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COPYRIGHT 2006 Society for the Advancement of Management
Business and government, increasingly try to improve their efficiency and effectiveness. In many cases, they use information technology (IT) for solutions, such as the design and implementation of information systems. Organizations may develop these systems internally or externally. The motivation to outsource systems development may be driven by internal budget constraints or lack of the necessary skills in-house. Usually, companies expect to get the work done at a lower cost. Consequently, outsourcing has become increasingly popular with U.S. businesses.
Offshore outsourcing services will grow substantially over the next several years. Vijayan [2003] projects outsourcing growth at more than 20% annually, pushing it from $7 billion in 2003 to $10 billion by 2005 and $15 billion by 2007.
Basic IT functions, such as programming and testing, are becoming commodity tasks. Businesses will send this work offshore, and U.S. information technology personnel will focus more on systems architecture, design, and integration. However, shifting work offshore requires increased management effort for both the system design project and the outsourcing project.
Benefits and Risks of Offshore Outsourcing
Why has overseas outsourcing grown at such a significant rate? For many companies, costs are a major factor. McAulay et al. [2003) surveyed multiple organizations regarding the greatest and least important outsourcing benefits. IT managers reported that enhancing competitiveness, creating strategic advantage, improving service quality to customers, and increasing access to expertise were primary benefits. Non-IT managers reported that improving service quality or delivery to customers, reducing operations costs, and reducing workforce costs were benefits. Besides lower costs, offshore outsourcing can provide expertise, availability, and responsiveness to business needs.
There are also significant risks or concerns with outsourcing information systems. Davison [2004] reports that the Metagroup identifies a top 10 list of risks. Cost savings may be only 15-25% during the first year, although longer-term process improvements may further increase savings and the quality of IT services. Data security is the second major risk, and most countries do not have the protective practices that the U.S. and Europe require. Other risks include lack of process discipline, loss of business knowledge, vendor failure to deliver, scope creep, government oversight and regulation, culture adjustments, turnover of key personnel, need for knowledge transfer, and political instability of foreign governments.
IT outsourcing does not always achieve desired results. A study of 116 outsourcing decisions found that 38% of outsourcing arrangements were successful, 35% were failures, and 27% had mixed results relative to cost, quality, flexibility and other considerations [Kern and Willcocks 2003]. Deloitte, Touche, and Tohmatsu (2003) report that "In the real world, outsourcing frequently fails to deliver its promises." In their survey of outsourcing companies, they found that 38% of the participants paid hidden costs, 31% stated that vendors became complacent once contracts were in place, 20% experienced greater-than-expected employee turnover, and 44% found that vendors did not have the capabilities to provide the expected level of quality and cost savings. They concluded that vendor complacency, employee turnover, unsatisfactory delivery resources, and unbalanced contracts have prompted organizations to increase their demands, and vendor management continues to pose challenges. They believe that "50 percent of outsourcing in the near future will be successful, with the failures stemming from clients that don't know what they are doing, don't understand outsourcing, or don't understand their own business. Therefore, they don't know how to structure and manage the deals."
Why are the results so inconclusive, especially with regard to cost savings? Part of the answer may be the failure to link closely the outsourcing project with the overall systems development effort. This article will focus on the offshore outsourcing project and its impact on the typical information systems design by describing the links between the two projects and explaining the interrelationships affecting the planning, scheduling, and successful implementation of the system design effort.
Project Management of an Outsourced Information Systems Project
Project management can reduce risk, capture the total cost of the project, enhance quality and manage the time elements and resource constraints, and increase the likelihood of meeting target dates. Project management enables managers to focus on other critical success factors, such as vendor capability. The overall project involves managing both the offshore vendor management process as well as the systems development life cycle (SDLC) of the IT project.
The SDLC is a structured approach for developing information systems. It begins with the planning phase and builds toward a successfully implemented information system. There are several models for an SDLC framework, such as the waterfall or structured approach, prototyping, spiral development, and extreme programming (Marchewka 2003). Table 1 provides a brief summary of each method, along with the potential strengths and weaknesses. The SDLC used in this article will be a version of the waterfall (structured) approach that includes the following phases: planning, analysis, design, project development and management, testing, implementation and maintenance.
Figure 1 is a graphical representation of the SDLC, the offshore vendor management process, and the links between them. Each link is described more fully in the...
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