An abundant rise in the number of IT firms outsourcing their IT services within the country and overseas has registered a rise in the recent past. That has been driven by prevailing and rising trends in endowment factors which provide comparative advantage due to comparative cost differences for IT firms and other firms engaged in outsourcing business process outsourcing. Commonly outsourced tasks include programming and software development. The study aims to investigate the comparative advantage for IT firms in terms cost, performance, improvement of customer relationship, and the risks IT firms are exposed to when making decisions to outsource IT services based on the factor endowment theory framework. The factor endowment theory explains comparative advantage firms engaged in global trade experience in relation to the existence of comparative cost differences (Sokoloff & Engerman, 2000). The theoretical basis for argument are trade disparities due to diverse endowments of production factors and the requirement for firms to utilize production factors with varying rates of intensity. That is typically because in international business, countries, local and international companies are endowed with different factors that affect their production costs. In this study, the term outsourcing incorporates off-shoring and are alternately used with the same meaning.
Introduction
The emergence of web 2.0 paradigm has opened floodgates for Information Technology (IT) business outsourcing due to prevailing endowment factors (Garner, 2004). Since then, outsourcing has experienced exponential growth mainly due to changing market and industry conditions driven by comparative cost and price factors. The comparative cost differences and factor prices have led business cycles to experience a common boost in outsourcing of information processes due. That has further been reinforced by the needs and expectations of customers in different markets becoming more specific and highly demanding. The increase is further reinforced by the need to constantly generate value and develop a competitive advantage for the customer, leading to a general appreciation of outsourcing as a cost-cutting strategy. Thus professionalism in the delivery of products and services has become more pronounced (Jae-Nam, 2008).
According to Gibb and Buchanan (2006), IT outsourcing involves organizations contracting their computer or Internet-based tasks to external companies or consultants due to prevailing endowment and price factors. Commonly outsourced tasks include programming and software development. Yeaple (2006) views IT outsourcing to be a subset of business process outsourcing (BPO) of organizational tasks that require fewer technical skills. The rationale for outsourcing include, lack of adequate technical and human resources, lack of sufficient resources to support implementation of a functional IT department, the need to reduce costs, and to maximize marginal revenue (Adeleye, Annansingh, & Nunes, 2004). Thus, IT outsourcing reduces lead times by increasing throughput and turnaround times with positive implications on business processes (Doh, 2005).
IT outsourcing results in the transformation of business fixed costs into variable costs, which contribute to organizations managing their cost structures and marginal returns (Lall & Narula, 2004). Cuadros, Orts and Alguacil (2004) view the management of variable costs as a tool to reduce opportunities for investing in assets with the potential to respond in real time to market changes. Hence, the business can focus on managing its core competencies and capability to sustain its competitive advantage in a competitive market (Willcocks & Feeny, 2006). Researchers have determined that organizations that invest in IT outsourcing enable employees to reflect on restructuring, redesigning, and developing core business competencies (Adeleye et al., 2004). Examples of such activities include customer engagement, development of customer relationships, and improvement of business operational processes. These lead to increased customer interactivity and sustainable customer relationships. Eventually that builds lasting customer loyalty, brand loyalty, and positive customer engagements. The study aims to investigate the comparative advantage IT firms experience due to comparative cost differences and prevailing endowment factors in terms cost, performance, improvement of customer relationship, and the risks IT firms are exposed to when making decisions to outsource their services based on the factor endowment theory (Iacovou & Nakatsu, 2008).
Factor of Endowment
The theory of factor endowment explains comparative advantage in relation to global trade and the existence of comparative cost differences (Sokoloff & Engerman, 2000). The theory attributes trade disparities to be due to diverse endowments of production factors and the requirement to utilize production factors with varying rates of intensity. In international business, countries as well as companies are endowed with different factors that affect their production costs. One of these factors of production is information technology functions. With outsourcing, multinational businesses with insufficient IT capabilities or in need of lowering costs of production are able to access IT functions efficiently. These factors position such companies at competitive advantages with rivals in a competitive global market. Companies therefore outsource IT functions from other countries to lower costs of production (Fujiwara & Shimomura, 2005).
Comparative advantage is core to neoclassical trade theories irrespective of being driven by technological or factor endowments. It is important to offer simple, unifying perspectives on fundamental forces that shape the comparative advantage in the information technology discipline. This offers new insight on the joint effects of the technology as well as factors of endowment in international specialization (Fujiwara & Shimomura, 2005). Competitive effects of information technology are higher when non-tangible elements are merged. These elements include clear support on the part of upper management by using technology for updates, higher training, technical qualities, and reduced conflicts levels. Along with the traditional factors of endowments, the role of innovative inputs includes capital investments in information and communications technology (ICT) as well as accessing outsourcing (Fujiwara & Shimomura, 2005). The Classical framework has been used less systematically in explaining recent trends in globalization. That is due to the fact that it describes the role of traditional factors such as productivity and endowment in international trade. In addition to that, it appears unfit in the provision of insight into impacts of innovation in areas of specialization. The classical framework is limited in its ability to account for new approaches that are used to conduct international trade which is based on cross country movement of the intermediate off-shoring as well integration of productions on global scale. Off-shoring allows the release of resources, which can be allocated to areas such as research. This enhances technological impacts on wages among others. In practice factor endowment coexists with the technological as well as institutional differences thus making this area of study to be unified yet a highly tractable framework.
Statement of the Problem
Organizations currently function under increased pressure to improve their performance and gain a competitive advantage along with continuous review of their operations with the aim of addressing threats emanating from changes in the external environment and harnessing opportunities (Mani, Barua, & Whinston, 2010). Various challenges drive firms to IT outsourcing.These include increased operating costs and a need for innovation and improvement of business processes. Advanced technology and globalization has enhanced the ability to outsource, yet in spite of firms’ ability to outsource, outsourcing and off-shoring faces many challenges that may affect business operations. We know that IT outsourcing has led to the emergence of homogeneous organizations that have equivalent core competencies (Gibb & Buchanan, 2006). This has resulted in a loss of business core competencies through exploitation of best practices in IT (Gibb & Buchanan, 2006). Risks and information insecurity associated with IT outsourcing have increased leading to a loss of customer loyalty. In addition to that, the fear that IT outsourcing cannot be implemented across continents because of the risk of data access by unintended users, virus attacks, and lack of device interoperability has increased (Rist, 2008).
In spite of these challenges, off-shoring firms have reported some benefits. Outsourcing companies have managed to reduce their operating costs through improved business processes that result in enhanced competitive advantage (Cuadros et al., 2004). Levina and Vaast (2008) affirm that IT market competitiveness has provided opportunities for firms to improve the quality of provided services through innovations that leave customers satisfied. Customer satisfaction leads to customer loyalty, and increased profitability. This study will use the concepts and the factors of endowment theory while examining the impact of outsourcing on firms.
Purpose of the Study
This is a quantitative descriptive study inquiring into IT outsourcing by multinational corporations based on the endowment theory which provides a comparative framework upon which IT outsourcing and business performance related operations such as cost reduction and profitability are examined. The study aims to investigate the comparative advantage for IT firms experience due to comparative cost differences and prevailing endowment factors in terms cost, performance, improvement of customer relationship, and the risks IT firms are exposed to when making decisions to outsource IT services based on the factor endowment theory (Iacovou & Nakatsu, 2008).
The risks and threats IT firms are exposed when off-shoring will be crystallized in this research. A structured questionnaire will be used as a tool to capture data about the benefits and limitations of outsourcing. Respondents in the study will include current and previous IT consultants in outsourcing, business individuals who outsource, and technology vendors. The questionnaire was identified as the best tool to capture data over a wide scope of the study because of its relative ease to administer (van den Bergh, 2009).
This study brings to light the importance of outsourcing and shortfall due to outsourcing in information technology. In addition to that, it is worth noting note that profit maximization and cost reductions have been experienced with outsourcing firms incurring lower costs while gaining expertise from offshore firms and experts.
The study is further informed by a continuity model (BCM) as a case study of the comparative advantage for determining mechanisms where operational costs involved IT outsourcing can sustainably be managed. Business continuity process (BCP) of the IT organizations depends on the level of quality assurances, levels of quality monitoring, quality capability, and control for exploitation of the sustainability models.
Quantitative variables used within the framework of this study will be informed by examining related research studies on business process outsourcing in information technology based on the endowment theory.
Research Questions
In this study, two types of quantitative research questions will be employed, descriptive and predictive. Descriptive research questions will be utilized to seek answers to queries on the frequency with which IT outsourcing in businesses as the reason for comparative costs with factor endowments. On the other hand, predictive quantitative research questions can determine whether a variable can be utilized to predict future results on the implications of price factors due to outsourcing.
Many organizations in the modern business environment have adopted IT business outsourcing. Advances in any technology come with intended purposes as well side effects. IT business outsourcing may not be left out since its adoption could be associated with gains as well as losses. Therefore, questions such as the ones presented below will be answered in this study.
- RQ1. Does outsourcing IT lead to cost reduction?
- RQ2. Does IT outsourcing increase IT risks?
- RQ3. Does IT outsourcing lead to information insecurity?
- RQ4. Is outsourcing linked to poor customer reactions in the outsourcing firms?
- RQ5. Are outsourcing linked to reduced innovation?
- RQ6. Does outsourcing of all IT functions affect the overall performance of a firm?
Hypotheses
- H10. There is no statistical significant evidence that organizations achieve their planned cost reduction from IT outsourcing.
- H1a. There is statistical significant evidence that organizations achieve their planned cost reduction from IT outsourcing.
- H20. There is no statistical significant relationship between IT outsourcing risks and outsourcing.
- H2a. There is a statistically significant relationship between outsourcing risks and IT outsourcing.
- H30. There is no significant relationship between IT outsourcing and information insecurity.
- H3a. There is a statistical relationship between IT outsourcing and information security.
- H40. Outsourcing is not the cause of poor customer reactions in outsourcing firms.
- H4a. Outsourcing, including off-shoring, has a statistically significant relationship with poor customer reactions in outsourcing firms.
- H50. There is no statistically significant evidence that outsourcing enhances the efficiency of a firm’s operation through improvement in its innovativeness.
- H5a. There is statistical significant evidence that outsourcing enhances the efficiency of a firm’s operation through improvement of its innovativeness.
- H60. Statistically, IT outsourcing do not relate positively to the performance of an organization.
- H6a. There is a statistically significant relationship of IT outsourcing, including.
A test statistic was used to test the hypotheses:
- H10. There is no statistical significant evidence that organizations achieve their planned cost reduction from IT outsourcing.
- H1a. There is statistical significant evidence that organizations achieve their planned cost reduction from IT outsourcing.
12 participants were taken for a sample study to test the above stated hypotheses. 35% of the results from the study indicated no evidence of statistical significance for organizations to achieve cost reductions from IT outsourcing. A random selection of one subject who agreed that IT outsourcing reduced costs was selected.
The tests were modeled after a binomial distribution. Assuming each person respondent to the questionnaire without the interference of another respondent, then, let X be the number of subjects who agree that there is IT outsourcing is less costly, then, X can be modeled as follows:
X∼B (12, p)
H10: p=0.35 (No statistical evidence that IT outsourcing leads to lower costs)
H1a: p#0.35(There is evidence IT outsourcing leads to lower costs)
If H10 is true, then
X∼B (12,0.35)
A 10% level of significance on a two tailed test will be done with a 5% distribution on both sides of each tail distributed evenly between lower and upper limits.
H10 is rejected if P (X<x) <5%.
Using 1 as a test value, let x=1; then examining the lower limit,
P (X<1) = P(X=0) + P(X=1) ~ 4.2%.
On the other hand, the critical region for the lower limit can be obtained based on the expression:
P(X≤c)<5%
Since 0 and 1 lie in the critical region, then lets test c=2.
P (X≤2) =0.042+…+P(X=2) =0.51512=15%.
H10: p=0.35
From the statistical analysis, x=1 lies in the critical region thus supporting the fact that cost reductions benefits are experienced by IT outsourcing firms.
Literature Review
Information technology represents an important factor in the modern world given the advance in technology. Among many other things, it helps firms innovate and produce high-quality products that meet customer needs and demands. Due to the constantly changing business environments, firms have found it necessary to reduce operating costs while exploiting the comparative advantages of human IT skills offered by other countries (Manaschi, 1998). Therefore, companies have opted to outsource critical IT skills to other firms in other nations endowed with the requisite expertise. In spite of the benefit of cost reduction and improved operations, IT outsourcing poses security and generic risk issues to firms (McKendrick, 2010). If a firm manages these issues well, it will likely benefit through increased innovation and high product quality that could positively improve customer satisfaction and, hence increase customer loyalty. This study examines outsourcing, specifically as it applies to IT organizations.
Outsourcing involves companies contracting other firms to produce goods or services at a lower cost which can be offered by the outsourcing firm but at higher costs (Blokdjik, 2008). Firms that work for lower costs can either be locally available or in overseas destinations. However, when the parent firm relocates its activities to lower cost overseas destinations, then, the entire process is offering goods and services is referred to as off-sharing. In this case, off-shoring is a variant of outsourcing and the study uses outsourcing to accommodate both outsourcing and off-shoring (Trojahn, 2009).
The requirements and expectations of customers in different markets are becoming more demanding. Businesses are therefore required to take appropriate actions in order to satisfy the demands of a certain market. Value addition to products has for a long time been used as a means of creating a competitive advantage by many businesses, however these strategies are not enough in themselves, thus outsourcing was embraced. Outsourcing has been around for many decades and companies seek these services due to a number of reasons. No matter what the reason, the rate at which companies are outsourcing and off-shoring their service is steadily increasing. This has led to the globalization of services, consequently boosting trade and commerce all over the world (McKendrick, 2010).
Technology development and trade practices
The level of trade has grown remarkably over the last few decades because of the advances that are being made in the field of ICT (Jovanovic, 2011). These advances have also increased the number of tradable services in the field of IT and ICT, which have made the outsourcing of services much easier. The ease in the tradability of these services, coupled with the increased independence of the location, has contributed to the off-shoring of services by many companies in the West (Kapila, 2009). Companies are now outsourcing services such as support, customer care, research and consultancy. The main reason behind this is that outsourcing of services is much cheaper with the end result remaining of a high quality (Tenner, 2011). The development in IT and ICT has motivated organizations to outsource their products and services all over the world. India provides most of these services (Blokdjik, 2008).
India is a prime location for IT outsourcing. It has a large skilled labor force. The high population increases the competition for employment, which means that labor is relatively cheap. India also has a high number of competent personnel in almost all industries. These individuals are highly educated, professional, and have much experience, knowledge and skills, which is required to execute their respective tasks effectively. This group can also speak and write English fluently, an aspect that gives them a competitive edge over rival countries such as China, Singapore, and Malaysia (McKendrick, 2010).
With the revolution in IT and ICT, location is not of the high concern it used to be. The advancement in technology has made the transmission of inputs and outputs much easier. These processes can now be conducted digitally and transmitted via electronic means (Smith, 2006). Companies have therefore off-shored much of their services, especially white-collar jobs, to improve their sustainability and efficiency. The customer care for the computer manufacturer Dell, for example, is located in India (Kurtz, 2010). When local residents call the customer care, they are being served by an operator who is located in India (Tenner, 2011).
Sustainability of outsourcing
Despite the benefits accrued from off-shoring, there has been a lot of debate on the effectiveness and sustainability of this trend. It is evident that outsourcing benefits both the origin and destination country. The destination country enjoys increased rates of employments and free trade, and the origin country enjoys the availability of goods and services. The mutual relationship between these two countries is beneficial, since both of their Gross Domestic Products (GDP) will increase in the short and in the long run (Jae-Nam, 2008).
Outsourcing has been shown to provide success and efficiency. As a result, many companies have adapted these mechanisms. However, some analysts claim that such companies may lose the control of their overseas organizations, a risk with severe implications which (Plunkett, 2006). IT market competitiveness has provided opportunities for equivalence of service level, which has resulted in a loss of brand identity and brand community and decreased market share (Plunkett, 2006).
These criticisms of outsourcing raise many questions as to the efficiency of outsourcing. Outsourcing has increased trade to a new level, enhanced globalization, and improved the operations of organizations all around the world (Doh, 2005). These outcomes have only been experienced in the short run. The sustainability of outsourcing remains in question. This is because there are a number of drawbacks that are coupled with of IT services (Hirschheim, 2009). These drawbacks affect the free market by changing the balance of trade. A study should therefore be conducted to investigate the viability and sustainability of IT outsourcing (Lacity, Willcocks, & Feeny, 2004).
Cost Reduction
Objectives of any organization include maximizing profit or revenues earned from sales. In order to achieve this objective, the management focuses on reduction of all costs incurred by the firm. Studies carried out has been able to establish that firms outsource IT services to other firms in different countries and regions in order to minimize operating costs. Since costs are important factors in profit determination, the organization uses various strategies to minimize costs, one of them being outsourcing (Oshri, 2011). Outsourcing has developed mainly due to changes in the market and industry conditions, and the business cycles have experienced a common boost in outsourcing of information processes (Farok, Vikas, & Sumit, 2010). The needs and expectations of customers in different markets are becoming more specific and highly demanding on businesses. The increase is due to the constant need to generate value and develop a competitive advantage, leading to a general increase in outsourcing as a cost-cutting strategy to ensure professionalism in the delivery of products and services. Thus reinforcing the rationale for IT outsourcing which has led to the reduction in the cost of services and products in the market.
The theory of factor endowments put forward by Heckscher and Ohlin postulates that countries have different factors of production that enable them to gain a comparative advantage over other nations (Manaschi, 1998). This theory could be used to explain the pressure for companies to outsource IT services to other countries. Countries that have enough skilled IT expertise have a comparative advantage over countries that do not have the expertise (Farok, Vikas, & Sumit, 2010). Therefore, organizations operating in such deficient countries tend to outsource the services from well-endowed nations in order to improve their competitive advantage. Therefore, outsourcing is a form of international trade that occurs because IT skills differ between countries. Tenner (2011) supports this theory as applied in outsourcing by noting that organizations that outsource IT expertise obtain the best skills for the right cost and at the right time. Organizations have identified IT talent limits among their employees and talent from outside the company best fills the gap. Outsourcing IT expertise enables an IT firm to be nimble in the quest to fulfill business unit requests, especially with regard to operations that are likely to run behind schedule (Plunkett, 2009).
Large enterprises generally tend to have the resources to establish their own. However for most small to medium sized firms, it makes financial sense to outsource a call center with the aim of providing technical and customer support to current clients as well as potential customers. Outsourcing certain services helps in streamlining a company’s performance hence saving both time and money. In recent years it has become a common trend to move call centers to foreign countries such as India.
Outsourcing certain function to foreign countries and in particular the third world countries, costs much less as compared to establishing them in the developed countries (Sharp, 2003). This is occasioned by the reduction in the cost of manpower in the developing countries. Consequently, companies can access high-quality services on a daily basis at reduced costs, translating into even more profits for the establishment. The cost-effectiveness aspect is also supported by the fact that the developing countries have the operational expertise to provide the needed services without compromising on quality.
Outsourcing a number of operations to foreign countries provides the perfect opportunity for specialization in the different aspects of company operations such as telemarketing, disaster recovery and technical help desk services (Blokdijk, 2007). Such specialization if introduced in a company located in developed countries like the United States and the United Kingdom would require the input of hefty financial resources as compared to setting up the company in the developing countries.
Risks in IT Outsourcing
Every organization gets the outsourcing collaborator that it deserves (Adeleye et al., 2004). Therefore, firms that experience inefficiency in IT management end up getting incompetent outsourcing partners. In contrast, organizations that have efficient management of their IT departments always obtain competent IT outsourcing partners. In addition, other firms that do not conduct enough research in determination of outsourcing partners are worse off because they may end up overhauling their better IT expertise for worse outsourced expertise. In addition to these risks, there are many others. For instance, outsourcing requires best management skills. Organizations that lack good management skills may not reap maximum benefits from outsourcing.
According to Varadarajan (2009), some companies have difficulties in managing their IT departments. Such organizations may face challenges in maintaining outsourcing. Corporations that do not conduct market testing for IT outsourcing run the risk of losing the benefits of IT outsourcing.
Most companies focus on cost reduction as the main driver of outsourcing (Yang et al., 2007). However, overreliance on this factor is not necessary, since most of the benefits of IT outsourcing are not transparent. The supply of outdated technology is another risk common in long-term IT outsourcing contracts. This may result in unfruitful relationship between the two companies. It is evident that IT skill outsourcing can reduce the operating costs of a firm. However, this can only be realized if the company can manage its IT management costs.
Information Insecurities
Security concerns have been raised concerning outsourcing of IT expertise from other countries. Outsourcing firms run the risk of breaches of information security, and there is hence the need to audit and restricting system users for the organizations (Tenner, 2011). Not all foreign software coders could be trusted by outsourcing firms. It is important that outsourcing firms conduct proper background investigations of foreign software coders. Given that only a few firms conduct such investigations, corporations involved in outsourcing are not safe since their confidential information could be compromised (Mani, Barua, & Whinston, 2010).
Customer Reactions
The reactions of customers regarding company products vary depending on the overall effects of outsourcing. To begin with, outsourcing can prevent a firm from innovating. Companies usually have high expectations of outsourcing, including innovativeness at lowest costs, which can result in unrealistic expectations (Gibb & Buchanan, 2006). However, innovation requires that the firm provide the necessary resources, flexibility and in-house competency (Couto et al., 2007). Due to these inadequacies, the firm may be disappointed, and hence also disappoint the clients in terms of quality of produced goods. Customers may react to this by finding alternative products. In contrast, the benefits of outsourcing could result in increased innovativeness, low costs, high product quality and customer satisfaction and loyalty (Garner, 2004).
Innovation and Performance
It is difficult for firms to decide on what to outsource and what not to outsource (Mitra & Ranjan, 2010). The rule of thumb is the basis of many IT outsourcing contracts. This rule postulates that firms should outsource non-strategic IT functions while strategic IT functions should be left to the internal IT team of the firm (Nambiar, n.d.). Firms initially outsourced all IT functions from one vendor, leading to a lack of variety and low quality services, and hence reduced differentiation in the products offered by the company. However, this trend has changed over time, with organizations distributing the outsourced IT functions to different corporations. For instance, British Petroleum (BP) decided that the company no longer needed to own the technologies that provide business information to its employees, and outsourced its IT expertise and functions from different firms from different regions (Nambiar, n.d.).
Following outsourcing of IT functions, the firm benefited in many ways. Firms that outsource strategic IT functions are in the position of bringing necessary organizational cultural change needed for creation of competitive advantage (Bhalla et al., 2008). The business processes are also improved, because outsourcing enables firms to improve their operations. For instance, outsourcing encourages business managed budget development and controlled project expenditure. Thus, firms are encouraged to outsource the latest IT technologies that can enable them properly to budget and manage projects. Another benefit that firms realize is the cost management controls. Outsourcing helps firms to minimize expenditures while increasing company savings (Doh, 2005). In a survey conducted by Lall & Narula (2004), it was noted that outsourcing is able to reduce costs incurred by an organization by up to 20% of the annual budget. Although many organizations dispute outsourcing costs, IT costs could have risen for corporations in the industry.
Mani, Barua, and Whinston (2010) conducted a study that sought to establish the impact of information capability on the ability of a firm to outsource IT technology and personnel. The survey measured service satisfaction as applied in other outsourcing studies. It was established that satisfaction is a proxy for perceived effectiveness of outsourced technology. Following their survey, this study measured several variables that would include effectiveness of outsourced technology, cost reductions, satisfaction and innovativeness. The data in the variables would be collected using interviews and questionnaires as explained above. The coding process would take place in preparation for analysis by SPSS.
A study conducted by Mitra and Ranjan (2010) focused on the impact of off-shoring on unemployment. In their survey, they established that in a two-sector labor market, an increase in off-shoring of IT skills given labor mobility would result in increased wages and reduced unemployment. They used questionnaires to collect data on the level of outsourcing in the different sectors. The questionnaires were subjected to pilot studies to establish their effectiveness. Similarly, this survey will develop a number of questions that will be administered to the respondents.
Research Method
This study examines the drivers, impacts, and usefulness of IT outsourcing to organizations’ business processes and operating costs based on the factor endowment theory as framework for conducting the research (Iacovou & Nakatsu, 2008). The factor endowment theory provides a framework upon which the study aims to investigate the comparative advantage for IT firms in terms cost, performance, improvement of customer relationship, and the risks IT firms are exposed to when making decisions to outsource IT services.
Quantitative research method entails use of statistical methods and numbers (Thomas, 2003). It uses numeral measurements to evaluate a particular phenomenon. The method involves the collection of quantifiable data that can be subjected to statistical treatment. The collected data is then analyzed using mathematical tools such as regression analysis.
There are three aspects of this study that include reasons for the emergence of IT business outsourcing, risks associated with its use, organization’s customer relationships, and performance. The method is suitable for this study because it will enable the researcher to obtain first hand data that will increase the reliability and validity of the study, hence making the study valid for any user (Tashakkori & Teddlie, 2010).
Quantitative study provides the possibility and convenience of applying statistical tools such as standard deviation, mean and correlation analysis, which enable the researcher to establish the existing relationship between various variables of the study, such as IT outsourcing and business process improvement. This will provide for the measurement of variables in the business entities (Pollard & Pollard, 2005). Other statistical tools used include mode, percentages, probability, and statistical table tests. They are indispensable in testing the level of significance. The level of significance is vital in treating the study hypothesis. A properly designed and implemented study is pertinent in making a convincing argument about the meaning and significance of research findings.
Qualitative research method does not aim principally at specific measurement of determined hypothesis. It focuses on holistic comprehension of complicated truths and processes. In such cases, research questions and hypothesis come up cumulatively as the research is carried out. Questions in this kind of research are not structured, as in quantitative research; they are normally general and open-minded. This makes this method inappropriate for the research. Observational research is also inappropriate for the research since there are pre-determined hypothesis and research questions and phenomena do not require observation and recording (Bluman, 2009).
Operational Definition of Variables
Variables are measurable attributes that assume different values among the subjects under consideration. This study employed both dependent and independent variables. Independent variables are directly related to the cause of the study and can be manipulated by the researcher to examine their effects on dependent variables. On the other hand, dependent variables are responses that are measured due to the effects of the independent variables (Lind, Marchal, & Wathen, 2010). Some variables were qualitative (non-numeric, or rather, attributes), while others were quantitative (numeric) and were either discrete or continuous. The following section of this paper briefly identifies and defines the major variables of this study.
Outsourcing
Outsourcing helps the organization reduce operating costs while simultaneously optimizing customer service. Outsourcing was identified on a nominal scale by asking the respondents, “Do you outsource or off-shore any of your operations from another provider?” The responses were labeled as follows: 0 = No, 1 = Yes, and 2 = partially. The third option was necessary to enable the study to categorize differently the IT firms that were in-between; that is, they were only partially outsourcing or off-shoring. The study intends to identify trends on how the variables of interest changes across these categories of firms. Because the focus of this study is to examine IT outsourcing as applied in multinational corporations, the only firms of interest surveyed were IT related.
Cost Reduction
These are the expenses incurred by a business venture on a daily basis during its operations; they include administration, sales, and marketing expenses. They do not include depreciation expenses, interest expenses, or income taxes. The data sources used are obtained from the income statements of the different companies. Operating costs are identified on an interval scale by the determination of the total operating cost of the specific company versus its generated revenues (Thouin, Hoffman, & Ford, 2009). To measure how the operating costs changed among the firms surveyed, the study calculated the percentage of the operating costs of the company using generated revenue figures as the base number retrospectively for two years. This was done for two reasons. First, standardization of operating costs across all the firms surveyed was necessary because generated revenues were used to control for excessive operating costs in large companies and vice versa. Second, using financial data for two full years will enable any correlations between outsourcing to be evident in operating costs. This is because the impact of economic variables such as inflation will have been well assessed and their impact on a company’s performance is well established.
IT risks
The major benefit of outsourcing is normally the reduction of costs and maximization of efficiency. To ensure its success, a company usually focuses on finding the best firm to contract a job. Outsourcing IT services should be handled with a lot of care as it serves as the back bone of the company. The generic risks organizations face when deciding to outsource or off-shore will be broken down into three sections followed by a series of questions; security risks, legal issues, and organizational information threats. The kind of response expected for this variable are 0 = No and 1 = Yes to the types of risks specified. These responses will come from the IT managers of the companies since they are the most likely to understand the risks involved in outsourcing.
Customer reactions
Customer satisfaction is the degree to which the clients are content with the service provision of the company. Customer satisfaction was determined on an ordinal scale by asking the respondents, “How satisfied are you with the products of the company?” Their responses were then plotted on a five-point Likert scale between 1 (poorly satisfied) and 5 (very satisfied) (Francis, 2006). This variable will involve the ordinal level of measurement as the responses will be ranked in an order based on their level of satisfaction. This data will be obtained directly from the customers since it is their satisfaction that will be evaluated.
Organization performance
This is an accumulated end result of organizational processes and activities. Performance of the organization is directly affected by all departments. Failure of one department might greatly affect the overall organizational goals of success. Commonly, organizational work measures include organization effectiveness, productivity, profitability, innovation, and operational efficiency (Hazra, Turban, MacLean, & Wetherbe, 1999). The outsourcing firm should be able to meet the defined standards of performance of the employer to ensure its relevance to the employer. Since performance is a complex variable to determine using structured questions in questionnaires and survey, records from the company will be used with the permission of the management. Additionally, some survey questions will be used directed to the top management of the organization.
Measurement
The effectiveness of any study device calculates in terms of consistency, validity and sensitivity as well as specificity. These impressions are also useful in this quantitative study since it is imperative for the researcher to establish the consistency of the study. To facilitate the development of figures for quantitative investigation (facts), a measurement procedure should take place. Alternatively, the canvasser in this study will translate a few human phenomena precisely into statistical figures. The procedure of translating observable facts into data is referred to as ‘measurement’. In the social sciences, much of what researchers seek to calculate is biased, such as conceptions including physical health, which have complete descriptions (Grover, Cheon, & Teng, 1996). Consequently, measurement turns out to be a tricky and multifaceted subject, and noise is forever formed in the information because of imprecision in the procedure of measurement. Therefore, it is imperative to reduce error by utilizing consistent and suitable techniques of measurement.
The accuracy of study tools is typically measured in terms of consistency, soundness and sensitivity in addition to specificity. These ideas will also be useful in this study. The researcher employs them to determine the reliability of the researcher (Heeks, Krishna, Nicholsen, & Sahay, 2001). Clarke suggests that consistency is the capability by which an investigation is competent enough to generate results that are reliable and firm over a specified period of time and given comparable states of affairs (Clarke, 1998). A variety of validities subsists, which consist of interior validity and exterior validity. Interior validity pertains to the relationship between objects when measured on a range. At whatever time that an investigation offers equivalent outcomes after the use of two diverse measures, the result is alleged to be corresponding.
Validity is the point at which a specified tool is calculated to measure. The validity of a research can fluctuate in dissimilar illustrations employed. In one state of affairs, an investigation can be convincing, whereas in another it may possibly not. The validity of a research is calculated by what the research alleges to measure and the accessibility of coherent errors in the conclusions derived from the exploration. Crotty (2003) argues that interior validity is the scope to which it is feasible to make self-regulating orientation from the conclusion of a study, particularly if the independent variable controls the dependent variable. It is possible to measure variables in this study since IT outsourcing and off shoring, being a dependent variable, is controlled by other variables, such as the availability of finances to undertake it and the accessibility of skilled labor. Conversely, outside validity is the universal submission of the results of a study to other sceneries. The findings on IT outsourcing and off shoring are critical to the improvement of business performances in the global market (Jennex & Adelakun, 2003).
The measurement of the hypothetical construct of an exploration is calculated using construct validity, while convergent validity judges on the achievements that are attained from diverse apparatus that are utilized in the exploration. Unlike convergent validity, divergent validity compares the instruments used in the study that calculates conceptions, which are conflicting. Due to the above validity and reliability, the exploration is convincing and consistent for application by several individuals or calculated branches (Clarke, 1998).
A research design is the logical structure of a given study (Leedy & Omrod, 2005). A research design ensures that the data collected during a study enables the researcher to answer the research questions unambiguously and hence to be in a position to meet the set objectives of the study. This study utilizes quantitative research methods to examine the impact of outsourcing on the performance of organizations. In addition, the study is positivistic, and adopts deductive reasoning to work from the known to the unknown. Therefore, the study would begin from a known theory to the fulfillment of the hypothesis that outsourcing is positively correlated to improved performance and business processes of an organization.
A descriptive research method is effective in evaluating the relationship between two or more phenomena (Mitchell & Jolley, 2009). Therefore, descriptive research design is ideal for the study of the stated problem of information technology in business. The level of significance is vital in treating the study hypothesis. A properly designed and implemented study is pertinent in making a convincing argument about the meaning and significance of research findings. Poor research design can lead to the findings being interpreted or explained in multiple and incorrect ways (Kothari, 2008). This will limit the value of a research study in this field. A descriptive research design in studying this problem fits into the whole process of research, from the research questions through to final analysis and data presentation.
Although descriptive research may be perceived as a mere description, a cogent description has enormous benefits for business enterprises. This is because it adds immeasurably to the knowledge and information of information technology to the business entities. This study design is ideal in addressing different types of variables because it gives an opportunity for the collection of a wide range of indicators and economic information of business entities during data collection. In this study design, there is the use of structured questionnaires administered to business entities. This will retrieve data for analysis and presentation, and thus a quantitative method is used in this application. This can be an abstract or concrete description achieved with quantitative method of research. Accurate descriptive research is the basis for policy development, which is an ideal approach for business entities in the current, competitive market economy (Burge, Carroll, McCall, & Mistrík, 2008). A competent descriptive study has the capability to challenge the commonly accepted assumptions about the way business establishments operate, thus provoking action (Mitchell & Jolley, 2009).
The study population for this study includes all IT outsourcing firms in the US. Considering the large number of IT firms involved in outsourcing in the US, the researcher will select a sample of 50 firms using stratified sampling technique. Stratified sampling is suitable for the sample selection because it enables the researcher to obtain proportions that are even and fair from each stratum. The study will utilize both primary and secondary data. The primary method of data collection that will be utilized in this study entails the use of surveys. For the surveys to be effective, the researcher will design questionnaires which will be administered to the respondents. Prior to the actual study, a pilot study will be conducted in order to determine their effectiveness of the questionnaire in collecting the data. The surveys will be sent to the respondents through the Internet. This will aid in saving time and cost of conducting the survey.
The questionnaires used in the study will consist of closed ended questions. In addition, the researcher will also incorporate a Likert scale to aid in the interpretation of the data collected and coded for ease of analysis. Coding the responses makes it easier for the researcher to incorporate computer software such as Excel.
Secondary data would include both published and unpublished information related to outsourcing in the firm, such as the financial reports. All data collected will be related to the impacts and advantages of outsourcing in an organization.
Summary
The study aims to investigate the comparative advantage for IT firms in terms cost, performance, improvement of customer relationship, and the risks IT firms are exposed to when making decisions to outsource IT services based on the factor endowment theory.
From factor endowment theory, it is evident that countries have different amounts of resources or factors of production. It is obvious that countries that are endowed with large amount of resources tend to perform better than those with fewer resources. However, outsourcing has come up as a business function that makes it possible for business to acquire resources that they lack or have in fewer quantities. Outsourcing is the ability of firms to seek human capital from other nations. Many firms operating in different fields have been reported as outsourcing different skilled human capital from different countries. One of the most significant skills sought is IT, outsourced by IT firms. The outsourcing of IT personnel is driven by many factors, including the need to minimize costs while maximizing profits, the need for innovation, inadequate local IT skills. IT outsourcing is good for firms because it enables the firms to obtain rare skills that cannot be obtained locally, provides the ability to minimize operating costs and improves business processes, among other benefits. A typical example is where FLY India has continued to re-outsource to even cheaper destinations such as Thailand with a different endowment structure while maintaining more complex work in India.
In spite of these benefits, however, outsourcing poses some generic risks to the firm (Shachaf, 2008). The outsourcing firm is likely to obtain incompetent IT personnel or obtain IT technology that has not been tested. In addition, untrustworthy vendors who may also compromise the security of confidential information of the firm may exploit the firm. It is therefore important that the outsourcing firm conduct enough investigation regarding IT technology vendors before outsourcing (Bhatt et al., 2010).
Organizations have resorted to carrying out IT business outsourcing by pursuing the advantages that comes with it. In contrast, though, this process may not be entirely what it appears to be on the basis of face value. This research shall therefore bridge the gap of the knowledge claim of the advantages or disadvantages of IT business outsourcing. The design chosen will help interact with people with knowledge in this field, thus providing required information that will be used to validate the findings. Since analysis shall be conducted purely using categories, there will be little in the conclusions made pertaining to the population at large (Safizadeh et al., 2003).
Organizations seeking to outsource of off-shore information technology functions and services need to realize that there are advantages as well as disadvantages or challenges of doing so. This research provides both positive and negative effects to the outsourcing company. Understanding the kinds of risks and challenges involved makes it possible for companies to make informed decisions. The benefits of outsourcing and off-shoring might seem obvious, but without careful considerations, these processes can cost a company a lot. This can even lead to a loss. Different companies gain different benefits and suffer different losses in using IT services that are outsourced. This means that every company should consider its factors and limitations before making the decision to outsource.
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