Abstract
The information technology industry is an industry in turmoil. Today, the industry faces a significant number of companies that are choosing to outsource technical support. This outsourcing has caused changes in both the structure of these companies and the local markets in which they reside. This paper is an examination of those changes and the impacts that outsourcing has had on the information technology industry.
In the western world, there is a debate raging between those who support outsourcing and those who claim it harms the economy. Ever since the American market crashed in the post-September 11th world, companies have been looking for ways to cut costs; one of the ways that they have done so is to outsource talent, particularly customer support and information technology (hereafter “IT”) talent overseas, particularly to nations that are less developed, like the Philippines, India, and Hong Kong (Azadinamin 2009). While both sides of the debate have a tendency to see the “answer” to the issue of outsourcing in absolute terms, the reality is that the impact of outsourcing on the IT industry has been mixed. The issue is much more complex than politicians and the media claim the issue to be.
Before discussing the details of the IT industry and the effects of outsourcing on that particular industry, it is important to first understand what outsourcing looks like in the context of the information technology industry. Information technology outsourcing can come in many different forms, and the details of each outsourcing agreement changes based on the needs of the company that is outsourcing talent (Haugen, Musser and Lovelace 2009). Haugen, Musser and Lovelace (2009) write that there are a plethora of reasons that businesses choose to outsource, and all of them are complex.
Haugen, Musser and Lovelace (2009) give a structural overview of the process of outsourcing IT professionals in the American corporate world: first, two organizations enter into a mutual contractual agreement in which one company agrees to pay the other for information technology services. These services may include customer service help, technical support, and data storage; the details of these agreements change based on the needs of the company in question (Haugen, Musser and Lovelace 2009). Haugen et al. (2009) write that one of the main reasons that companies choose to outsource talent-- particularly IT talent-- is to maximize the ratio of cost to performance in their core competencies (Haugen, Musser and Lovelace 2009). Information technology outsourcing may also be used, as are other types of outsourcing, to offset a shortage of skill or talent in a particular geographic locale (Haugen, Musser and Lovelace 2009). Although information technology talent is often outsourced to foreign countries, outsourcing can remain domestic as well (Haugen, Musser and Lovelace 2009). For instance, IBM has outsourced its IT personnel to Europe, rather than India or Southeast Asia (Barker 2014).
Outsourcing information technology talent allows companies to have greater control over their budgetary concerns; this is one of the primary reasons that companies choose to outsource information technology talent (Outsourcing.com 2014). Companies that outsource may choose to do so due to a lack of local talent, but the vast majority choose to outsource to maintain better control over their budget and to reduce costs. The Outsourcing Center provides a marketplace for companies interested in outsourcing; the marketplace is always busy, and has grown significantly in recent years (Outsourcing Center 2014). Bennedsen and Schultz (2003) note that a competitive market often motivates companies to outsource, although many companies will choose to do so regardless of the market; they write, “We argue that although outsourcing is more attractive when the private market is competitive, the outsourcing decision will be the same in a competitive as in a monopolistic market” (Bennedsen and Schultz 2003). They go on to claim that in the information technology sector, the greater budgetary control outweighs the risks of putting control of part of their company in the hands of a third party organization (Bennedsen and Schultz 2003). When a company chooses to outsource, they are necessarily abdicating some form of control; Bennedsen and Schultz (2003) postulate that the abdication of control is a risk that is outweighed by the benefits of outsourcing to a professional third-party source (Vitasek et al., 2012).
Similarly, outsourcing reduces the need for an organization to find, hire, and train staff; companies that specialize in information technology talent have already found, hired, and trained staff who are responsible for these tasks (Hira and Hira, 2005). Hira and Hira (2005) suggest that outsourcing allows organizations and companies to pay for the information technology services they need, in a cost- and time-effective basis; it reduces the need for those organizations to find staff or to hire them, and allows for a relationship with the third party that is managed on the needs of the company (Hira and Hira, 2005).
Outsourcing-- particularly outsourcing IT talent as a result of globalization-- has fundamentally changed the business world. Some claim that outsourcing is a good thing for businesses, and therefore must be good for the local economy; without a doubt, the greater budgetary control gives companies and corporations much more flexibility in terms of the amount spent on information technology services. Gorg et al. (2007) note that there are distinct effects on the microeconomy of a region whenever outsourcing is employed; they also note, importantly, that these impacts are mixed (Gorg et al. 2007).
Indeed, the empirical evidence available seems to support this claim that greater budgetary control; Azadinamin (2009) writes: “The proposition of added value by outsourcing IT has been supported by both empirical evidence and common sense, and thus, managers must take steps to review internal IT activities and seek candidates for outsourcing. The empirical evidence is shown by monitoring the share prices of the given companies over a certain time period starting 40 days prior to the public press release on outsourcing until 40 days after. The evidence shows that this group of companies outperforms the market in the same period by almost 6% over the 80-day period” (Azadinamin, 2009). In short, companies that choose to utilize outsourcing show an increased performance in the market, likely because of the combination of greater budgetary control and the increased expertise available in information technology outsourcing firms (Azadinamin, 2009). Picard et al. (2009) also note that outsourcing can change the existing structure of the firm, making the rest of the labor contracts held by the firm more flexible and economically viable (Picard et al. 2009).
Although businesses clearly benefit from outsourcing, there are also arguments against outsourcing information technology talent. Because information technology talent is a form of skilled labor, removing these jobs from the geographical locale where a company is located may have a negative impact on the local economy as a whole. For instance, if Company A is located in California, and they outsource their information technology talent to Company B, located in India, all the skilled jobs that would have been filled in California are now gone; the individuals who would have filled these jobs have no recourse, because the jobs have disappeared (Hira and Hira 2005).
Wages are also affected when a company chooses to outsource its labor, whether it chooses to outsource domestically or globally. Hsu (2011) studied the effects of outsourcing on the wages of white collar workers, and writes: “ outsourcing decreases the wages of white-collar workers and the relative wages of white-collar workers to blue-collar workers in the outsourcing home country if outsourcing industries are blue-collar worker intensive compared with non-outsourcing industries. Scientists who conduct research and development always benefit from outsourcing” (Hsu 2011). Some skilled laborers, therefore, do benefit from outsourcing; scientists are given as an example in the Hsu (2011) study. However, Hsu (2011) does note that IT professionals are part of the group whose wages decline when IT is outsourced from one company to another.
Another often-undermentioned problem when it comes to IT outsourcing, according to Hira and Hira (2005), is the issue of security. Most companies store all their information digitally; information technology professionals, then, have access to huge amounts of information. This information may be sensitive to the company-- protected company secrets, for one thing or another-- or customer information (Hira and Hira 2005). When a company chooses to outsource information technology, their liability changes-- all of a sudden, there are more people involved in the security process, and there is more liability for the company who is employing the outsourcing company (Hira and Hira 2005). In the United States, this is a very complex area of the law; new laws and statutes have been considered in recent years as a result of these very real security concerns (Hira and Hira, 2005).
The information technology industry is certainly in transition, and much of this transition is as a result of outsourcing. Companies who choose to outsource often reap the benefits, but there is also a very real risk for companies that choose to outsource: they can maintain better budgetary control and flexibility, but they also may be putting their customers at risk based on what type of information technology they choose to outsource and the integrity of the third-party company that the IT talent is outsourced to. Although the effects of outsourcing on the local markets may be mixed, there are very good reasons for companies to choose to outsource their information technology processes outside the internal structure of the company.
References
Azadinamin, A. (2009). Does IT Outsourcing Benefit Shareholders? Evidence from the Market. SSRN Journal. doi:10.2139/ssrn.2017420
Barker, C. (2014). ABN AMRO signs multi-billion dollar outsourcing deal with IBM | ZDNet. ZDNet. Retrieved 3 December 2014, from http://www.zdnet.com/abn-amro-signs-multi-billion-dollar-outsourcing-deal-with-ibm-7000036318/
Bennedsen, M., & Schultz, C. (2003). Outsourcing, Market Structure and Elections. SSRN Journal. doi:10.2139/ssrn.480081
Gorg, H., Geishecker, I., & Munch, J. (2007). Do Labor Market Institutions Matter? Micro-Level Wage Effects of International Outsourcing in Three European Countries. SSRN Journal. doi:10.2139/ssrn.1048402
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Vitasek, K., & Manrodt, K. (2012). Vested outsourcing: a flexible framework for collaborative outsourcing. Strat Outs, 5(1), 4-14. doi:10.1108/17538291211221924
