Answer

Risks and Dangers of Outsourcing

Abstract

In the contemporary global economy, the practice of outsourcing has become a widespread phenomenon. Many organizations are increasingly moving towards outsourcing their information technology (IT) functions with the aim of enjoying benefits such as improved productivity, time to market, lower costs, higher customer satisfaction, ability to target efforts on core areas, and higher quality among others. Despite these benefits, the findings of this paper reveal that outsourcing of IT functions or operations continue to present many dangers and risks including provider staff qualification, lack of adherence to the contract on the part of the provider, technical knowledge loss, loss of control, providers’ inability to adapt to the novel technologies, and hidden costs. Besides, other risks and dangers associated with outsourcing are unclear relationship between cost and benefit, security concerns, the fear of the irreversibility associated with outsourcing decision, staff problems, and potential opposition from organizational employees. These findings bear a significant implication for organizations in terms embracing robust measures that can enable them to mitigate the dangers and address risks posed by outsourcing. Such an undertaking will ensure that companies are better placed to enjoy the benefits of outsourcing without encountering issues that may greatly undermine their activities and lead to the closure.

Key Words: Outsourcing, Outsourcing Risks, Outsourcing Dangers, Information Technology Functions, Information Systems

Risks and Dangers of Outsourcing

In the contemporary global economy, the practice of outsourcing has become a widespread phenomenon. Many organizations are increasingly moving towards outsourcing their information technology (IT) functions (Gonzalez, Gasco, & Llopis, 2016). Some of the factors that are driving companies to outsource their IT functions include saving staff costs, saving technology cost, following the fashion, limiting the risk associated with obsolescence, facilitating technology access, and increasing flexibility (Słoniec, J., & Rodriguez, R. G. (2018; Gonzalez et al., 2016; Nazari-Shirkouhi, Miri-Nargesi, & Ansarinejad, 2017).  Other reasons for outsourcing by firms include improved productivity, time to market, lower costs, higher customer satisfaction, ability to target efforts on core areas, and higher quality (Nazari-Shirkouhi et al., 2017). Despite these benefits, outsourcing of IT functions or operations continue to present many dangers and risks including provider staff qualification, lack of adherence to the contract on the part of the provider, technical knowledge loss, loss of control, providers’ inability to adapt to the novel technologies, and hidden costs (Shirdeli et al., 2018; Gonzalez et al, 2016). Besides, other risks and dangers associated with outsourcing are unclear relationship between cost and benefit, security concerns, the fear of the irreversibility associated with outsourcing decision, staff problems, and potential opposition from organizational employees.

Provider Staff Qualification

Even though outsourcing theoretically enhances or facilitates organizational access to technical expertise and knowledge of information system specialists, the outsourcing firms, in many situations, are supported by the same employees as before considering that such employees have been shifted or transferred from client companies to provider organisations (Gonzalez et al., 2016). In relation to this, Nazari-Shirkouhi et al. (2017) argue that firms that chose to outsource their IT functions often feel the loss of business, experience, and knowledge considering that providers always send their most qualified staff to achieve novel clients in other companies within the sector once they have signed a contract. 

Lack of Adherence to the contract on the Part of the Provider

When agents execute tasks for principals, the principals often face the threat that the agents might not perform all the duties or tasks as required or that the agents might pay limited attention such tasks or monitor such duties less closely relative to how the principals would have done (Gonzalez et al., 2016). In addition, when it comes to the outsourcing of information systems, the needs of clients many not be met properly or there can be erroneous establishment of priorities considering that providers do not comprehend what the companies’ businesses entail (Ko et al., 2019).

Technical Knowledge and Corporate Culture Loss

Mousavi (2020) argues that when companies outsource some of their IT functions, they gradually lose their comprehension of the services related to the outsourced functions over time. Even in circumstances when providers deliver innovative services to clients, a significant proportion of the novel knowledge needed remains within the providers’ hands and cannot be reclaimed by clients (Gonzalez et al., 2016). This situation is worsened by the fact that firms may lose their capacity to remain up-to-date with recent technological advancements. Moreover, the companies’ innovation capabilities may be reduced considering that every innovation calls for a sufficient existence of economic and technical resources (Smuts et al., 2020). Firms that focus on the pursuit of innovation strategies acknowledge the need to hire and recruit highly qualified persons, offer them a long-term focus and limited control, and engage in the appraisal of their performance for beneficial long-term impact.  Nevertheless, Zhang et al. (2018) assert that when firms engage in outsourcing some support services such as software development, materials, and IT management, innovation may greatly be impaired. Furthermore, when companies hire external providers with the aim of acquiring labor flexibility, adjusting to fluctuations within the market, and reducing costs, they may experience the interruption of long-standing cooperative work, which in turn may adversely impact firms’ corporate cultures (Ko et al., 2019; Gonzalez et al., 2016).  

Loss of Control

According to Liu and Yuliani (2016), organizational managers always complain about companies’ loss of authority of their process quality standards and process technologies when specific IT services and processes are outsourced. In relation to this, Nazari-Shirkouhi et al. (2017) assert that firms can experience severe consequences. When tasks formerly executed by the company employees are granted to outsiders or providers who the organization has limited or no control, the quality of such as tasks may be greatly undermined. Furthermore, outsourcing may result in the disruption of production schedules or development of contractual disagreements (Gonzalez et al., 2016). In circumstances associated with incorrect or inappropriate detail specification of work, providers may be tempted to act in opportunistic ways. For instance, some providers may opt to use subcontractors or charge unwarranted or unforeseen price increases with the aim of exploiting the firms’ dependency. It is also vital to note that geographic distance, especially in situations where vendors are offshore, may exacerbate control issues (Meiser & Beimborn, 2020).

Monitoring productivity and performance can be challenging in outsourcing arrangements. Furthermore, companies may experience problems when it comes to achieving effective communication and coordination with offshore vendors (Smuts et al. 2020). Firms’ ability to have face-to-face brainstorm and discussions, or explore nuances of hindrances can greatly cripple business operations. Moreover, distance can increase the possibility of experiencing outages, which in turn may disable the communication infrastructure or systems between outsourcing firms and vendors (Meiser & Beimborn, 2020). Fountain and Langar (2018) argue that based on whether the outsourced function is executed or not, firms can experience language-related or cultural differences with vendors. Such disparities are associated with significant implications for clients. For instance, Gonzalez et al. (2016) argue that in circumstances where the call centers of companies are outsourced, the local language or culture may influence the manner or way in which agents answer, react to or interpret complaints from customers, particularly complaints made on telephone calls.

Dependence Related Issues

  Gonzalez et al. (2016) argue that outsourcing may subject companies to problems arising from dependence, which is often generated by this practice. Organizations experience problems when it comes to the quantification and definition of their needs in relation to information services, which also tend to evolve or transform over time (Gonzalez et al. 2016). As such, in situations where companies have not agreed on all services in the original contract, extra fees can be charged, thereby increasing the aggregate costs (Nazari-Shirkouhi et al., 2017). In relation to this (Fountain & Langar, 2018), argue that that external providers can be considered strategic partners as they do not focus on the pursuit of a common interest with their clients, and that the benefits of providers increase with the increase in clients’ costs.     

Providers’ Inability to Adapt to the Novel Technologies

Mousavi (2020) emphasizes that outsourcing presents the threat of the inability of providers to adapt to the novel technology. Even though outsourcing provides companies with the benefit of accessing state-of-art technology, this advantage is not always enjoyed by firms (Haider et al., 2016). For instance, in circumstances where providers where providers fail to establish clear benefits in the integration or incorporation of novel technologies, they may hesitate to adopt them given that their primary focus is complete exploitation of the service they are providing. Gonzalez et al. (2016) add that when contracts do not incorporate clauses meant for technological evolution, clauses can end up not being completed.  

Hidden Costs

According to Nazari-Shirkouhi et al. (2017), hidden costs associated with outsourcing may be experienced in four area. The first source of hidden costs in outsourcing is the search for vendors, as well as hiring. The second area of hidden cost concerns the transition costs, particularly the time spent by internal employees in assisting outsourcing vendors (Ko et al., 2019). Costs arising from interruptions and the absence of skilled vendors, who can react quickly and appropriately as in the case of a firm’s IS internal department at the commencement of the contract, are considered transition costs (Haider et al., 2016). The third source hidden cost is associated with the provider coordination and control. The fourth source of hidden cost is associated with transition expenses after outsourcing (Gonzalez et al., 2016). This cost is often experienced when the outsourcing agreement ends and the client company chooses to execute its IT functions or activities internally or shift to a different provider (von Bary & Westner, 2018).

Nazari-Shirkouhi et al. (2017) assert that some outsourcing benefits and costs are easily recognized and quantified owing to their identification by the accounting system.  Nonetheless, other benefits and costs are relevant to decisions embraced by companies, but are not components of the accounting system (Haider et al., 2016). Therefore, such factors cannot be overlooked owing to the difficulty involved in obtaining them or the fact their identification is based on estimates. According to Gonzalez et al. (2016), the cost associated with outsourcing risk happens to be among the most significant and least comprehended considerations when it comes to the make-or-buy decision. However, there are several other factors that should be taken into consideration when it comes to the selection of the appropriate level of involvement within the value chain as well as the location or position of the primary value-added functions (Smuts et al., 2020). In addition, factor conditions, the location and nature of the service or product’s demand, the existence of supporting industrial operation, and industry competition should be taken into account. Issues such as profit repatriation ability, tax consequences, political and currency risk, synergy with other aspects of organizational overall strategy, and capability of managing and coordinating in various locations should also be considered (Gonzalez et al., 2016).

Unclear Relationship between Cost and Benefit

Studies emphasize the unclear or ambiguous relationship that exists between costs and benefits in outsourcing arrangements or models (Gonzalez et al., 2016; Haider et al., 2016; Zhang et al., 2018). According to Gonzalez et al. (2016), taking all the relevant factors associated with outsourcing into consideration and attempting to translate or transform them into monetary aspects presents a significant challenge.  For example, Haider et al. (2016) assert that the valuation of the potentially better outsourcing service delivered by providers or the measurement of the consequences associated with poor quality services offered by providers may present problems. When confronted with these problems, many companies admit that they always base their outsourcing decisions exclusively on unambiguous or explicit costs generated, thereby neglecting the tacit costs as well as profits (Haider et al., 2016; Zhang et al., 2018). 

Security Concerns

There are also potential security problems associated with the involvement of firms in outsourcing arrangements.  According to Mousavi (2020), the consideration of security concerns in outsourcing IT activities is significant in situation where providers attend to various direct competitors. In such situations, the confidentially of information belonging firms to which a provider offers outsourcing services must be taken into account and effectively guarded from third-parties. In information systems subjected to outsourcing, the aspect of security is dependent on the provider company and hence a negotiation must occur within the model of the outsourcing agreement with the aim of establishing procedures and policies targeted at ensuring that the aims of the information systems are accomplished on a constant basis. Gonzalez et al. (2016) mention seven aims of information systems including privacy, validity, authorization, efficiency, integrity, adequacy, and effectiveness.   

The Fear of the Irreversibility associated with Outsourcing Decision

Existing studies also report the danger that often comes with the irreversibility of outsourcing decision once companies have engaged in such an arrangement (Gonzalez et al., 2016; Smuts et al., 2020).  According to Mousavi (2020), many companies often fear the irrevocability of the choice to outsource information systems, especially in situation where users have discarded the human and technical infrastructure required to reconstruct or redevelop their information systems in-house. Hanafizadeh and Ravasan (2018) attribute the irreversibility of outsourcing decision to three factors. The first factor concerns the high costs associated with the reconstruction of the information system department. The second factor involves the difficulty encountered in attracting the necessary staff. The third factor involves the time needed to reverse the outsourcing arrangement once it has been made.  Many firms are always unwilling to subject themselves to these conditions once they have outsourced their IT functions. On the other hand, companies that have not outsourced their IT services are often unprepared to do so considering the magnitude of these problems.  

Staff problems

Outsourcing is associated with many staff challenges or issues, as employees encounter uncertain circumstances that trigger anxiety, a feeling of insecurity, and low morale (Njenga, 2018). These experiences can result in a reduction in employees’ levels of productivity during the period preceding the signature of the outsourcing arrangement and even following the signing of the agreement (Njenga, 2018; Gonzalez et al., 2016). In a situation where only a portion of the staff members is transferred, companies can easily identify the absence of motivation among workers who are left behind.  Zhang et al. (2018) argue that employees who are left behind may feel offended or disappointed by the fact that the competence or skills have not been taken into consideration during the transfer of other workers to the service providing firms. Employees who remain within client companies can change their duties and their statuses, and in many circumstances, they can engage in the execution of novel responsibilities to which they are not used owing to their frustrations (Zhang et al., 2018). Nonetheless, Hanafizadeh and Ravasan (2018) consider the shifting of the remaining employees to other novel tasks logical, as the information system departments have to be reorganized after the transfer of some workers to the service provider firms. It is also vital to note that members of staff who are transferred from various companies may undergo a range of changes including those impacting their seniority or ranks and any beneficial circumstances that they might have had in their former firms, and changes associated with the requirement to adapt to a novel corporate or organizational culture. As such, many companies fear a potential opposition from their employees when it comes to their involvement in outsourcing arrangements, which always pose a significant threat to their responsibilities, positions, and tasks (Njenga, 2018; Ko et al., 2019). This risk is even profound in situations where firms engage in global outsourcing.

When it comes to the danger of potential opposition from organizational employees, it is vital to note that many firms often experience a considerable non-quantifiable risk considering that outsourcing, particularly services’ outsourcing, can be viewed as a violation of the relationship between employers and employees (Njenga, 2018). Employees may spend much of their time wondering the group of workers or functions that will be outsourced. Ko et al. (2019) argue that workers who are displaced in an outsourced firm always feel conflicted in relation to who their bosses are between the novel external service contractors and the client firms which they were formerly employed.

Conclusion

Even though companies are moving towards outsourcing their IT functions with the aim of enjoying benefits such as improved quality, increased productivity, access technology, saving staff costs, and higher customer satisfaction among others, this practice presents a range of risks and dangers to companies as discussed in this paper. These threats and dangers include provider staff qualification challenges, absence of adherence to the agreement by providers, loss of organizational culture and technical knowledge, loss of control, hidden costs, and the inability of providers to adapt to the novel technologies. Other dangers and risks arising from outsourcing are unclear cost and benefit relationship, security issues, the fear of the irrevocability associated with the choice to outsource, staff challenges, and potential rebellion from organizational workers. As such, there is a significant need for organizations to embrace robust measures that can enable them to mitigate the dangers and address risks posed by outsourcing. Such an undertaking will ensure that companies are better placed to enjoy the benefits of outsourcing without encountering issues that may greatly undermine their activities and lead to the closure.