TRUE COST OF OUTSOURCING IT DEPARTMENTS

 Running head: TRUE COST OF OUTSOURCING IT DEPARTMENTS 1
The True Cost of Outsourcing IT Departments
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TRUE COST OF OUTSOURCING IT DEPARTMENTS 2
The True Cost of Outsourcing IT Departments
Outsourcing IT departments has major implications for the companies and the economy
of the home country. Parry and Graves(2008) noted that the financial cost factor was the main
driver for outsourcing in the last decade of the twentieth century, but companies were
increasingly basing their decisions on several factors. This change in outsourcing decisions is
influenced by the notion that outsourcing has hidden costs. The true cost of outsourcing IT
departments includes the cost of transition, loss of managerial control, loss of key internal skills
and negative effects on the economy of the home country.
The cost of transition involves choosing a vendor and transferring the work to the
selected service provider. Vendor selection includes steps such as defining requirements, sending
out requests for proposals and examining offers, and contract negotiation. This element of the
cost of outsourcing amounts to about 0.2% to 2% of the total financial costs(OSF Global
Services, 2012, p. 2). The cost of transition includes the cost of communications, legal fees, and
technical costs. This cost varies with the size of the IT department. Companies require sufficient
resources to select the appropriate vendor and transfer the department successfully.
The loss of managerial control over the outsourced function is a major limitation of
outsourcing and has wide implications for the company. Outsourcing expands traditional
organizational boundaries, giving rise to new challenges and the need to adapt the management
of IT departments to match the change(Aubert & Rivard, 2008, p. 163). Important issues like the
quality and reliability of IT systems is partly or wholly transferred to the service provider.
Management loses control of these critical aspects of the department, increasing the risk of
disruptions to operations.
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The loss of key internal skills due to outsourcing translates to high costs of IT systems in
the long run. The practice hampers the development of internal technical skills in the
organization, which can undermine the company’s competitiveness(Aubert & Rivard, 2008). The
company incurs additional costs to transfer the work to another provider if the current provider
becomes incapable of delivering the service. Similarly, if the company decides to return the
outsourced function to in-house provision, initiatives to develop the required technical expertise
increase spending significantly.
Outsourcing IT departments to providers located in foreign countries affects the economy
of the home country in a number of ways, including through the loss of jobs, loss of revenue and
reduced demand for the outsourced skills (Kohleick, 2008, p. 16). Part of the revenue in the
outsourcing arrangement benefits the host country at the expense of the home country. Similarly,
the host country experiences an increase in jobs while the home country loses jobs. The reduced
demand for the outsourced skills in the home country influences the country’s expertise
negatively.Accordingly, the overall impact of outsourcing IT departments on the countryis likely
to be negative.
Outsourcing IT departments has financial and other hidden costs that affect both the
companies and the home country. The true cost of the practice includes the cost of transition, loss
of managerial control, loss of key internal skills and negative effects on the economy of the
home country. Outsourcing decisions should involve a careful review of all the costs to establish
whether the project is viable.
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References
Aubert, B., & Rivard, S. (2008). Information Technology Outsourcing. Armonk, N.Y.:
Routledge.
Kohleick, H. (2008). Designing Outsourcing Relations in Knowledge Intensive Business
Services. Koln: Kolner Wissenschaftsverlag.
OSF Global Services. (2012). The Real Cost of Outsourcing.
Parry, G., & Graves, A. (2008). Build to order: The road to the 5-day car. London: Springer.