insourcing and Outsourcing ....................................................................... 2

Figure 1.2; Reasons for Outsourcing .................................................................................. 2

Figure 1.3; Reasons for Insourcing ..................................................................................... 2

Discussion.................................................................................................................................. 3

Figure 2.1; Insourcing Risk’s/Reward’s ............................................................................. 3

Figure 2.2; Outsourcing Risk’s/Reward’s .......................................................................... 3

Insourcing Risk ........................................................................................................................ 4

Cost ................................................................................................................................. 4

Expertise ......................................................................................................................... 5

Chapter Graphic ..................................................................................................................... 5

Figure 3.1; Chapter Graphic ............................................................................................... 5

Outsourcing Risk ..................................................................................................................... 6

Relationship .................................................................................................................... 6

Management .................................................................................................................... 7

Chapter Graphic ..................................................................................................................... 7


Insourcing Reward................................................................................................................... 8

Efficiency ........................................................................................................................ 8

Chapter Graphic ..................................................................................................................... 9


Outsourcing Reward .............................................................................................................. 10

Expertise ....................................................................................................................... 10

Chapter Graphic ................................................................................................................... 11

Figure 6.1; Chapter Graphic ............................................................................................. 11

Conclusion .............................................................................................................................. 12

References ............................................................................................................................... 13

Appendix ................................................................................................................................. 14

Tables of Interest .................................................................................................................. 14

Table 1.1 Real world examples of contract issues, a major outsourcing risk. .................. 14

Table 1.2 Stage Model of IT/IS Outsourcing ................................................................... 14

Table 1.3 Insourcing Archetypes and Classification ........................................................ 15

Table 1.4 Benefits of Outsourcing .................................................................................... 15

Table 1.5 Selecting an Appropriate Contract ................................................................... 16

Methodology ........................................................................................................................... 17

Process Development ........................................................................................................... 17

Cross-Sectional Review of Literature ........................................................................... 17

Planning Process ........................................................................................................... 17

1

Introduction

As current day dependence on technology within organisations is rapidly growing, the need

for efficient and dependable IS/IT support is growing with it. Choosing the correct methods

for sourcing IS/IT support becomes more significant.

Two approaches exist Insourcing and Outsourcing. Insourcing is an internal operational

performance whereas Outsourcing enlists non-affiliated organisations to complete specific

tasks (Dhar, 2012). This literature review will investigate the risks and rewards associated

with Insourcing and Outsourcing, through investigation and reporting findings in previous

studies. This paper aims to identify the most commons risks and rewards incurred by

organisations when implementing these methods.

IT Outsourcing, which has been defined as the organisation arranging for an external firm to

run/maintain their IT services, IT Insourcing is defined as the organisation which relies on an

internal IT department to run/maintain their IT services (Qu et al., 2010)

The below visual table shows the most commonly found risks and rewards this investigation

has yielded.

Cost/Expertise

Relationship/Management

Efficiency Expertise

Reward Risk

IS/IT

Inso

urci

ng

Out

sour

cing

Figure 1.1; Findings

2

Main reasons for Insourcing and Outsourcing

During the cross-referencing on relevant studies in the area of IS/IT some highlighted reasons

why Insourcing and Outsourcing are chosen became evident, these reasons have been

highlighted below;

Reasons for

Insourcing IS/IT

Competitve edge/

advantage

IT outsourcing failures in the

industry

They are an Inovation company

Union Pressure to

not Outsource

Reasons for Outsourcing

IS/IT

Economic / Financial Pressures

Precieved Cost

efficiency of IT

IT part of their main functions

Does not create

Innovations or profits

Figure 1.2; Reasons for Outsourcing

Figure 1.3; Reasons for Insourcing

3

Discussion

There are many reasons why a company may choose to insource or outsource their IS/IT

services highlighting the dominant factors for outsourcing risks/rewards (Figure 2.1) and

insourcing risks/rewards (Figure 2.2) found during cross-referencing multiple articles. This

section will provide evidence for the individually selected risk and rewards components for

IS/IT.

Main Insourcing Risks and Rewards found;

Main Outsourcing Risk and Rewards Found;

Risks Rewards

Figure 2.1; Insourcing Risk’s/Reward’s

Risks Rewards

Figure 2.2; Outsourcing Risk’s/Reward’s

4

Insourcing Risk

Through cross-referencing articles, risks with insourcing became noticeable. The below will

discuss the two most prominent issue which arose, Cost of insourcing and lack of Expertise

within the current organisation1.

Cost

The information supplied from the articles found the

significant risk of insourcing was the financial cost. This can

be down to training of current employee's (Kishore et al.,

2003) and improvements to existing infrastructure including

the available technologies (Pinnington & Woolcock, 1997).

The need for the organisation to stay current with

technologies and employee knowledge can financially cost

them in the long run, in comparison to an outsourced vendor

who specialises in the area (Dhar, 2012). The need for house

services the organisation may need to physically grow and build, compared to an outsourced

vendor who is already established (Pinnington & Woolcock, 1997). The lack of knowledge

while insourcing can cost the organisation if a manager makes an incorrect decision on a

project it can financially cost the organisation and damage the reputation (Lacity et al., 1996).

To summarise the main costs;

• Training

• Development

• Lack of Performance

• Infrastructure

• Technology

1 See Table of Interest 1.3

5

Expertise

As discussed above the lack of expertise can cost an

organisation greatly in both the financial sense and

reputation (Lacityet al., 1996). Internal departments of an

organisation may struggle to find and develop expertise

with the technology due to external vendors possessing

both existing expertise but in some cases technology

(Dibbern et al., 2004). The lack of in-house expertise can

lead to issues for the organisation one most notable as

security (Hirschheim & Lacity, 2000). Poor insourcing

expertise can lead to security issue for the IS/IT sector of the organisation which in turn can

corrupt the entire sector (Hirschheim & Lacity, 2000).

Outsourcing firms are experts in the IS/IT sector which make them viable for an organisation

lowering the risks but gaining knowledge.

To summarise main Expertise risks;

• Development

• Security

• Knowledge

Chapter Graphic

High Cost

LowExpertise

Figure 3.1; Chapter Graphic

6

Outsourcing Risk

Through cross-referencing articles, the risks of outsourcing became noticeable. The below

will discuss the two most prominent issue which arose, Relationships between the

organisation and the vendor when outsourcing and how the management of from the

organisation to the vendor can be a risk when outsourcing2.

Relationship

The vendor of the IS/IT outsourcing may not take full

responsibility for outcomes, there can be breakdowns

which lead to significant disagreements in the services

provided (Kishore et al., 2003). The project may seem

simple to the organisation, but the vendor may over/under

appreciate it leading to contractual issues (Peak et

al.,2002). The development of knowledge between the

organisation and the vendor can lead to a breakdown in

process transparency hampering overall performance; this

is also true for the vendor developing knowledge through a relationship with the organisation

(Qu et al., 2010). If this relationship is poor, the add on effect is poor service/product

outcome, this will leading to a poor customer relationship with the organisation, not the

vendor (Earl, 1996).

To summaries, main Relationship risks;

• Contractual Issues3

• Performance

• Knowledge Development

• Customer Relationship

2 See Table of Interest 1.2 3 See Table of Interest 1.1

7

Management

If management processes between the organisation and the

vendor are poor there can be high risks of issues arising

with IS/IT services, the vendor's resources may be poorly

directed and managed to lead to issues (Dhar, 2012).

Overlooked assumptions by the organisation can empower

the vendor to innovate, but this may not be what the

organisation need leading to conflict between the

organisation and vendor (Earl, 1996).

Management may intend to change the way the business

works through outsourcing IS/IT to vendors, but stakeholders may not see the vision causing

internal conflict (Hirschheim & Lacity, 2000). Poor or management which does not

communicate effectively can have detrimental effects on an organisations outsourcing of

IS/IT services (Peak et al.,2002)

To summaries, main Management risks;

• Direction

• Assumptions

• Communication

• Stakeholders

Chapter Graphic

ManagementIssues

Relationship Issues

OutssourcingRisks


8

Insourcing Reward

Efficiency

Internal IS/IT services give the organisation higher levels

of efficiency, as the process takes place in-house means the

lines of communication and management overview are

shortened (Dibbern et al., 2004). Keeping IS/IT services in-

house gives the organisation an edge over competitors, all

the innovation/design is in-house meaning competitors do

not have access to the people or technology giving the

organisation developmentally advantages (Quinn, 1999).

Keeping IS/IT services in-house can lead to enhanced

coordination between departments for extended periods of time, this coordination is

spearheaded by communication, a vital asset within any efficient business to thrive (Qu et al.,

2010). Qu et al. (2010) & Dibbern et al. (2004) both have highlighted that insourcing leads to

efficient performance through improving internal processes, including customer service,

product development and the supply chain operations leading to an overall efficiency

stability.

The company gains a competitive edge but keep all R&D in-house, making the organisation

more innovative. This innovation is promoted in an insourcing environment and can translate

into other sectors. This could not happen if IS/IT was outsourced as the innovation would be

sourced out of house, giving competitors access in some circumstances (Quinn, 1999) (Lacity

et al., 1996) (Peak et al., 2002)

The use of in-house IS/IT services leads to overall sector development, keeping key resources

such as knowledge and adaptability in-house increases efficiency with a roll on effect to

solving customer issues (Qu et al.,2010). These factors lead to in overall insourcing value

creation and performance (Lacity et al., 1996). Once management has adequately identified

the strategic value of IS/IT to the organisation, as most see the functions of IS/IT as non-core

activities means that the potential efficiency of the organisation may be hampered

(Hirschheim & Lacity, 2000).

9

To summarise the main Efficiency rewards;

• Lines of Communication

• Management Direction

• Customer Satisfaction

• Performance

• Value Creation

Chapter Graphic


CompetitiveEdge

Performance

Managment

InsourcingEfficiency

10

Outsourcing Reward

Expertise

Through outsourcing of IS/IT sectors4 organisations tend

to offer contracts to experts in the industries they wish to

grow and improve in, this gives them access to expert

insights which would be difficult to insource5 (Quinn,

1999). The time frame for projects to be completed greatly

increase when outsourced as the expert vendors are

accustomed to such situations meaning deadlines are

reached (Dhar, 2012).

Outsourced firms have the knowledge and access to specialised software/technology which

for the organisation to implement may cost more than the outsourcing contract. Through the

outsourcing relationship, the organisational employee can gain knowledge from the vendor

experts which can be beneficial if the organisation choose to insource in the future (Dibbern

et al.,2004). Through using outsourced experts stakeholders/management in the business

become confident in the functions and stability of the organisation, in turn, this can lead to

more innovation through backing from the stakeholders involved (Peak at al., 2002).

Innovations combined with expertise can help to organisations grow and develop through

means that if insourced may be reached but with a longer period of trial and error with the

lack of expertise which vendors supply (Qu et al., 2010).

The use of expert vendors means the outcome of the project will be done to a higher standard,

this is helped through the sharing of information and risk. The burden of risk is shared with

the vendor, the inhouse services lack of expertise when in comparison to the vendor (Quinn,

1999). These experts maybe in a different time zone meaning the organisation can operate

24/7 with no downturn in performance as the vendors are experts in the area outsourced to

them (Peak et al., 2002). The overall expertise gained and utilised through outsourcing to an

expert vendor give the organisation multiple rewards which cannot be overlooked in the

decision process, these rewards translate into multiple sectors and levels of the organisation

(Dibbern et al., 2004).

4 See Table of Interest 1.4 5 See Table of Interest 1.5

11

To summarise main Expertise rewards;

• Experience • Deadlines • Knowledge Transfer • Confidence

Chapter Graphic


12

Conclusion

In conclusion, this cross referencing literature reviews gives an in-depth understanding of the

author's findings of the common risks and rewards found with outsourcing and insourcing.

As Kishore et al. (2003) discussed the need for an organisation to evaluate the options for

insourcing and outsourcing effectively is a key component in making a choice for which

option is most desirable for them as seen in this review both harbour risks and rewards. This

review has highlighted the author's findings through cross-referencing articles on what the

main risks/rewards of insourcing and outsourcing which an organisation needs to understand

when evaluating which option best suits them. Not every organisation have the same needs

meaning that following the trend of competitors can be disastrous (Hirschheim & Lacity,

2000).

The above discussion has highlighted the risks and rewards of IS/IT insourcing and

outsourcing. It reviews literature in the area through cross-referencing articles focusing on the

negative and positive findings.

13

References

1. Dhar, S. (2012). From outsourcing to Cloud computing: evolution of IT services. Management Research Review, 35(8), 664-675.

2. Dibbern, J., Goles, T., Hirschheim, R., & Jayatilaka, B. (2004). Information systems outsourcing: a survey and analysis of the literature. ACM Sigmis Database, 35(4), 6-102.

3. Earl, M. J. (1996). The risks of outsourcing IT. MIT Sloan Management Review, 37(3), 26-32.

4. Hirschheim, R., & Lacity, M. (2000). The myths and realities of information technology insourcing. Communications of the ACM, 43(2), 99-107.

5. Kishore, R., Rao, H. R., Nam, K., Rajagopalan, S., & Chaudhury, A. (2003). A relationship perspective on IT outsourcing. Communications of the ACM, 46(12), 86-92.

6. Lacity, M. C., Willcocks, L. P., & Feeny, D. F. (1996). The value of selective IT sourcing. MIT Sloan Management Review, 37(3), 13-25.

7. Peak, D. A., Windsor, J. C., & Conover, J. (2002). Risks and effects of IS/IT outsourcing: a securities market assessment. Journal of Information Technology Case and Application Research, 4(1), 6-13.

8. Pinnington, A., & Woolcock, P. (1997). The role of vendor companies in IS/IT outsourcing. International Journal of Information Management, 17(3), 199-210.

9. Qu, W. G., Oh, W., & Pinsonneault, A. (2010). The strategic value of IT insourcing: an IT-enabled business process perspective. The Journal of Strategic Information Systems, 19(2), 96-108.

10. Quinn, J. B. (1999). Strategic outsourcing: leveraging knowledge capabilities. MIT Sloan Management Review, 40(4), 9-21.

14

Appendix

Tables of Interest

Table 1.1 Real world examples of contract issues, a major outsourcing risk.

(Qu et al., 2010)

Table 1.2 Stage Model of IT/IS Outsourcing

(Dibbern et al., 2004)

15

Table 1.3 Insourcing Archetypes and Classification

(Hirschheim & Lacity, 2000)

Table 1.4 Benefits of Outsourcing

(Dhar, 2012)

16

Table 1.5 Selecting an Appropriate Contract

(Lacity at al., 1996)

17

Methodology

Process Development

Cross-Sectional Review of Literature

This image highlights the key components of insourcing and outsourcing risk and rewards the author found.

Planning Process

This image highlights the plan and outcome of the author completing this review showing the need for change and development.

completed it sourcing and projects

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