Enterprise Information Systems Sourcing

Enterprise Information Systems Sourcing

Introduction

            Recently, major U.S companies such as GM, Intel, GE, etc. have followed the emerging insourcing or reshoring trend to bring jobs back to the U.S. The trends appear cyclical and related to the changes in market conditions such as bigger domestic talent employees, productive video conferencing on distributed teams, and particularly the overall maturation of the outsourcing market (Staples, 2013). Conversely, many enterprises also turn to outsourcing providers for more new IT activities, e.g., process management, business process outsourcing, or knowledge management (Rockart, Earl, & Ross, 1996). Facing a range of sourcing decisions, many companies are in a struggle to assess insourcing versus outsourcing, onshoring versus offshoring and selecting among offshoring options such as near-shoring versus far-shoring.

            This document will focus on information systems sourcing to discuss (a) a sourcing decision cycle framework, (b) the key decision factors between insourcing and outsourcing, (c) the factors between onshoring and offshoring in outsourcing concept, and (d) far-shoring, near-shoring, and captive center in offshoring approach.

Sourcing Decision Cycle Framework

            According to Pearlson and Saunders (2004), business souring involves multiple decisions in a series and parallel cycle. The key drivers for sourcing are (a) technology, (b) location, and (c) legislation and regulations (Deloitte Consulting, 2012).

Technology in IT and IS consists of gamification (13%), BYOD (bring your own device, 28%), crowdsourcing (35%), open innovation (41%), enterprise mobility (53%), big data (55%), hosted virtual desktop (59%), business process as a service (66%), and cloud computing (69%) (Kapoor, 2017) as shown in Figure 1 below:

Source: Adapted from Dr. Kapoor’s live chat (2017).

            Figure 1: The technologies in an outsourcing approach.

In locations, the developed countries include India, the U.S., China, and Poland; the developing countries include Philippines, Romania, Mexico, Australia, Brazil, and Malaysia (Kapoor, 2017); future opportunities include south Africa, Guatemala, Israel, Ecuador, Panama, Iceland, and Nicaragua. 

            Legislation and regulations are the measures issued by the government to protect data privacy and anti-corruption such as the Sarbanes-Oxley Act of 2002. The regulations

decrease or increase of using outsourcing as shown in Figure 2.

Source: Adapted from Dr. Kapoor’s live chat (2017).

            Figure 2: Legislation and Regulations in outsourcing approach.

The sourcing decision cycle may start at the original decision of make (insource) or buy (outsource) that is branched into insourcing or outsourcing from the company. Insourcing is a practice in which a business decision is made to maintain control of critical production, e.g., information system (IS) services, or keep core competencies in- house. Insourcing of the complexities of IS in-house requires management attention and resources. Outsourcing is a practice in which a company purchases IS services or products from another company. The primary motivation for outsourcing is on reducing costs. For example, Kodak outsourced its data center operations to IBM in 1989. Outsourcing can be done in the cloud, onshoring, or offshoring as shown in the sourcing decision cycle framework in Figure 3 below:

Source: Adapted from Pearlson and Saunders (2004).

            Figure 3: Sourcing decision cycle framework

            The companies, in general, decide to go outsourcing because labor is cheaper; employees’ skills are more available; environmental regulations are lower; tax of products and plants are much less; or in-house work is unsatisfactory.

Key Decision Factors between Insourcing and Outsourcing

            The companies recently face many decision factors in outsourcing or insourcing in the highly competent market in both local and global environment. The process of insourcing versus outsourcing decision can be illustrated in Figure 4:

 Source: Adapted from Dr. Kapoor’s live chat (2017).

            Figure 4: Insourcing versus outsourcing decision process.

     1. Decision Factors in Outsourcing

            Some of the key decision factors that play into the decision for outsourcing versus insourcing are (a) lower costs, (b) ability to handle big production, and (c) the client company’s consolidation of data centers. Firstly, the primary reason for outsourcing is cost reduction. Outsourcing providers derive savings in the large scale of centralized data centers, large pools of expertise, and better contracts with suppliers. Secondly, the outsourcing provider’s larger resources make greater capacity on demand in availability. And thirdly, an outsourcing provider can assist a client company to consolidate data centers that could not be done by an internal group (Pearlson & Saunders, 2004).

            Other factors that support outsourcing are:

          a. The outsourcing provider has specialized in know-how.

          b. Cost considerations are in favor to the outsourcing provider.

          c. The client company lacks of ability to build the IS product.

          d. The outsourcing provider can meet small volume requirements.

          e. The client company has capacity constraints

          f. The client company desire not to add workforce for saving income.

          g. The client company is not sure the volume requirements of the products.

          h. Routine product is available from many sources.

          i. Building requires high capital startup costs.

            Outsourcing has several advantages: greater flexibility, lower investment risk, improved cash flow, and lower potential labor costs. However, outsourcing also has some disadvantages: greater risk of choosing wrong the outsourcing providers and distributors., loss of control over the processes, potential of losing core supportive activities, long lead-times, and hollowing out (competency) (Lacity & Hirschheim, 1993)

Notice that since IS products or services are commodities instead of a core competency, outsourcing brings distinct advantages. For example, client company management pays less attention to IS operations and focuses more on core activities. If the IS product or IS service is categorized as a commodity instead of a core competency, outsourcing is probably the best choice.   

     2. Decision Factors in Insourcing

            Many key decision factors that play into the decision for insourcing versus outsourcing are:

          a. Loss of control over critical aspects of the client company.

            Due to outsourcing, a client company loses control in many areas such as project, scope creep, the technologies, the costs, financial controls, accuracy of financial reports and IS direction. The client company depends on outsourcing providers on its operations.

          b. Failure of anticipation of new technological capabilities

            A client company may not use new technologies because the outsourcing provider loses revenue in process of implementation and support, even of the new technology implementation would serve the client the best. Poor outsourcing planning can be a loss in IS flexibility.

          c. Failure in potential development for competitive advantage

            By surrendering IS functions, the client company is unable to develop new IS technologies for competitive edge. The partnership between a client company and outsourcing provider can compromise the advantage but the advantage can become available to the outsourcing provider’s other clients. 

          d. Dependency on outsourcing provider,

            A client company can be highly dependent on the outsourcing provider. The client company may have little resource in terminating the contract in sour relationship between the client company and the outsourcing provider. The client companies may be locked in the agreement that they no longer want. The outsourcing provider may go out of business before the contract’s end.  

          e. Loss of competitive secrets

            When the client company goes to outsourcing, it must realize that competitive secrets may be lost. The outsourcing provider can access database, sensitive information, customers’ data for its activities. Data security, process skills are likely at risk.  

          f. Incompatibility in culture and operations

            The outsourcing provider’s culture and operations may be incompatible with the client company’s culture and operations. Delivery of the contracted service and system is likely difficult because conflicts between the client’s staff and the outsourcing provider’s staff. The conflicts would delay progress and reduce quality of IT services and products.  

          g. Recognition of the lower cost savings

            Albeit the client companies go to outsourcing because of cost savings, the savings may not be realized due to the complexity of the outsourcing process. For example, implementation of new technologies may fail to generate savings because the in-house process is no longer in use for comparison.

          h. Challenges in working with multiple vendors.    

            There are many challenges when the client companies work with multiple vendors. Having more vendors requires more coordination than working with a single outsourcing provider. In complex IT or IS services, when a major problem occurs, it is difficult to determine the root cause due to a tendency of finger-point.     

            Insourcing has advantages: higher degree of control over inputs, increase of visibility over the process, and economies of scale and scope. Insourcing also has some disadvantages: requirement of high volume, high investment, dedicated equipment in limited uses, and problems with supply chain integration (Lacity & Hirschheim, 1993).

Thus, the decisions for successful outsourcing should be considered carefully with adequate care and deliberation on well selection, good contracting, and great scope. If the IS product or IS service is categorized as a core competency instead of a commodity, insourcing is the preferable choice.  

Outsourcing: Decision Factors between Onshore and Offshore

            In general, outsourcing is a practice in which a client company purchases IS services or products from one of more companies or outsourcing providers. From the sourcing decision cycle framework in Figure 1, an outsourcing approach consists of three options: (a) cloud, onshore, and (c) offshore. Cloud is a separate topic and it maybe will be discussed in another research study (Field, 1997). The document will focus on onshoring and offshoring only.

     1. Onshoring

            Onshoring or inshoring is an option of outsourcing whose work is performed in the same country as the client provider. Onshoring is an outsourcing work performed domestically. The onshoring trend in the U.S. is rural sourcing where outsourcing providers set up operations in rural parts of the country. The factors that lead onshoring are:

          - Rural sourcing companies are competitive due to reduced salaries, lower living costs.

          - Rural sourcing companies’ advantages are closer time zones, similar culture, and fewer hassles.

          - Rural sourcing is more politically correct by restricting offshoring and to protect U.S. jobs (Violino, 2011).

            Some issues with rural sourcing are the rural sourcing firms are usually too small to deal with large scale projects and they do not have the most skillful employees. 

     2. Offshoring

            In contrast, offshoring is another option of outsourcing whose work is performed in a different country. Offshoring or outsourcing offshore is the company, particularly the IS organization, uses contractor services or builds its own data center in other country. The works that are sent offshore include IT transactions, knowledge-based business process (Saunders, Gebelt, & Hu, 1997).

The factors that lead offshoring are:

          a. Labor costs are much lower. Programmer salaries are very low due to much lower living standard at the U.S.

          b. Workforce in many offshore companies is well educated.

          c. The offshore service providers are more willing to provide more brainpower at the problem than the US counterparts do.

            However, telecommunications, travel, process changes, and management overhead are required to relocate and supervise operations overseas with more costs. In addition, communication, languages, and cultural differences are big issues for the offshoring approach.

Offshoring: Decision Factors on Far-shoring, Near-shoring, and Captive Center 

            When the outsourcing phenomenon becomes mature, the marketplace differentiates offshoring approach that can be relatively close, e.g., near-shoring or at the distant land, e.g., far-shoring. Alternatively, offshoring can be a captive center. Far-shoring is a form of offshoring in which service work is sourced to lower-wage country in far away distance and different time zones such as India (for software) and China (for hardware). On the other hand, near-shoring is another form of offshoring in which service work is sourced to lower-wage country in close distance and the same time zones such as Mexico, Nicaragua.

     1. Advantages

            The advantages of near-shoring are geographical, temporal, cultural, linguistic, economic, political, or from historical linkages. The client company faces fewer challenges in communication, control, supervision, coordination, or bonding socially. The short distance, culture, languages, custom, etc. play a crucial role in making decision in a near-shore or far-shore destination. 

            With cost advantages in less expensive economies and managing the risks with outsourcing vendors, captive centers as outsourcing providers are subsidiaries set up to serve the parent companies. The captive centers that are owned by the parent companies have two types: hybrid and shared. The hybrid captive center performs high profile work for the parent company and outsources the commoditized work at lower cost than the outsourcing provider’s work. The shared captive center performs work for both a parent company and external customers. Captive centers can be near-shore or far-shore with decisive characteristics such as less expensive locations, far from the company’s headquarters, owned by parent company (Deloitte Consulting, 2012).    

     2. Decision Factors on Offshoring

            A decision of selecting an offshore destination is often based on attractiveness, the level of development, and cultural differences (Pearlson & Saunders, 2004). Attractiveness of hosting offshoring business is viewed as the company’s geographic orientation in language, war zone, lower rate of crimes, less regulatory restrictions, data security, intellectual property protection, technical infrastructure, and low-cost labor pool.  

            Making decision on an offshore destination is also influenced by the level of development from the host country. The countries at the top tier such as UK, U.S. Japan, etc. are mature software exporting nations. The countries at the second tier such as Brazil, South Korea, etc. are emerging software exporting nations. And the countries at the third tier such as Cuba, Vietnam, etc. are infant software exporting nations. Carmel and Tjia (2005) determine the tiers on the industrial maturity, clustering of software enterprises, and export revenues.  

            Cultural differences are also a decision factor in selecting an offshore destination. Miscommunication in languages and misunderstanding culture often arise and hinder the quality of IT deliverables. It is important to be aware of the risks and manage the differences in cultures to avoid conflicts and labor strikes.

     3. Recommendation    

The recommendation on IT and IS sourcing is described as follows:

            It appears that the outsourcing market is starting in maturity. The conflict between outsourcing versus insourcing is saturated. The companies should find the right combination of best talents and most effective IT services. The best sourcing strategy is to combine both outsourcing and insourcing for complementary with options of onsite, onshore and near-shore in the unique global services model where reshoring is an inevitable outcome of the global services strategy. That means, the companies should consider the right-sourcing for their benefits in IT and IS services (Staples, 2013).

Conclusion

            The document presented the trends of information technology sourcing that include outsourcing, insourcing, onshoring, offshoring, far-shoring, near-shoring, and backshoring in business, particularly IT and IS services in the last few decades. The document also provided the sourcing decision cycle framework based on three key drivers (technology, location, and legislation and regulations). The responses to three comprehensive questions include (a) the key decision factors between insourcing and outsourcing, (b) the decision factors between onshoring and offshoring from outsourcing, and (c) the decision factors on far-shoring, near-shoring, and captive centers from offshoring. The recommendation for sourcing was a right-sourcing that both insourcing and outsourcing, instead of conflicting between themselves, are combined complementarily in the global IT services strategy model.

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