IT Outsourcing For Commercial Banks in China

The issue of outsourcing has gained significant attention in recent years, in different industries. The different industries have varied factors that influence the scope and nature of outsourcing. China has been one of the most active destinations for outsourced processes and activities. This study focuses on the decision-making models and processes considered by bank managers in developing IT outsourcing strategies, in China. This is based on the increasing use of IT outsourcing in the banking and financial services industry in order to meet customer demands. China was selected because of the challenges it may present for decision makers. Its research objectives are to determine and assess the potential risks for Chinese commercial banks that want to engage in IT outsourcing activities.

The study seeks to assess the key decision factors that Chinese commercial banks consider in their IT outsourcing strategies. The methodology employed focuses on the strategic model, as well as the criticality of outsourcing to financial institutions and management attitudes. Analysis of the findings utilizes two constructs to assess the decisions made by commercial banks regarding outsourcing in China. The study proposes to accomplish its objectives using a qualitative study design that utilizes face-to-face interviews to collect data. The data will be coded and assessed using the two constructs of perceived risk and benefit in order to develop a new model. The findings of the study will be highly relevant and significant to medium-sized commercial banks and outsourcing services vendors.

The Global Outsourcing Landscape

The issue of outsourcing has grown significantly in the global economy. Firms are subcontracting an ever-increasing number of activities ranging from marketing, customer care, research and development, as well as manufacturing. As a result, some organizations have developed into virtual manufacturers that own the designs, but do not make any of the products. Vertical disintegration has become a significant aspect in international trade. The production of particular cars in the US includeonly 37% of their value generated within the country while the rest is from different places. When most people refer to the issue of globalization, they think of a manufacturing process that takes place across different geographical locations.

The purchase of raw materials and development of standardized products was the initial view of outsourcing, but it has changed significantly with time. Today, it refers to the selection of strategic partners to establish bilateral relationships in order to undertake investments that enable it to fit into the firm’s particular needs. As a result, outsourcing involves more than just purchasing goods and partners have to act with care. These complexities have made outsourcing difficult to measure at an international level (World Trade Organization, 1998). Some scholars on the topic have used trade in intermediate inputs or components as a proxy for what they have termed as global production sharing or intra-product specialization (Rapoport & Yi, 2001).

Although the measures used in assessing the growth of international outsourcing are imperfect, they show rapid expansion. The rapid expansion in outsourcing has been in key sectors and industries such As textiles, machinery, electrical equipment, and footwear. Outsourcing in intermediate products and business services are some of the principal areas that have received the most attention in relation to outsourcing (Baldwin, Irani, & Love, 2001).

IT outsourcing is one of the key growth areas in today’s business environment. This is because of the increasing significance of ICT to the operation and success of businesses. The size of the global outsourcing industry was estimated by Dataquest to be more than $100 billion in 2001 and growing at the rate of 20% per Annum. A survey of the FTSE index in the London Stock Exchange found a significant correlation between high levels of outsourcing and stock market performance. This highlights the significance of outsourcing and suggests that companies that manage it best are likely to reap the benefits. According to the research company Gartner, the worldwide IT outsourcing market is expected to reach $288 billion by the end of 2013, a 2.8% increase from 2012.

Definition of Outsourcing

Outsourcing simply refers to the contracting of work to outside firms. These firms can be domestic or foreign, and they enable the outsourcer to concentrate on key competencies. It involves business processes that the outsourcing firm feels can be accomplished more effectively by the outside firm as opposed to in-house. It involves different processes that may include manufacturing or the provision of services such as customer care, or marketing. Most companies engage in outsourcing in order to address challenges regarding the availability of skills and resources. They seek efficient and highly qualified outsourcing companies to provide services for their customers or internal operations.

Today outsourcing is used as a means of reducing costs and achieving strategic goals. Different models are applied depending on the focus of the organization. The changing waves of outsourcing are developed in response to changes in the business environment. The three main segments of outsourcing applied in today’s world are business process outsourcing, information technology outsourcing, and knowledge process outsourcing. The potential impact of outsourcing can be seen across various business activities and processes. Information Technology outsourcing involves issues such as programming, applications development, and coding. This is mainly geared towards enhancing the ability of organizations to access IT resources that may be difficult to exploit in-house. Outsourcing also involves the performance of a particular business processes and functions such as finance and accounting, back-office operations, processing, and administration, as well as contract functions. This is known as business process outsourcing with organizations seeking service providers to undertake their non-core processes to enhance efficiency.

Knowledge process outsourcing (KPO) involves offshoring of domestic business functions to lower cost foreign providers. It helps companies to gain competitive advantages by virtue of the type of activities and processes outsourced. Unlike BPO and ITO, KPO involves high end or knowledge-driven processes. These processes require specialized domain expertise such as financial management, risk assessment, insurance underwriting, clinical trials, legal services, or R&D. KPO is unlike BPO and ITO because it does not involve simple rule-based process expertise and leveraging economies of scale. It focuses on accessing the global talent pool in order to carry out processes that require specialized analytical and technical skills, as well as decision-making and judgment. KPO adds value by providing high quality expertise and superior productivity (Baldia, 2012).

IT outsourcing in different industries and organizations is undertaken because of the strategic advantages it offers to them. The central driver of IT outsourcing is cost reduction. It allows companies to access high quality services and processes without spending money in installing computing resources. The outsourcing companies provide services at relatively lower costs compared to what the company may access in-house. It also provides an opportunity to select the lowest cost provider to enhance profitability. IT outsourcing is also used because it allows access to superior skills and expertise. The outsourcing company has access to high quality work force to perform the different tasks effectively. The presence of superior skills from the service provider allows high service quality thus enabling the outsourcing company to deliver the same to its customers.

IT outsourcing is a significant aspect in relation to strategy and focus. It allows an organization to select the best-suited service provider to ensure that its services are in line with the needs. Outsourcing allows changes in capacity in line with organizational needs without incurring heavy costs. As a result, it enhances flexibility for the outsourcing company. It plays a strategic role in enhancing the capacity of the outsourcing company to meet its expanding needs for computing (Aalders, 2012).

Importance of IT Outsourcing In the Financial Sector

The financial services sector is one of the largest investors in Information Technology. The financial services sector requires significant computing resources in order to perform their activities efficiently and cooperation across geographical locations. The industry has increased utilization of IT resources in response to the financial crisis that affected the global economy (Bartels & Pass, 2000). Increasing market volatility has also made is essential for financial institutions to have effective IT systems for enhanced efficiency. Increasing competition, shrinking demand, globalization, and regulation require banks and other financial institutions to engage in system upgrades and integration. This activity is especially significant for banks involved in mergers and acquisitions because of the need to integrate the operations of the merging institutions. This has highlighted the need for financial institutions to evaluate their operating models, and make significant changes in processes as well as IT. This has prompted many banks to incorporate IT outsourcing as a way of enhancing their operational efficiency (Hirschhein & Lacity, 2000).

Financial and banking institutions dominate the global ITO industry. The banking and financial services institutions ITO market is worth US$ 100 billion and is dominant in the industry. Improving profitability and customer experience are the most critical objectives influencing IT investment for the banking industry currently. Some of the key themes in relation to IT outsourcing in the industry involve cloud computing, analytics, and social media. These technologies have a significant role to play in enhancing the operation of financial institutions.

The development of informationalization of Chinese commercial banks

The Chinese banking industry has grown significantly with the increasing demand for financial services. This has also increased demand for IT services in the sector enhancing growth of the banking industry IT solution market. The market is expected to grow at an annual compounded rate of 21.7% from 2013 to 2017 (Kearney, 2004). The market will be 9.6% higher than China’s banking industry IT market. The year 2012 was a milestone for the development of the banking sector with the launch of the five-year plan for development and reform of the financial industry. Measures for managing commercial bank capital resulted in the introduction of new capital regulations for the industry (IDC, 2013).

The interest rate market also developed significantly in 2012 because of the bidirectional expansion of floating ranges for loan and deposit interest rates. Financial reforms were a significant aspect in political debate, in 2012 laying the foundation for the development of the banking industry. It experienced significant development in 2012 with business and IT functions being highly integrated. The significance of technology in the industry became more apparent and stepped into a new phase of internationalization.

Indigenous innovation policy and widespread government investment have helped in enhancing technological advancement, in China. In spite of these advancements, China’s computer network and technology still lags behind compared to the advanced economies. Chinese financial institutions have been falling short of international competitors because of low financial innovativeness. This has reduced the ability of such banks to develop into world standard players.

The current situation in the banking industry in China is that the different institutions have realized the significance of technology. They have embarked on strategies for enhancing the utilization of technology in order to increase competitive advantage. The government has also started encouraging collaboration with international players to enhance their global footprint. Initially, financial institutions in China, especially the most sensitive banks, were used to doing everything internally (Daianu, 2005). The “opening up” policy of 1978 enabled Chinese companies to learn from foreign nations and interact in the global market (Hawkins & Mihaljek, 2006). They did not open up to working with foreigners because of their conservative mindset. This mindset is changing, and they are making efforts to enhance performance through the establishment of strong alliances. One such alliance is the collaboration between the Bank of America and China Construction Bank. The two banks sought to get in to collaboration to provide innovative credit card services in China. This collaboration was meant to leverage the financial strength of CCB with BoA’s leading credit card expertise (Bank of America, 2007). This collaboration provided the bank with the capacity to develop solutions that will enable it retain market share while meeting the growing market demand.

Problem Definition

It is critical for administrators and other decisions makers to understand the benefits of IT outsourcing for their organizations. They also require comprehensive information on the risks and potential pitfalls that their businesses can encounter while implementing IT outsourcing. There are many areas that require consideration including the model to be implemented as well as the best way to ensure the security of critical information.

Significance of the study

Most of the available literature on IT outsourcing has focused on advanced economies. China and other emerging economies have been assessed as the destinations for outsourced work from the West. There is limited research on the outsourcing drivers and issues for domestic organizations in China. This study will provide critical information on how banks and the financial services sector can benefit from outsourcing IT (Deloitte Research, 2003). It will also shed light on the considerations made by the administrators and other decisions makers before outsourcing their IT functions. This will play a critical role in aiding companies that provide outsourced IT services to know how to attract commercial banks as clients. It will guide them on the aspects that they have to consider. This will enhance their competitiveness and attract high-value clients such as financial institutions or commercial banks.

The study is also essential in providing a clear understanding of the political economy and the business atmosphere surrounding the financial services sector. The industry is highly dependent on the government, and there are key political factors that require consideration in strategic decisions (King, 2005). The current study will highlight the political factors that have to be considered by decision makers in the financial services sector. This will aid in understanding the considerations that organizations have to remember in order to benefit from outsourcing in the financial services sector.

Purpose of Study

The background information on the banking industry and developments in relation to IT outsourcing show that significant thought is put into such decisions. The managers have to assess critical information regarding their operations as well as the market in order to benefit from outsourcing. It is clear that financial institutions will benefit from outsourcing y ensuring that they implement key strategies effectively. This highlights the purpose of the current study, which seeks to investigate the impact of different factors that influence decisions towards outsourcing strategies applied in commercial banks, in China.

Research Objectives

The research aims and objectives of the study focus on the decision-making aspects considered by managers in commercial banks when adopting IT outsourcing. The objectives of the study are:

1. To determine the potential risks for Chinese commercial banks that want to engage in IT outsourcing activities
2. To assess the key factors that Chinese commercial banks consider in their IT outsourcing strategies
3. To investigate the strategic model that is most appropriate for outsourcing decision-making in commercial banks
4. To assess the criticality of outsourcing to financial institutions
5. Assess whether management attitude towards outsourcing influences their perception on the criticality of the strategy

Research Questions

The research objectives of this study will be accomplished by developing effective research questions to be tackled during the study. These questions will focus on the key areas that are significant to decision-makers in the financial services sector. The research questions to be addressed in the study are:

1. What are the potential risks for Chinese commercial banks that want to engage in IT outsourcing activities?
2. What are the key factors that Chinese commercial banks consider in their IT outsourcing strategies?
3. Which strategic model is most appropriate for outsourcing decision-making in commercial banks?
4. How critical do financial institutions consider outsourcing to be?
5. Does management attitude towards outsourcing influence their perception on the criticality of the strategy?

Theoretical Framework

The hypothesis considered for this study is that commercial banks have to consider several key aspects before engaging in IT outsourcing. They have to take a core competency focus and ensure regulatory conformity in their operations. These are the two top factors considered by commercial banks when implementing outsourcing strategies. It is critical to consider that commercial banks also worry about the security of their critical information because of the privacy of customers. As a result, the decision makers in commercial banks have to consider the quality of work, as well as the security offered by the service providers. In outsourcing IT functions, in commercial banks, they focus on different factors that may influence the decision. Commercial banks have priorities such as security, quality of work, strategic aspects that they follow in selecting the model and the service provider. This study follows the model of perceived risks and benefits to assess whether they have a significant influence on the decision by managers. It utilizes a model adopted from (Gewald & Dibbern, 2009) to assess the influence of perceived roadblocks, risks, benefits and criticality in adoption of IT outsourcing for commercial banks. The study utilizes the model suggested from Gewald & Dibber (2009), but modifies it to ensure that the constructs of perceived risk and benefits suit the context of the Chinese financial services sector.

Literature Review

This chapter highlights the available literature on the use of IT outsourcing in different industries. Its focus is to show the areas that have been highlighted in previous studies. It will also emphasize strengths as well as weaknesses of the data or available information in order to show gaps.

Outsourcing in Emerging Economies

Outsourcing decisions on different organizations are based on different factors such as labor cost. The cost of labor and services provision is the main reason why many organizations outsource their non-core activities. This is because it provides them an opportunity to access high quality services at competitive prices. This occurs because most of the destinations for outsourcing services are low cost emerging economies that have an abundance of skills. They offer IT and other services at significantly low costs compared to other countries. This has played a critical role in making emerging economies significant destinations for outsourced work. The governments in these countries such as China and India have taken the initiative by encouraging their citizens to establish outsourcing companies (Yeats, 2001). Benefits such as tax breaks act as an incentive for the development of these institutions.

This has made emerging nations key beneficiaries of outsourcing because of their availability of cheap labor, high skill levels, and an appropriate environment for attracting FDI. Most of the clients for outsourced services are in advanced economies such as Germany, the UK, and US. Labor cost arbitrage due to the differential is the main aspect influencing outsourcing from these economies. The factors that influence the outsourcing of IT and other knowledge-based services also differ significantly from manufacturing. Different industries have varied factors and roadblocks that may influence their uptake of outsourcing activities. The factors influencing outsourcing among companies in the same country or region also vary considerably compared to offshoring across regions. This means organizations in emerging economies have to be effectively apprised with information on the quality of services provided as well as other factors that influence their decisions (Fowler & Jeffs, 1998; Ketler K. & Walstrom, 1993).

Benefits of IT Outsourcing

The main reason why organizations engage in IT outsourcing is that they can derive significant benefits that increase their competitiveness and productivity. Arguments on core competencies, comparative advantage, and transaction cost economics indicate that outsourcing has a cost aspect (Lacity et al, 2009). Managers who are motivated by expectations to generate benefits such as cost reduction, flexibility, and high productivity often see it as a rational decision. Outsourcing provides a significant opportunity to control costs by enhancing flexibility. This is because they can purchase IT capacity as required by their operations. Outsourcing companies have economies of scale and scope because they specialize on particular services or areas (Janko & Koch, 2005). This enables them to provide services at significantly lower costs compared to the cost incurred by their clients in doing the same in-house.

Outsourcing provides an opportunity for organizations to improve on their productivity by focusing on core competencies. They get access to a pool of highly qualified technical skills and knowledge for augmenting organizational gaps. The management of a company that outsources its non-core activities gets access to skills that enable the organization to enhance the productivity of its resources. This provides an opportunity for enhancing competitive advantage for the organization. This is because the organization combines in-house skills with those of the outsourcing vendor (Casale, 2001). Outsourcing provides significant benefits to the overall business performance through process improvisation and customer satisfaction.

The different studies on the benefits of outsourcing indicate that it is meant to provide tactical, strategic, and business benefits. One of the main benefits is flexibility because it enables the transformation of fixed to variable costs. This presents benefits that enable organizations to focus their activities to the benefit of customers and creation of value (Fisher et al, 2008; Yang & Huang, 2000). Some of the tactical and strategic benefits of outsourcing include efficient management of organizational knowledge. Improvisation of IT, business processes, and innovation provides benefits for organizations that enable them to meet customer demands effectively.

Risks of IT Outsourcing

Outsourcing is a highly lucrative business process because of the benefits it confers to them. It is critical to consider that the high payoff associated with outsourcing also involves risks that may hinder success. The growing trend of outsourcing involves a growing practice in terms of scope and nature. This situation presents a risk that client organizations face because of their reliance on the vendors for services. The client firm may become over reliant on the vendor of outsourcing for IT or other business needs. This over reliance is negative because it leads to the client organization failing to get the benefits of outsourcing (Duhamel, 2003;). This risk is exacerbated by the inability or unwillingness to provide the level of quality required. This leads to the client organization failing to get the benefits of outsourcing because of quality inconsistency (Marin & Verdie, 2003).

Another risk of increasing IT outsourcing is that the client firm may lose core competencies in the field. Organizations outsourcing processes or IT expose themselves to the risk of losing essential internal competencies, cross-functional skills, or innovation capacity. The client organization may also lose control over the processes or the vendor thus reducing its ability to meet customer needs. Engagement in an outsourcing contract also develops problems associated with adverse selection and agency theory. Adverse selection, failure by the vendor or low quality services can increase the complexity of business management. This may defeat the rationale of outsourcing because it makes business difficult for the client. A study by Rouse and Corbitt (2003) showed that management of vendor relationships is one of the main risks associated with outsourcing. Poor management of these relationships can result in reduced realization of the expected benefits and may damage the client organization.

Banking and financial services institutions have an additional set of challenges associated with the regulatory environment (Jinnan & Hualiang, 2010; Puga & Trefler, 2002; McLaren, 2002). They have to consider the legal obligation for services and information as well as reputational risks for issues such as lost data or poor service quality. Confidentiality and data integrity issues may arise with IT outsourcing in commercial banks (Gewald & Franke, 2005). These risks may result in many financial institutions shying away from outsourcing their IT because they represent very heavy potential losses. These risks span the wave of outsourcing from ITO to BPO and KPO, but the degree of impact from each factor differs based on the type of outsourcing and the organization.

Theoretical Models Applied In Prior Research

Prior research on the factors influencing outsourcing decisions in different organizations have focused on management attitude towards outsourcing. The perceived risk theory (Peter & Micheel, (1976) has played a critical role in determining such studies. Other decision theories that have been used in assessing decision making regarding IT outsourcing include resources theories and innovation diffusion theories. Cost-risk analysis and Delphi model expert opinion have been applied in prior studies on the decision-making process involving outsourcing activities. Four theoretical constructs based on perceptions have been applied to conceptualize different factors that influence outsourcing decisions. The Jain and Natarajan (2011) study used four theoretical constructs of perceived benefits, perceived roadblocks, perceived risk, and perceived criticality.

Research Methodology

This section of the paper highlights the strategy applied in addressing the research questions by collecting and analyzing data. The research methodology shows the participants of the study as well as the data collection and analysis plans. The study is designed qualitatively because it relies on the development of a new decision-making model addressing influential factors. The qualitative study relies on in-depth interviews that seek to understand the factors influencing management decisions in commercial banks regarding IT outsourcing.

Participants

The participants for the study are Chief Information Officers (CIO) from major banks in China. The focus on CIOs is because they are involved in decisions regarding IT, which makes them appropriate for this survey. The study focuses on major banks in China because they have considerable IT operations and they would benefit the most from outsourcing. This strategy aids in assessment of the political economy in China in order to develop decision models that fit into the environment.

Data Collection Plan

The data will be collected using open-ended interviews that will be conducted on CIOs in major Chinese banks. The interviews will be conducted face to face in order to provide opportunities for getting additional information. The respondents will be selected using convenience sampling and will rely on getting qualitative data from a small sample of CIOs. The respondents selected will be given an opportunity to expound on the questions asked in order to provide qualitative information on decision-making regarding IT outsourcing.

Data Analysis Plan

The data collected from the interviews will be coded in order to prepare it for analysis. This will make it possible to assess the responses and analyze them according to the model selected. The responses will be coded to show the categorizations of perceived risk and benefits from the respondents.

Anticipated Findings

Anticipated findings from the study will be beneficial to medium-sized commercial banks in China. They can use the results of the research to evaluate their situation before making outsourcing decisions. This will aid them in developing a strategy to avoid undesirable consequences and costs. Development of a decision model for assessing outsourcing strategies will help banks to gain a competitive advantage over their competitors.

IT outsourcing vendors can also benefit from the findings of the study. Knowing what the customers need is a fundamental requirement for any business. IT outsourcing vendors will gain information how to attract the proper market segment and develop efficient products. This is especially beneficial for foreign vendors because they will gain an understanding of local preferences and risk endurance. The government and regulators can also benefit from the findings of this research by gaining insight on the deficiency of regulations implemented.

Limitations of the study include the use of a considerably small sample. This may reduce the reliability of the data and its generalizability in the population. Another limitation is that institutional information is unreliable. For instance, data from the banking industry indicates that Chinese Banks are performing brilliantly, but the market doubts the accuracy of these figures because of the institutional ineffectiveness of poor information and regulation (The economist, 2011).

Summary

This study will focus on the decision-making processes and models considered by bank managers in developing IT outsourcing strategies. This is based on the increasing use of IT outsourcing in the banking and financial services industry in order to meet customer demands. The research objectives of this study are to determine and assess the potential risks for Chinese commercial banks that want to engage in IT outsourcing activities. It also seeks to assess the key factors that Chinese commercial banks consider in their IT outsourcing strategies. It also focuses on the strategic model, as well as the criticality of outsourcing to financial institutions and management attitudes. The study utilizes two constructs to assess decision-making models on IT outsourcing in commercial banks, in China. The constructs proposed for the study are perceived benefits and perceived risks of IT outsourcing. The study is accomplished using a qualitative study design that utilizes face-to-face interviews to collect data. The data will be coded and assessed using the two constructs of perceived risk and benefit in order to develop a new model.

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Is It Worth Not Outsourcing Information Technology and Keeping Operations Domestic?

The report on the importance of IT outsourcing asks the question is it worth not outsourcing information technology and keeping operations domestic and then answers best possible solution of it. The outsourcing of information technology is associated with various issues in the implementation of IT outsourcing but it has achieved highest level to increase the competitiveness of the user or client organizations to reduce costs, increase their learning and knowledge and improve their business efficiency due to best quality services from the outsourced vendors. In the global commerce and competition, IT outsourcing has been highly effective and useful due to cost efficiency, productivity, learning and experience and the development of IT knowledge. The report also described Singapore growth in IT diffusion initiative by the central government which has contributed greatly in meeting their global IT business needs and increasing the future competitiveness and economic development of the country. The outsourcing of information technology in the emerging global market and throughout the world has contributed greatly in achieving short-term and long-term business objectives of the user organization in their relation with service providers.

Introduction

The outsourcing of information technology has become a global phenomenon and various user organizations prefer to outsource their IT functions despite keeping operations domestic. It is worth to outsource information technology despite some contractual and operational level deficiencies. The report identifies the global commerce and competition and how IT outsourcing has contributed greatly in meeting business objectives of user or client organizations to achieve competitiveness in their business operations and administrative functions at lower costs and highest level of efficiency. The report describes various aspects that contributed greatly in the expansion of IT outsourcing and giving it worldwide popularity among top business organizations. IT diffusion model in the Singapore context, development of IT outsourcing in the emerging markets, management of IT outsourcing in the global firm, and outsourcing of information technology worldwide has become so popular that large numbers of business organizations now depend in outsourcing the operations of their business projects. The report identifies that how business organizations have achieved efficiency, competitiveness and excellence in their business operations by adopting IT outsourcing and preferring to get the development of their business projects from outside their regional territories from experts anywhere any time in the world. Trends in IT outsourcing has increased in the recent years with increased level of communication and transfer of information across various organizations in no time and at no costs. Since 1950s, business organizations have adopted IT outsourcing due to their associated benefits like save in their operational costs, improvements in strategic performance of businesses like applications development, programming, development of desktop applications, telecom management and management of operational systems of the organizations.

Global Commerce and Competition

In the global commerce and competition, the outsourcing of information technology has achieved considerable growth among various business organizations around the globe. The report identifies is it worth not outsourcing the information technology and keeping operations domestic and suggests possible solution of it. The outsourcing of information technology is associated with some client related problems that are most common in the process of outsourcing information technology but overall outsourcing of IT proved to be highly effective and useful for various clients worldwide. Some problems in IT outsourcing include not understanding the post-contractual processes and decisions, receiving no support from client leaders, poor mutual understanding in different IT outsourcing contracts at their implementation level, lack of retained or governance team or one that is too small, the retained may not have the right skills required for the new roles, lack of losing key talent or poor knowledge transfer, inability to meet pent up demand of their services, end-user resistance to sometimes adopting new methods, issues of cultural clash between the client and the service provider and such a change does not last long. But despite all these managerial and implementation issues in the process of IT outsourcing, it is worthy to outsource information technology and not to keep operations domestic and client or user organizations should get the benefits of outsourcing with the development of their IT functions with best quality at reduced costs (McCray, 2008).

In the global commerce and competition, outsourcing of information technology is highly effective and useful for user organization and organizations are enjoying cost efficiency, productivity, learning and expertise in the latest software and IT development knowledge. There is no need to keep the operations domestic when there is such a huge opportunity available due to globalization and increased success of IT outsourcing globally. Outsourcing is based on the idea of hiring someone for the development of a specific job that is impossible to do within the regional or domestic boundaries. In business, outsourcing can be found in different industries, whether they are bigger or smaller, simple or complex. During the 1900s, the main objective of the outsourcing was to get the jobs done on labor intensive tasks and doing the business activities outside the core competencies of the user organization, such as outsourcing payroll development system of the organization, printing press outsourcing, inventory system outsourcing, ERP system outsourcing. Outsourcing in the information technology is increasing over the period of time and user organizations are outsourcing certain technical functions to reduce costs and to enjoy quality services out of their territorial boundaries. As the technology is continuously increasing, more sophisticated functions of the information technology firms are being outsourced. Like other utility providers, the new forms of outsourcing also assume to take the responsibility of some highly technical jobs, on behalf of their customers, to make sure the delivery of new services to ensure excellent performance, availability and scalability of the outsourced jobs (Kathawala, Zhang and Shao, 2005).

In global commerce and competition, outsourcing of information technology has become very famous among potential business organizations. Many large organizations have also outsourced some of its information technology functions to the service providing companies worldwide. Due to the popularity and the benefits they enjoy from IT outsourcing, they have now started to outsource all of their information technology functions and business operational activities. Different factors have contributed greatly in the evolution of IT outsourcing including reduced costs, enhancements in their functional productivity, higher quality of delivered IT work on various business functions, high level of customer satisfaction, time to marketing, and management ability to focus on other areas of the some of the major benefits of outsourcing. However, IT outsourcing is also associated with some challenges and risks that’s why it is examined whether or not user firms should outsource their functions and keep their business operations domestic. The outsourcing of information technology is based on the delegation of IT related activities that are associated with decision making, business processes, internal and external activities of the services, effective management and administration of activities according to agree upon deliverables, performance standards and outputs by setting up contractual agreements in between vendors and user organizations. But outsourcing is associated with some hidden costs, diminished service levels, unexpected service levels and outcomes. Despite these hidden costs and diminished service levels, various business organizations prefer to outsource some or all of their information technology functions to get excellence in their business operations and reduce their costs (Dhar and Balakrishnan, 2006).

Singapore and its Model for IT Diffusion Initiatives

Singapore and its model in information technology diffusion give best example of how outsourcing and globalization of IT functions became popular and essential among various business organizations in the world. Singapore is the major hub in Asia in the areas of manufacturing and services sector, it has improved the future competitiveness and economic development which is significantly affected due to the emergence of IT outsourcing and development of e-commerce globally. E-commerce development in Singapore is considered to be highly important from international comparative perspective due to several reasons. Firstly, Singapore is the first country in Asia that was targeted information technology as the strategic sector to promote economic development of the country during the period of 1980s. Singapore has also developed highly advanced ICT infrastructure in the country to meet the global demands before the arrival of e-commerce and internet in the country. E-commerce has represented a disruptive radical technological change and it has given new dimension to the outsourcing of information technology and other growth in the IT functions. Secondly, Singapore has achieved considerable economic growth in the country and become a hub of business activities in the Southeast Asia due to their strategy to attract foreign direct investment and to leverage their technology transfer and to considerably develop their local industries at the competitive level by supplying components and services to meet their customer needs (Wong, 2001).

IT diffusion model in Singapore was adopted in the early 1990s to prepare the country for the next phase of its future development. IT diffusion was known as IT2000 in which information technology resource were used throughout the country to give considerable development the e-commerce and IT outsourcing in the country. The Ministry of Education developed IT Master plan in the early 1997 to revolutionize the learning process in the country. The master plan was not only targeted to increase the learning of individuals to teach computer literacy and information technology but to increase the linkage between learning institutions in IT and the world around it to encourage creative thinking and to generate innovative process to promote education and administrative excellence in the country (Tang and Ang, 2002). The diffusion of information technology was broadly divided into two main levels including macro and micro levels. The macro level model was focused to aggregate various numbers of adoptions considering the user population in the entire diffusion process based on adoption, the numbers of adopters at a time and peak level in adoptions. Users are connected by some social or communication network in this model which allows items to be diffused using the neighboring adopters. The micro-level diffusion was based on modeling each user in their local adoption decisions and in the development of this model, complete knowledge of user to user relationship is essential and the knowledge of influential probability between the two neighboring users. In the development and promotions of IT outsourcing and e-commerce, the diffusion of IT model in Singapore has played a very important role in the Southeast Asia which influenced the other countries to increase their attention on the development and excellence of information technology and to grow their businesses significantly (Luu et al., 2012).

Emerging Markets and their Aspects in IT Outsourcing

Emerging markets are those markets where most of IT outsourcing profits is made and investing consultants help emerging nations to privatize their telecom sector. Such an investment arrangement in the telecom sector can provide world’s best connectivity to the businesses that locate within the nation’s boundaries. Outsourcing is associated with assurance of technology connectivity in the areas where it provides low-cost labor worldwide. Outsourcing structure in the emerging markets worldwide involves entry modalities and government structure that range from full ownership to control without equity, and arm’s length relationship. Outsourcing is also determined as intermediating user organizational functions or transacting through a business contract or deal in terms of market based activities. The information technology market has grown rapidly in the recent years in the emerging markets of the world including the United States. The buying of IT outsourcing services increased from 54% in 2000 to 59% in 2005 and same trends are also reported in other emerging countries. There were some short-term and long-term factors behind the purchase of information technology services based on discrete or project based purchase. In the short-term nature of outsourcing, there was a need reduce costs of the projects due to the current economic conditions while in the long-term outsourcing, the capabilities of the organizations were increased to get an access to new technology solutions through IT utility services like website hosting. In order to know whether or not information technology should be outsourced and to keep the operations domestic, it is necessary to know what potential benefits are associated with information technology outsourcing. The IT outsourcing market is growing steadily in emerging market like China, India, and Brazil. The outsourcing of information technology reduces the operational costs of the business, increases knowledge and awareness of latest technologies and enhances customer satisfaction through best quality IT outsourcing services at lower costs. Both the short-term and long-term factors are responsible for the continuous increase in information technology outsourcing. Short-term factors of IT outsourcing are associated with the need to reduce costs due to economic declining conditions of the world and long-term outsourcing increases the capability of delivering continuous access to latest technology solutions through IT utility (Liao and Reategui, 2002).

In order to examine the research question to know is it worth not to outsource information technology and keep operations domestic, outsourcing of information technology in emerging marketing like Asia, the Middle East, South Africa and Africa shows great appeal for many organizations to outsource their IT projects and to get quality work in limited resources. The outsourcing of information technology in emerging markets means companies develop partnership with service providing companies that establish legal and physical presence in the entered countries, setup necessary systems and processes and develop strong net of local relationship. The outsourcing of IT projects in the emerging markets indicates that multinational and domestic businesses are facing almost similar conditions in these markets, while their outlook and geographical condition differs. Outsourcing gives speed and scalability to the information technology projects as different companies in the developed world can outsource their business requirements to those who are well established service providers than building up own infrastructure (Data, 2013). When user organization outsource their information technology projects to service Provider Company in another country, it gets cost advantage both in labor and raw materials, and achieve highest level of productivity due to low wages benefits. In outsourcing IT projects in different areas, the user organization enjoys highest value of chain integration as it gets extensive integration with suppliers and customers. The more integrated the company is with its suppliers, the more benefits it can develop from such a relationship and strengthen their supply chain management against their competitors and achieves excellent position at their local markets. IT outsourcing also offers opportunities for retail market operations where user firms can accelerate their operations due to modernization, foreign investment, consolidation and privatization. Outsourcing of information technology becomes worthwhile for user organization depending on many factors that influence decision of IT outsourcing based on financial, resource, strategic, managerial and cultural concerns. All these broad categories suggest that outsourcing of IT projects is based on series of forces that work either in favor of outsourcing or against outsourcing. The interaction of these forces finally mold management decision making to outsource or not in the emerging markets. All these factors suggest that outsourcing of information technology is beneficial to the user organization that reduces its financial costs, improves financial index performance, improve cash flows, leverage financial strengths, get an access to external expertise and technologies that are not possible without outsourcing of information technology, build mergers and acquisitions and business transitions, reduce project delivery lead time, enhance business focus, ease globalization, build strategic partnership with experts, ease performance measurements and gives overall solution to the user organization to get best services at lower costs (Liao and Reategui, 2002).

Management of IT outsourcing in Global Firm

Management of IT outsourcing is based on the management of workers who work for the development of desired technology abroad. It is not an easy task to do because it is associated with cultural differences to manage in outsourcing the IT projects. The outsourcing activities of a firm have become a very important issue in the modern day world with politics, welfare economics, international business and business management. The management of IT outsourcing is not a new phenomenon and getting development of information technology projects in locations other than the country in which they are used by the user organization. The world has seen dramatic increase in the outsourcing of information technology in which domestic firm sends some part of value added activities, whether the development of payroll systems in IT, the development of inventory or ERP systems, or software writing developed for another country continuing to sell its output into the domestic market. It helps domestic customer to transfer money to foreign producers other than local by draining liquidity out of the domestic economy. The phenomenon has developed the management of global firm in IT outsourcing to generate value for product design, manufacturing, support of services sector, services support, distribution services, customer services and the development of different software development projects. All these activities are performed in multiple differentiated locations all over the world by using intra-firm trading activities to tie up operations into an efficient whole, and then selling unique mix of goods and services at differentiated market places around the world and enhancing the position of these goods and services to original home market (Tallman, 2011).

The management of IT outsourcing in the global firm has led to significant increase in the exploration of new knowledge and expertise, cost savings and improvements in the bottom line. Some companies have even achieved greater returns by outsourcing their projects worldwide and using their global partners to drive innovative strategies to develop new software, innovative products and services in the information technology, faster service time-to-market and their successful entrance into new markets. It has made considerable shift of traditional outsourcing to the collaboration globally and getting competitive advantage over time without any need to be restricted their operations within the domestic markets. The outsourcing of information technology is worthwhile to the business organizations as it has increased their efficiency, increased global technology standards with open architectures, and developed a powerful collaboration tools and infrastructure by outsourcing their IT projects. Furthermore, the global collaboration of the information technology has aligned strategic development, organizational design, product development, program and project management, platform specification and intellectual property management of the organization involved in the outsourcing of their information technology projects at the global level (MacCormack et al., 2007).

It is Worth Outsourcing Information Technology?

In today’s global economy, the outsourcing in information technology has become very common among businesses operating in this line. Some large business organizations are successfully outsourcing their information technology operations to reduce costs. The report identifies is it worth not to outsource information technology and keep operations domestic. But the outsourcing of information technology projects have increased in the recent years and business organizations prefer to outsource their projects meeting their business needs. Different factors have contributed greatly in the outsourcing of IT projects with reduced costs, enhanced productivity, higher quality of IT development, higher level of customer satisfaction, time to market and focusing on the main areas of the benefits of outsourcing. At the same time, outsourcing of IT projects pose some risks and challenges to business owners that’s why report indicates that operations of information technology should be done domestically. The outsourcing of information technology is based on delegation of some or all IT tasks to professionals in other countries. These tasks are offered to them to enhance the quality of work and considering the IT related activities in business processes, internal activities, and services to external providers who manage and administer these activities according to already decided deliverables and performance standards. But considering some risk factors in IT outsourcing it is essential that organizations should be careful in planning of what knowledge to be kept in-house and what to be outsourced. Companies can also face some other risks to outsource information technology in the formulation of scope and decision making on budget and schedule estimates (Dhar and Balakrishnan 2006).

Business world has shrunk in the recent years and same trends of outsourcing information technology have also been adopted by the IT industry unlike traditional models of economy. The level of communication has increased in the modern world and it is now possible to transfer the information across the globe in no time and at lower costs. It is not essential to produce goods at the site of consumption as the consumer of information not cares where the information is generated and how much time it will take to be on time. The non-tangible nature of the information technology has made this business highly attractive to be outsourced to highly qualified professionals. Is it worth not outsourcing information technology and keeping operations domestic is not good in the modern world because IT outsourcing is associated with knowledge and learning produced through outsourced activities and business processes. In outsourcing, the property or decision rights of a user organization over information technology are transferred to an external organization. The IT outsourcing is based on high expectations of the user organization but it is also associated with some bitter disappointments. The outsourcing industry has shown considerable increase in the recent years and worldwide spending on the services of IT outsourcing have reached to a milestone of $64 billion in 2001 and increasing with a constant rate. But despite these growth patterns, both the user organization and the vendors are struggling to realize about the value proposition of outsourcing as vendors deliver economic and management benefits to their customers outweighing contractual costs (Levina and Ross 2003).

Since the early 1950, business organizations are using outsourcing of information technology (IT) to get the benefits of best services from worldwide at reduced costs. Early period of outsourcing was associated with the extraordinary benefits of saving operational costs, but in the recent times, the motivation to outsource IT projects has been shifted to strategic business performance improvements. Large numbers of IT functions has been outsourced like programming of business projects, applications development, desktop applications development, telecommunication management and operational systems. The associated value of knowledge and learning in outsourced activities has given new prospects to the outsourcing industry that has grown with a rapid pace in the recent years. In performing some activity, business organizations learn more about the development of some specific product or service. It gives greater knowledge to the business organizations to be competitive with their competitors after getting the development of their outsourced projects at reduced costs with extraordinary benefits. But at the same time, outsourcing of IT projects cause some severe problems to the pervasiveness in IT functions of most of the business organizations. The lack of appropriate IT resources that the user organization outsources may reduce the capability of the organization to compete well. When some particular function, knowledge or activity or non-core IT activities are outsourced, they may lead to the firm’s capability of outsourcing wide array of other related competencies, or deteriorate some of retained competencies and activities of the organization, particularly if the information technology projects are outsourced among large numbers of subunits considering the business needs of a user organization (Singh and Zack 2006).

The business outsourcing can be done anywhere at any time; whether business projects are small or large, simple or based on huge complexity. During the period of pre-1900, outsourcing was only focused on the production of labor intensive activities and business activities that were performed outside the core competency of the organizations, like the outsourcing of the printing press, janitorial work and food preparation, and recruitment of seasonal migrants’ farm workers. In the industrial society, outsourcing was expanded to the manufacturing industry to get the reduction in costs after great depression period in Western economies. Most of the large business organizations outsourced their manufacturing operations like outsourcing of automobile to different producers and metal, glass and rubber products. Latest developments in the considerable growth of information technology (IT) have given companies new opportunities to outsource some of their technical functions that are beyond their technical competencies. For example, in the earlier outsourcing of information technology, payroll processing was outsourced by user companies to vendors worldwide. When technology increased considerably worldwide, other information technology operations and functions were also outsourced like data management, document storage functions and technology and maintenance of their platforms. Like other established utility providers like energy providers, the new outsourcers would be responsible to offer best services at reduced costs on behalf of their customers, and to manage the delivery of new services while ensuring their availability, scalability and performance. Therefore, companies have adopted global outsourcing strategies in the information technology because they want to build sustainable competitive advantage and competitive flexibility in their worldwide operations (Kathawala, Zhang and Shao 2005).

The strategic value of IT outsourcing is highly focused on the knowledge and learning of information technology and reduction in costs to get competitive advantage over others. It is worth outsourcing information technology due to highest level of productivity and information sharing organizations have achieved over the years with no need to keep their operations domestic. The business activities that contributed greatly in the business growth of user organizations and service providers include the production of specific outcomes due to IT outsourcing, knowledge sharing that can be viewed as a platform from which many activities and outcomes can be derived and increased level of learning is enjoyed. Outsourcing maintains and increases the level of knowledge and learning associated with the activity which makes a profound impact on the long-term ability of the organization to compete than merely outsourcing its activity itself. But some organizations do not take knowledge and learning into considerations with outsourced activities as they find it highly difficult to find out the economic or strategic value of such intangible assets. Outsourcing of information technology is associated with some unique issue like the pervasiveness of IT functions in most user organizations. When executives consider it non-strategic in nature, they find that information technology is a source of strategic innovation and business strategies can be greatly influenced by emerging technologies that are only possible through the outsourcing of information technology. But the lack of appropriate IT resources that are outsourced by user organization can limit their ability of competition. The organizations face the deterioration of their retained competencies and activities, particularly in the areas of information technology resources that are shared among large numbers of subunits and affect the shape of most organizational processes (Khidzir, Mohamed and Arshad, 2013).

Conclusion

The report has identified that despite various issues in IT outsourcing, the outsourcing of information technology has become very popular throughout the world. The report has identified various points like the global commerce and competition, IT outsourcing in emerging markets, Singapore IT diffusion model, and the overall development of IT outsourcing in the world. The report has answered the question on IT outsourcing ‘is it worth not outsourcing information technology and keeping operations domestic’ in a way by highlighting all important points that determined the importance of outsourcing some or all functions of information technology to get business competitiveness and efficiency through reduced costs, best quality of products and services developed due to IT outsourcing and getting competitive edge over their competitors in this world of competition in information technology.

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