Trends in Information Systems Outsourcing

INTRODUCTION Today, the outsourcing of selected organizational activities is an integral part of corporate strategy. Historically, third party participation in a company's business has generally focused on the manufacture of parts and components and the provision of auxiliary services such as legal and travel services. A more recent phenomenon, however, involves third party participation in the management of the information systems (I/S) function. An increasingly competitive and cost conscious environment has caused organizations to reevaluate their approach to the management of many staff functions, including information systems. The outsourcing of information systems is a growing trend that has piqued the interest of companies such as IBM, EDS, and Anderson Consulting, among others.[1] Estimated revenues for the outsourcing industry vary from $7 to $12 billion for 1992, growing to as much as $38 to $50 billion in 1995.[2] In the United States alone, the industry is predicted to grow at an annual rate of 20 percent.[3] The outsourcing of information systems is also gaining momentum globally. In a 1992 survey of European information system executives, 71 percent indicated that they were planning to outsource some operations. This represented a doubling of interest from the previous year.[4] The evolving global economy dearly has helped stimulate this trend. Organizations typically have unique I/S needs when clients are located in a variety of foreign countries. At the same time, the systems that tie these organizations together often face an array of political, cultural, language, and logistics challenges unique to different host countries.[5] Consequently, the use of outsourcing may offer an effective strategic alternative to system development in situations that tend to inhibit satisfactory development and operation of such systems. Nevertheless, the effects on organizations implementing an outsourcing strategy are important, if not critical, and are still being evaluated. Since information is a principal resource in most businesses today, the consequences of external control of a firm's information system must be considered carefully. The formulation and management of the service contracts with information services suppliers are critical issues. This article reviews the trends in information systems outsourcing. A framework for evaluating the outsourcing decision is analyzed, and the implications for organizations making such decisions are discussed. I/S OUTSOURCING Outsourcing is defined as the procurement of products or services from sources that are external to the organization. For services, this usually involves the transfer of operational control to the suppliers. In the current environment of right-sizing, with a renewed focus on core business activities, companies can no longer assume that all organizational services must be provided and managed internally. Competitive advantage may be gained when I/S products or services are produced more effectively and efficiently by outside suppliers. The advantages in outsourcing information services can be operational or strategic, or both. Operational advantages usually provide for short-term trouble avoidance, while strategic advantages offer long-term contributions in maximizing opportunities.[6] The decision to outsource a part or all of an organization's I/S function is a complex issue facing managers in the 1990s. Outsourcing certain aspects of the more general information technology (IT) services has been a reality for the past four decades. These traditionally included on-site facilities management, remote data processing, maintenance functions, time sharing, and contract programming.[7] Such activities either supplemented or replaced in-house services and were under the control of I/S managers. The criteria for outsourcing decisions were also simple. Smaller organizations outsourced when they could not afford the required systems. …