The Effects of Outsourcing Information Technology

Last Updated: 04 Jul 2021
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The present trend in corporations is outsourcing their business activities to a third party and concentrating on their core business, which means all non-core activities are outsourced. However, corporations before implementing such strategies should consider their strategic plans in a meticulous manner. The goal of any corporation is one in which they utilize this business strategy to the maximum. In general, the main activities, which are outsourced, are IT related activities, data management, business process model and internal audit.

The study plans to focus on the impacts of outsourcing the IT related activities in U. S. corporations to private contractors. Many researches have been performed in analyzing the outsourcing activities of U. S. corporations. These studies have specifically concentrated on the positive impacts of the outsourcing activities. However, our study will throw light on both the positive and negative results from outsourcing IT activities to private companies. The paper will conclude with recommendations and possible implications for further research. Background of the Study

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Outsourcing is not a new concept. For the past decade, U. S. based corporations have been involved in the process of assigning all the non-core activities to the developing countries such as India, China, Pakistan, and private U. S. contractors. The outsourcing of information technology positions allow corporations to focus on the core activities of their business. Businesses are shifting to the competitive scale of outsourcing the non-core activities and it has become essential for corporations to be profitable in the market (Beulen, Ribbers, & Rose, 2006). Nearly four million U. S.

jobs worth $140 billion have been moved to low cost countries such as India, Russia, Pakistan and China (Agrawal & Farrell, 2003). This statement clearly shows that outsourcing is highly profitable in financial aspects to the private contractors. Though outsourcing has a good reputation among U. S. corporations; there are also possibilities of risk in the process. This is because of several reasons; one such reason is the risk of customer data protection, which threatens the providers and buyers. If customer data is lost or stolen it could cost both the consumer and the company a large amount of time and money.

In addition, the threat of global volatility is one more distress among the buyers and the providers. The list grows as the risk increases day by day. This study will examine the effects of outsourcing information technology positions to private contractors and the toll it has taken on information technology workers. Statement of the Problem Outsourcing has become a huge topic among employees in the information technology field that has had both positive and negative outcomes on their professional careers. Information technology workers in the U. S. have been displaced because their positions have been outsourced to either a private contractor or their jobs have been transferred overseas due to cheaper labor. Purpose of the Study This study will determine the effects the outsourcing to private contractors has had on information technology workers in the United States. The study will analyze both the positive and negative impacts the outsourcing has had on information technology professionals in the United States. The study will also investigate why employees are being displaced due to the outsourcing and what is actually happening to their positions after they are being displaced.

Research Questions First Question: Are information technology employees being displaced as a result of their positions being outsourced to other companies? Second Question: Are IT services being outsourced more often now as opposed to the past? Third Question: If IT services are being outsourced more often than in the past what are the effects on information technology employees? Fourth Question: Are IT positions being outsourced more often to other countries or to U. S. based private contractors? Definition of Terms

Outsourcing – A transfer of non-core activities of the company to a third party who provides professional service to the outsourcing company for an estimated cost. The process has been made easier in recent past after availability of speed Internet services and optical cables across the world. Assumptions and Limitations The study is focused on the effects of outsourcing IT services to private contractors. The study in general focuses on the outsourcing by U. S. corporations and the effects the outsourcing has on IT employees. This study does not focus on one particular corporation or any specific type of IT position.

Studying the overall effects of IT outsourcing on IT workers and is narrowed down to analyze the effects the outsourcing has had on IT workers professional careers. The study does not specifically concentrate on any legal outcomes on the subject, as it would be part of the impact. Nature of the Study The data for the study will be collected from secondary sources such as past empirical studies conducted on the subject, from the published books, articles from journals, newspapers, and questionnaires answered by IT professionals. The data will be interpreted and compared to obtain the results.

This study will obtain new original information to analyze the effects of outsourcing on IT professionals. The new information will be gathered by a survey which will contain questions for information technology to determine how their careers have been affected by outsourcing as well as their general experience related to outsourcing. Organization of the Remainder of the Study This study’s research will be presented in the following eight chapters: Chapter 1: Introduction The introduction chapter presents the introduction to the problem along with the research questions.

This chapter also includes the background of the study, statement of the problem, purpose of the study, definition of the terms, assumptions and limitations, and the nature of the study. Chapter 2: Literature Review The literature review will be undertaken as a preliminary step to establish current and past research on the presented topic “the effects of outsourcing information technology services of U. S. corporations to private contractors”. The review will establish the empirical studies relating to the topic. The review of the literature will attempt to identify the lapse in the previous studies.

Chapter 3: Methodology This chapter will describe the research methodology used for this study. The steps that were taken for the data collection will also be included. Chapter 4: Information technology employees being displaced as a result of their positions being outsourced to other companies. This chapter will determine if information technology employees are indeed being displaced due to the outsourcing of IT positions to private contractors. Chapter 5: IT services being outsourced more often now as opposed to the past

This chapter will determine if information technology positions are being outsourced more often currently as opposed to the past. This chapter will also reveal the reason why IT positions are being outsourced to private contractors. Chapter 6: IT services are being outsourced more often now than in the past what are the effects on information technology employees This chapter will reveal the effects outsourcing has had on IT professionals and their careers. This chapter will determine such facts as how long it took displaced workers to find a new job and if they had to relocate to for their new position.

Chapter 7: IT positions being outsourced more often to other countries or to U. S. based private contractors This chapter will determine where outsourced positions are being placed. Outsourced IT positions are either being relocated to lower cost countries or they being filled by U. S. based private contractors to help lower corporations total cost. Chapter 8: Recommendations and Conclusions This chapter will provide recommendations based on the analysis and conclude by maybe making recommendations for future research.



Outsourcing is being carried out to quite a noticeable extent in order to alleviate costs (Makhnach, 2007). It is actually a subcontracting of tasks. Outsourcing of employees to low-cost countries is to take advantage of cheap labor and to get the work in an inexpensive way. Some of the most common services provided by outsourcing companies include finance, accounting, payroll management, benefit administration, researches, data processing, information technology, and many other activities.

It actually originated in a recessionary environment when tasks that were not that important strategically were contracted out to companies in other countries (Makhnach, 2007). Outsourcing IT employees is being broadly considered as the accepted strategy to curtailing costs, especially in America and other Western countries. It is believed that outsourcing information technology functions will improve job prospects in the home country and create better market opportunities.

The core concept behind outsourcing lies in the fact that the workings of the main sectors of companies is dumped onto the companies that specialize in the tasks and thus, are able to reduce costs and improve productivity (Weidenbaum, 2004; Makhnach, 2007). “In reality, most IT organizations save 15%-25% during the first year; by the third year, cost savings often reach 35%-40% as companies "go up the learning curve" for offshore outsourcing and modify operations to align to an offshore model. ” (Davison 2004, Pg. 1) This is not a recent phenomenon, however.

Outsourcing of IT employees had started years before, when IT companies in the US wanted to capture some share of the foreign markets (Weidenbaum, 2004). Apparently, 60 percent of the revenue of American information technology companies is originated overseas. This is due to the fact that domestic market has been saturated and companies face a decline in sales revenue as a direct result of this (Weidenbaum, 2004). Outsourcing IT employees can help a company survive in a market where cut-throat competition prevails (Weidenbaum, 2004).

Besides, an IT firm is forced to turn towards outsource as a last resort when its rival firms start benefiting from it and strengthen their market power. Global outsourcing can enable the companies to customize their products to meet the needs of local demands, besides allowing them to give 24 hours coverage, 7 days a week (Weidenbaum, 2004). According to research reports (Weidenbaum, 2004): “About 400,000 U. S. positions in information technology have gone offshore. Meanwhile, total U. S. employment rose from 129,000,000 in 1993 to 138,000,000 in 2003--mainly in services.

Only about 1. 4% of the $120,000,000,000 spent on information technology (IT) services in the U. S. in 2003 moved offshore. ” (p. 1) The positive impacts of outsourcing include lower inflation, increased productivity and lower interest rates (Global Insight, 2004). This gives a boost to business and consumer spending and improves the overall state of economic activity. In the US, global outsourcing of IT employees has improved the Gross Domestic Product quite to a substantial extent. “By 2008, real GDP is expected to be $124.

2 billion higher than it would be in an environment in which offshore IT software and services outsourcing does not occur. ” (Global Insight, 2004, p. 4) However, it can not be denied that outsourcing IT employees from other low-cost countries causes IT employees in USA to lose their jobs. In contrast to that, it creates more employment opportunities because economic activity undergoes an improvement and thus, global outsourcing has increased net employment in the US and IT workforce in the US is expected to grow (Global Insight, 2004; Makhnach, 2007).

“The incremental economic activity that follows offshore IT outsourcing created over 90,000 net new jobs as of 2003 and is expected to create 317,000 net new jobs by 2008. ” (Global Insight, 2004, p. 6) The impact of global sourcing on employment differs by industry sector. The major industry groups that are expected to gain a significant number of incremental jobs over the next few years are education and health services, transportation and utilities, construction, wholesale trade, financial services, professional, business and IT services, and manufacturing (Global Insight, 2004).

Moreover, it is also being noted that as global outsourcing of IT employees has increased productivity and lowered inflation rates, employees currently in the U. S. are enjoying higher level of wages than before (Global Insight, 2004). As the impact of global outsourcing continues to escalate, the wages are also expected to rise in the near future. The overall effect of this leads to increased efficiency and a higher output which depicts the well-being of the economy (Global Insight, 2004). “With lower inflation and higher productivity, real wages were 0. 13% higher in 2003 and are expected to be 0.

44% higher in 2008. ” (Global Insight, 2004, p. 1) Furthermore, as outsourcing IT employees from low-cost countries such as China and India, leads to a decline in total costs, outsourcing lowers the overall price of the products which in turn makes the products more attractive for the buyers in other countries and increases exports. That is again beneficial for the economy as it improves the balance of trade of a country (Global Insight, 2004; Makhnach, 2007). “Real exports were $2. 3 billion higher in 2003 and are expected to be $9 billion higher by 2008.

” (Global Insight, 2004, p. 2) Global outsourcing has caused IT professionals to redefine their roles and created opportunities for developers to move into design, architecture, understanding of domestic customer, managerial experience, process knowledge and product management while the non-core tasks are off shored (Weidenbaum, 2004). In many cases, the higher productivity often offsets the cost of operating overseas. These core outsourcing advantages help companies to achieve their goal and increase their profitability. It is also argued that employees in the U. S.

that are displaced due to outsourcing are freed up to engage in more lucrative work (Weidenbaum, 2004). “In the software and services area, the economy is expected to create 516,000 jobs over the next five years in an environment with global sourcing but only 490,000 without it. Of these 516,000 new jobs, 272,000 are expected to go offshore, while 244,000 are expected to remain onshore. Thus, the U. S. IT workforce will continue to grow. ” (Global Insight, 2004, p. 1) Conversely, outsourcing has marked negative impacts as well, especially for the outsourcing country, such as the US.

Firstly, outsourcing for some companies has created more complexities than were present before. This often leads to unnecessary costs and creates problem in the value chain, thus giving rise to a lot of managerial requirements. In many cases, some outsourcing companies are anticipating a lot of benefits and get disappointed when it does not work for them due to the increase in complexity which they find hard to tackle (Singhatiya, 2005). Even more so, organizational problems such as conflicting objectives put a company’s image, products and quality at stake when its operations are spread out to other countries as well.

Outsourcing raises concerns about data security because transferring operations to different countries increases the risk of losing confidential data to third party. This has raised many questions about the usefulness of outsourcing (Singhatiya, 2005). Subcontracting often leads to lack of control and there is a risk of the company being outsourced misinterpreting the tasks that need to be done and the requirements of the outsourcing company. To operate in different regions or to take full advantages an outsourcing company might need to contact more than one company which leads to a lot of communication hassle.

Some companies set a fixed limit as to the number of employees that will be outsourced but encounter problems dealing with unfathomable legal systems, protecting their intellectual property, and meeting the tax requirements besides putting up with the corruption in the outsourced country (Singhatiya, 2005). Outsourcing might also result in a loss of control of operations which instead of increasing profitability are likely to create chances of losses for the outsourcing company.

Besides, as outsourcing continues to increase steadily, students in the US are discouraged to take IT as their major subjects as they know that they have little chances to be employed. This might affect the future innovation of a country. With record levels of the US IT unemployment, it is unlikely that the workers displaced will find profitable work soon (Weidenbaum, 2004). In addition to all of this, subcontracting of tasks to other countries might put a downward pressure on domestic wages and create unrest among the present workers.

It might even add to unemployment in the country, when the companies in the US decide to operate offshore, displacing countless domestic employees (Singhatiya, 2005; Weidenbaum, 2004). Experiences show companies that overseas managers barely understand the corporate culture of the outsourcing company, the high quality standards set and the importance given to prompt delivery of orders. Sometimes, companies also have to face problems due to geopolitical crises in the outsourced country which is of course, highly undesirable (Weidenbaum, 2004).

Research reports have also shown that outsourcing IT employees has reduced flexibility to react to market changes in the outsourcing companies because the deal concerning the contracting of tasks is often made for a number of years and it is difficult to adapt processes to changes in customer demand and local needs (Singhatiya, 2005). When outsourced companies are pressed to short deal lengths, they often increase their prices, which ultimately bring a cost increase to the outsourcing companies (Singhatiya, 2005).

As knowledge, control and processes are being transferred to foreign countries, the outsourcing companies face an increasing dependence on the outsourced companies, even though the subcontracted tasks are not strategically important. This transfer weakens the organization and tightens the hold of the outsourced company which gains a bargaining position and might increase prices to its advantage Singhatiya, 2005). To counter this, companies are turning towards multi-vendor models, where more than one company is outsourced.

But second outsourcing is not very effective as far as services are concerned and is sure to increase complexity and demands more resources from the outsourcing organization (Singhatiya, 2005). Moreover, there is limited transparency where the vendor’s pricing strategies and cost structures are concerned so its difficult to predict the cost savings that outsourcing company will manage to gain. When more than one service is being outsourced, it becomes difficult to calculate the per unit cost and the amount saved, if any.

Sometimes, vendors have influential marketing strategies which might prove misleading for the outsourcing companies (Singhatiya, 2005). National welfare also suffers as a result because outsourcing companies don’t have to pay any federal or state kind of taxes for the outsourced employees. The impact of all this is that worker’s living standards are declining, and the income distribution gap between the rich and poor is widening while fears regarding job insecurity are spreading (Singhatiya, 2005). Many organizations have bought operations back in-house after being affected by the negative impacts of outsourcing.

However, whatever the positive and negative impacts of outsourcing IT employees might be, it has become a genuine fact that it is here to stay as firm’s survival is being endangered with the opening of more possibilities and product markets. Outsourcing companies are become more aware of which tasks to outsource and which tasks to keep away from subcontracting while vendors are becoming increasingly aware of their importance and are trying to be selective in making deals (Singhatiya, 2005; Weidenbaum, 2004).

Organizations are constantly trying to find out ways to protect their confidential data while outsourcing IT employees and are trying to maintain their control while only subcontracting non-core tasks. Moreover, it is predicted that organizations will only settle for short-term deals to tackle the flexibility issue and will only outsource a smaller percentage of operations (Singhatiya, 2005).

Amid all the discussions of the negative impacts of outsourcing, things which cannot be denied include that low inflation follows as a result of outsourcing, while it even makes the economy of the country thrive and develop and it encourages export by making the products appear cheaper to domestic and foreign customers. Sometimes, it even pushes wage rates upwards and offers more lucrative jobs to workers who were displaced initially because of the outsourcing of employees. This is all a sign of a healthy economy and thus it can be concluded that the positive impacts of outsourcing offsets the negative impacts.

“It is important to note that the total number of IT software and services jobs that have been lost since 2000 when the dot-com bubble burst is 372,000. That is, 10% of all IT software and services jobs in the U. S. have disappeared since 2000, but only 2. 8% of the total IT software and services jobs were lost because of offshore ITO” (Global Insight, 2004, p. 2) The Multinational Corporations When discussing about the negative impact of outsourcing IT employees from USA in the banking sector to low cost countries, must first discuss multinational corporations (MNCs) and the impact of their operations in these countries.

Do MNCs really give benefits to low cost countries? Many people may consider MNCs bring great benefits to the countries because they bring in jobs to the locals (Gillis. Roemers & Snodgrass, 1990; King, 1990). The reality and mountain of evidence show that the impact of multinational corporations in low cost countries has been disastrous (King, 1990). Not only in political and economic issues but also in the most important case, which are human right abuse and social conflict?

They take away the peace on these lands and replace them with abusiveness and conflicts among local population and competing government officials (The World Bank, 2000). From accounting point of view and focusing solely on cost, outsourcing may benefit a company that wants to cut cost and increase profit. No wonder firms of all sizes from western countries are flocking the low cost countries seeking to save cost and reaping the benefit of the strength of their dollar in these countries and the absence of any regulations in health care, justice and human rights, and most importantly, the environment (Vernon in King, 1990).

Generally, companies outsource their work and obtain the benefit of outsourcing in terms of cheaper cost of operation. Their success was glorified and glamorized by the media and soon, outsourcing becomes market trend. It becomes like a contagious disease that contracts every industry. Leading by manufacturing industry, it is followed by service industry and today, it is a fever in banking industry. More and more US banks are laying off their employees at home by attrition and move their work overseas or to transfer their employees overseas as the banks move their operation.

Some banking employees in Manhattan complained that they are being forced to train foreigners to take over their jobs and once their trainees master the job, they are kicked out of the job. Efficiency, the term used to downgrade government provisions and services also has become one of the fashion words among companies to conduct business with and focusing on least resources (Vernon, 1990). Unfortunately, in most outsourcing scenario, it only last for a short season.

Companies may evolve themselves into transnational or multinational corporations but in the long run, the cost of outsourcing is more than what has been glorified. “Multinationals are Mushrooms” is the title of Raymond Vernon as he discussed about multinationals companies in foreign countries – from their patterns of operation to lines of policy, the antitrust issue, the pressures for political ends and economic ends, to tax issue, and to their unfinished business (King, 1990). History reveals that companies that outsource overseas often go bankrupt within five years of their operation (Vernon, 1990).

Even though they are transnational or multinational, despite of their failure in operating overseas, they continuously operating even under solvency abroad because their finance is guaranteed by their government at the expense of the home countries. Take for example Indonesia’s financial deregulation scenario. Three years after the deregulation of banking industry, the country went bankrupt in 1995. Since 1975, the country has accumulated $45 billion US in debt resulted mostly in foreign direct investment and the case of banking retail has crippled the country’s economy.

The bail out package provided by the World Bank and the IMF did not help the country much because 75 percent of the fund received was used to salvage the foreign banks and corporations that went under during the crisis in the country. One percent of the remaining amount was used for safety nets and infrastructure redevelopment due to the religious war, certain percentage was used to bribe government officials to further the interest of the market groups, and the remaining disappear in the process (Vernon, 1990). “In terms of the manufacturing jobs,” said Vernon, “multinational enterprises have become a major factor … employed 3.

9 million persons outside the United States” (Vernon, 1990, p. 224). Unfortunately, in many cases, the benefit provided by these enterprises is paid by the lives of the locals and their ignorant government. The patterns of operation of the multinational enterprises are “contracting, or shifting their productive facilities around the globe… looking for environment with favorable cost structure… look for the most attractive package of subsidies and tax exemptions being offered by competing governments” (Vernon, 1990, p. 224 - 225).

Using their political ability, they ensure that host government would prioritize their interest, often approved through bribery, and influence them for performance requirements if they require international funding either loans or grants. According to Vernon, this performance requirement represents a “virulent form of beggar-thy-neighbor tactics among competing governments” (Vernon, 1990, p. 226). Many government officials of the foreign countries tend to fall into this trap because of either their ignorance toward foreign policies of the advanced countries or the bribes.

History reveals that in countries where multinational corporations set their kingdom, which is backed by their government, they “apply economic pressure … for political ends, with results that have sometimes been politically disastrous… other aims in applying economic sanctions, including efforts to enforce its concept of human rights,” (Vernon, 1990, p. 229), which often ends up in social conflicts such as experienced by the people in Southern Rhodesian, South African, Nigeria, Zambia, the Philippines, or Indonesia. The irony they bring to the host country is another competing values and paradox.

On one side, they nurture and promote democracy and market liberalism; but on the other side, they instill fear and conflict to promote human rights action in order to obtain control as described by Alexis Tocqueville in his Democracy in America. Their presence in foreign countries always “evoke bitter political reaction,” said Vernon (King, 1990, 230). In many instances, their presence in foreign countries is through direct investment or the most phenomenon’ way is through mergers and acquisition, and through recent government privatization policy of foreign policy through bilateral and multilateral arrangements.

The irony of having foreign ownership is that when the companies go bankrupt, it is not the company’s headquarters or their home government who is responsible for their losses but the host countries to pick up their loss such as in the case of Indonesia’s bankruptcy case. Another irony of having foreign ownership is that when the company considers that they are no longer in control of the countries’ economic and political policies, they move to another country where they will receive greater benefits.

Thousands workers would be left without employment and there is nothing the government could do because the assets are not the government (Vernon, 1990). Though the companies employ many local people, much of them represent labor. They come with their own employees with the capacity but keep the labor to the local. Generally, in order to gain favorable treatment in foreign countries, they also employ the local to become the leaders but without direct involvement in the companies day- to-day affairs.

The transfer of knowledge and skills according to western countries’ foreign policy is absence (Vernon, 1990). In her study as a consultant, Caroline Covell and confirmed by Michael Vatikiotis in his book Indonesia Politics Under Suharto, indicated it is difficult for government of any countries to try to salvage the companies’ by taking over these assets and keep the operations and the employees from being without employment. Again history reveals that companies that have been taken over by government also end up in bankruptcy.

Though many people today are working by emphasizing their preferences on “common sense,” one must understand that theory informs good practice (Tompkins, 2005). Foreign policy under the term of transferring the capacity from those who know how to employees of these countries never produce result. Alexis Tocqueville claim that in a democratic nation, one considers himself or herself more superior to the others and this transfer of knowledge and skills from foreigners to the local employees is never materialized.

Consequently, when the companies are leaving the countries due to political and economic disadvantages, none of these countries is able to survive because both the governments and the employees are becoming intellectually dependent. Outsourcing of Information Technology Positions Today, countries such as China, India, Sri Lanka etc. represent extraordinary delicate ground for the multinational enterprises to tread on. U. S. Corporations have located IT outsourcing jobs in these countries to lower labor costs.

The author of Outsourcing trend seen 'dangerous for Buffalo' states “The issue of U. S. companies sending jobs overseas has become a hot-button workplace and political issue, as a growing number of corporations have opted to use shops in low-cost countries, such as India, while laying off employees at home” (SharedExpertise Forum, 2004, 1). In the SharedExpertise Forum, Julie Davis, Bank of America spokesperson said, “We're always looking for ways to run our business more efficiently… It may mean using a strategic partner that may or may not be a U. S. firm” (SharedExpertise Forum, 2004, 1).

Although presidential candidates denounced this practice, President Bush, on the contrary, approves and encourages this practice. Looking at America’s invasion to Afghanistan and Iraq, the erection of America’s city in Bagdad, and after President Bush approved for an attack against Iran, one should have questioned, “Is moving Americas’ employees to the low cost countries going to provide negative or positive benefits for the U. S. corporations outsourcing their IT positions? ”

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