Outsourcing and Technology

According to Olavsrud (2010), outsourcing can be described as the process by which an enterprise strategically utilizes resources that are obtained from outside to accomplish the tasks that would have otherwise been accomplished by its own resources. The practice is increasingly seen the best way for companies to meet their goal as it enables them to lower their costs while improving on the level of their customers’ satisfaction, besides improving both the effectiveness and efficiency. A number of reasons have been given for the increasing tendency of firms to outsource. Some of the factors include: the firm’s ability to reduce the cost and improve efficiencies, as the outsourcing firms spend more time concentrating on areas where they are competent. It also takes care of the unexpected demand variation and finally gives the firm advantage of utilizing high specialized knowledge. The practice has thus been on the increase since 1990s, as the corporations have increasingly been restructured and downsized (Senn & David, 1999).

The relationship between technology and outsourcing can be looked at in two different dimensions. These include both the effects that technology has had on outsourcing and how outsourcing has impacted on the field of technology, including the information and technology as a career. The present report seeks to present an in-depth analysis on how the two relates.

Impacts of Technology on Outsourcing

Apart from the above factors, outsourcing has increasingly been determined by technology. For example, Bartel, Lach & Sicherman (2009), while citing the theory of cost transaction, argued that whenever there is greater specificity of assets resulting from investments, firms normally reduce the level of the functions they outsource because of the investment expropriation. Equally, they quoted the property right theory, which points out that outsourcing usually generates a mutual benefit for both the contracting and contracted firms. It is this mutual benefit that helps enhance the relationship between the involved firms. This theory predicts that there is a close association between the intensity of technology and more vertical integration, especially among the industries specializing in production. On the other hand, the technology intensity, experienced in the industries specializing in supply, normally experiences less integration, especially in cases in which the measurement of technology is based on the intensity of R&D.

Another study also found that the diffusion in technology resulting from R&D is partly the cause of the observed growth outsourcing within the United States (Bartel, Lach & Sicherman, 2009). Apart from the technological intensity, another aspect of technology that is closely related to outsourcing is the expectation by most firms that there would be a technological change. This aspect has been found to have a major influence, especially at the stage when firms’ management is making decisions to either outsource production or not. Some studies have revealed that the rapid change in technology used by a firm increases the benefits that the firm may enjoy from outsourcing.

Bartel, Lach & Sicherman (2009) further explain that firms that do not avoid buying and adopting new technologies have incurred large costs in the provision of their services. Contrary to this, the firms which outsource avoid unnecessary costs because they are able to buy their inputs from those firms with the latest technology. This means that the cost that would have been incurred by any outsourcing firm in terms of money and time is reduced with the increase in the pace of innovations of the technologies used in production. From this fact, it is evident that it is cheaper to produce through outsourcing than lit would be to acquire and use the technologies to produce in-house. This explains why the rate by which firms outsource services has been on the increase in places where the entrepreneurs expect a change in technology (Bartel, Lach & Sicherman, 2009).

Effects of Technology in Making Decision aimed at Outsourcing Production

According to Bartel, Lach & Sicherman (2009), any decision aimed at outsourcing production is closely influenced by the likelihood of having a change in technology. They argued that in the event that a final good requires an advanced capital tool and labor to be produced and an entrepreneur has a choice whether to produce the input in-house or purchase it from another supplier in the market, choosing to buy the input from another supply in the market amounts to outsourcing its production. In this case, it would be more expensive for the firm to consider having the capital equipment installed then having their workforce trained in the use of equipment (Bartel, Lach & Sicherman, 2009).

In a case where there is a technological change affecting the whole sector from which the capital good is obtained by the supplier, like the introduction of a more advanced capital equipment for the use by manufacturers, the firm will have to make a decision either to invest in the capital equipment or outsource its production to a firm utilizing this new equipment in the production of the required final product (Bartel, Lach & Sicherman, 2009).

There has also been a possibility of having an increase in the relative cost that firms will have to incur if they chose in-house production with the increase in the frequency of the change in technology. This is based on the fact that the duration for which a firm will benefit from a particular fixed investment would be greatly shortened to offset the cost that the firm would have incurred if it had not considered outsourcing. This means that in such cases, outsourcing still remains the better option.

The effect of the arrival of a new technology in the market on outsourcing

Another situation in which outsourcing decision is primarily affected by technology is when there is an emergence of a new technology in the market. In such a situation, any firm settling on producing their goods in-house abandons the use of the new machine and instead continues with the use of the available initial technology which it had acquired. It could also consider purchasing the old technology if it had not bought one. Another common idea held by most firms is that adopting the new technology is never a guarantee to making profit. It can, however, be examined by comparing the amount that would be saved in case the firm considered outsourcing to the benefits which would have accrued if the firm considered buying the new technology (Bartel, Lach & Sicherman, 2009).

The Effect of Outsourcing on Technology

Just as is normally the case with other kinds of businesses, the technology has not been left behind. The move of various IT firms to outsource some of its services has led to a close relationship between outsourcing and technology. This has given birth to such terms as IT outsourcing, a phrase that denotes sub-contraction of all or a section of the functions relating to information and technology. Some of the functions that an IT-related organization can outsource include the maintenance of software, its development, and support. Normally, various enterprises do outsource such IT-related services because of their relatively cheaper cost as compared to having their own employees being involved in accomplishing the task, as this would require the building of a team to be charged with the management of IT.

The relationship between outsourcing and technology is not a new phenomenon. According to Olavsrud (2010), outsourcing has been practiced by IT-related firms right from the early part of the 1990s when business computing began. He notes that, as early as this time, there were a number of service bureau operations run by such vendors as IBM and Burroughs which were already established as hardware vendors. The practice of IT outsourcing has since increased because of the view that it helps improve the flexibility of business operations and reduce costs and management overhead.  

Most enterprises normally consider outsourcing their IT functions because of various reasons. These include the need to reduce cost as it improves the service provider’s efficiency, as well as enables it to enjoy the benefits that come with the provision of services on large scales. It also enables an enterprise to have the advantage of choosing and making use of some of the best IT skills from experienced experts. At the same time, it removes non-core business, while also helping in reducing IT infrastructural capital expenditure (Olavsrud, 2010).

However, the practice has not been without its drawbacks to the Technology-based businesses that are involved in it. First, Olavsrud (2010) notes that the IT-related enterprises involved in outsourcing part or all of their technology functions stop to enjoy full control over those services. Additionally, outsourcing minimizes the amount of flexibility that any technology-related entrepreneur can enjoy in the services that it receives from the contracted third party. Moreover, there is tendency for the morale of the employees of the contracting firm to taper off. In fact, Olavsrud (2010) rightfully notes that there have been cases in which the contracted third party comes with cultures that contradict those which have been guiding the operations of the contracting technology firm.

Outsourcing and the Functioning of the Technology Based Enterprises

On the one hand, outsourcing has enabled IT organizations to carry out some of their functions. According to Olavsrud (2010), any established organization with a major dealing in IT normally spends between 5 and 6% of the total budget on service outsourcing. This is irrespective of the size of the organization, a factor which has been deemed irrelevant in determining the benefits that result from outsourcing. However, there is an agreement that the practice tends to be of more benefit to SMEs. This is especially so to those SMEs whose IT organizations are still small or in cases where they are totally non-existent.

The particular IT functions that make outsourcing very useful to IT include: the operation of data center, recovery of disaster, and the website systems, which are also commonly known as e-commerce systems. Amongst all these functions, Olavsrud (2010) notes that the help desk, operation of the data center, e-commerce systems, and the desktop support remain to be the IT functions which are enjoying the fastest growth in outsourcing. In specific, the help outsourcing has been more useful to large organizations, while the services aimed at maintaining, developing, and helping the operation of data network among small organizations. However, the functions that have enjoyed much outsourcing is the development of application though it has, in the recent times, increasingly lost its ground because of the tendency by today’s IT organizations to reduce their project-based work.

Olavsrud (2010) argues that the relationship between outsourcing and technology is expected to grow even stronger in this decade as the findings have continued to show that a greater percentage of companies were planning to add on the amount of money they were allocating towards outsourcing as the economy improves.

According to Olavsrud (2010), the development and maintenance of applications have remained to be the IT functions which are most regularly off-shored. On the other hand, IT security and the other services that are aimed at recovering disaster are least likely to be contracted out to the third party. The two processes have therefore worked together in shaping the relationship between India, Eastern Europe, and Southeast Asia with the other parts of the world, since they are popularly known for their provision of offshore IT sourcing.

Outsourcing as a Cause of Changes in Information Technology

Another relationship between outsourcing and technology is found in the impact of outsourcing on the qualifications and training requirements of the technology experts. This is because of the various measures that any organization needs to take to enable it to be successful in the process of executing its IT outsourcing. The employees have to be equipped to create the required robust business situation that can enjoy the support of its management on the need to outsource and the decisions that come with it. The employees must also be able to have a full knowledge and understanding of the organization’s current IT operation and their aim in involving the third party in the provision of their IT services (Mitchell, 2012).

Additionally, the employees must possess a good knowledge and understanding of the current state of their IT organization and the cost base so as to be able to find out whether the business is able to cut cost by contracting the third party in the provision of its IT functioning services.  According to Mitchell (2012), a proper understanding of the organization will also help employees in identifying the kind of organization that would be able to meet their objectives. Equally, there is need for a good understanding of the issues of outsourcing to enable the employees of the contracting company to influence the contracted organization to agree to terms that would allow for an orderly procedure of transfer and ensure the smooth transfer services back to the contracting organization or another contractor at the end of the term of the first service provider. Another important requirement that has come with this relationship is the basic knowledge of the legal requirements in any process of outsourcing. This would allow proper transactions based on written legal service agreements.

According to Mitchell (2012), any student who is interested in IT must seek to have a full understanding of the outsourcing trend in business. He argues that that this is what would enable them to understand and cope with all kinds of challenges that could come with outsourcing. He further notes that there have been several changes that have resulted from the relationship between outsourcing and technology. He notes that just about a decade ago, many people who were attracted to the field of information and technology basically envied the good pay, the challenging nature of the work, and the fact that the field provided growth opportunities as well as economic stability.

However, he notes that this has changed dramatically with the new and growing relationship between outsourcing and technology. According to him, it is evident that the future of those who are currently attracted to this field will partly be influenced by their knowledge on outsourcing. He argued that the salaries earned by those in the field of information and technology are likely to increase, especially among those countries which attract more outsourcing contracts, while it may go even lower in the United States. He also noted the likelihood of the increase in the job opportunities available in the field of information and technology. However, he warned that this would only happen in the countries which embrace outsourcing, while the opposite is expected in countries like the United States. He equally noted that job stability may, however, remain unknown up to the time of the maturation of the outsourcing business models (Mitchell, 2012).

Case Study of the Relationship between Outsourcing and Technology

Case Study One

Recently, the Microsoft Corporation announced having awarded Entex Information services, Inc., which has its base in New York, to play the role of an overseer in its global management, as well as to operate its over 15,950 computers and their networks. This means that during the entire period of the contract all the problems related to either the hardware or network systems by any Microsoft employee will be handled by the employees at Entex Information Services, Inc. People would wonder why Microsoft, which is perceived as superior in all technological aspects, would consider contracting a small company like Entex, an outsider, to handle a job that is very critical to its computers’ operation and performance, including that of the corporations’ networks (Faulhaber, 2005).

According to Faulhaber (2005), such concerns can be addressed in two parts. First, though small, Entex’s long year of service within the industry puts it in a better position to help Microsoft achieve its objectives as per ensuring the operation and performance of its computers. He notes that the company has provided the same services to a number of big corporations, like Intel and Oracle, which are also the leading players in their individual industrial segments. He identified another reason why Microsoft could have considered this option as the fact that it wanted to focus on the areas in which it is more competent.  It can thus be argued that the corporation was avoiding spending much of its time on services that could as well be done by a third party at a cheaper cost. It also enables Microsoft to allow its engineers or managers to focus their concentration on more skilled jobs, while leaving the hardware and network complications to the contracted third party. Moreover, Entex has proved that, apart from being reliable, it also possesses the required knowledge to provide the services.

Case Study Two

Another example to demonstrate the effect of the relationship between outsourcing and technology is the case in which EDS’s, which was commonly known as one of the giants in the IT outsourcing, had a great loss following its contract with the U.S Navy. In the deal, the today’s HP Enterprise Services was to be paid a total of $4 billion in exchange to manage video, training and desktops, voice and networking for over 300,000 users of the Marine Corps and the Navy. Unfortunately, the deal never yielded profit. This was evidenced when EDS reported having suffered a loss of nearly $350 million one year after the signing of the contract. Additionally, EDS did not recognize the many applications that the Navy and Marine Corps had made and were therefore never integrated and replaced. According to Olavsrud (2010), the loss suffered by Navy was worsened by the fact that it lacked somebody who could assist EDS in the determination of whichever legacy applications were to be kept and the ones that were to be replaced.


In conclusion, the relationship between outsourcing and technology is expected to grow since the technology is expected to change and so are the complications in outsourcing. This means that the effect of outsourcing on technology is expected to increase and so will be that of technology on outsourcing. However, there is need for further studies to help organizations be prepared to handle such challenges that can arise during off-shoring, if proper communication channels are not followed, like in the case of the second case study.

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