Identifying risks in information

system outsourcing

Table of Contents
1.

Introduction........................................................................................................ 4
1.1

Background.................................................................................................. 5

1.2

The Research Problem..................................................................................... 6

1.2.1

2.

Reasons for Outsourcing to the Indian IT Sector...............................................6

1.3

Research Rationale......................................................................................... 8

1.4

Aims/Objectives............................................................................................. 9

1.5

Research Questions......................................................................................... 9

1.6

Interview Questions...................................................................................... 11

Literature Review............................................................................................... 13
2.1

Definition of Outsourcing............................................................................... 13

2.2

Australian Work Culture................................................................................. 14

1.3 Indian Information Technology Sector....................................................................15

2.3
2.3.1

Cheap Labor......................................................................................... 16

2.3.2

Literacy Rate........................................................................................ 16

2.3.3

Cultural Similarities................................................................................17

2.4

Strong Government Initiatives.........................................................................17

2.5

The Expected Trends in Australian Outsourcing....................................................18

2.5.1

The Efficiency Drive.................................................................................. 18

2.5.2

Low Hanging Outsourcing...........................................................................18

2.5.3
2.6

3.

Reasons for Outsourcing to the Indian IT Sector...................................................16

Flexible contracts...................................................................................18
Big Data Outsourcing.................................................................................... 19

2.6.1

Cloud providers have an edge....................................................................19

2.6.2

Market Share of Companies in Outsourcing...................................................20

2.7

Industry -Analysis of Outsourcing.....................................................................20

2.8

Goals of the Research.................................................................................... 20

2.9

The Aims and Objectives of the Study................................................................26

Research Methodology......................................................................................... 28
3.1

Introduction................................................................................................ 28

3.2

The Research Onion...................................................................................... 29

3.3

Research Philosophy..................................................................................... 30

Empiricism................................................................................................. 30

Interpretivism.............................................................................................. 30

3.4

Research Approaches..................................................................................... 30
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3.4.1

Inductive Approach.................................................................................30

3.4.2

Deductive Approach................................................................................ 31

3.5

The Research Strategy................................................................................... 31

3.5.1

Qualitative Approach.............................................................................. 32

3.5.2

Quantitative Approach............................................................................. 32

3.5.3

Sampling Techniques..............................................................................32

3.6

Research Participants..................................................................................... 33

3.7

Research Evaluation...................................................................................... 35

3.8

Analysis for the Research............................................................................... 36

3.9

Summary.................................................................................................... 37

References.............................................................................................................. 37

1. Introduction
With the increase competitiveness owing to the technological advancement and the increase
of the opportunities in the global market the level of competition has escalated at times
becoming a business war between two corporation and the organizations taking side in the
war. To lower the costs of operations because of the increase of costs in almost all
requirements for business the most reasonable and practical solution that has been followed is
outsourcing the Information technology functions. The outsourcing company handles
everything for the organization and provide a higher level of quality services for a low price
making it a low cost function when outsourced to other companies especially overseas.
Organizational risks can fall under various categories, out of which business and information
technology risks have prominent roles. These risks have many factors or sources and
controlling them will be a lead for optimal performance and in achieving the organization
goals. Whilst with the case of international firms occupied with day to day information and
communication technologies, outsourcing the corresponding tasks or activities has become
quite common. According to Gonzalez, Gasco & Llopis (2010), Outsourcing continues to be
popular with poor quality, cost blowouts, poor management and inadequate technical skills.
The most common risks related to information system outsourcing are; loss of competences
and skills, staff qualification, compliance of the contract and dependence on the service
provider, security issues and cost-benefit relationships.
Outsourcing is done by basing the requirements on the organizational needs of the
information technology in the organization. The advantages and the disadvantages of
outsourcing for the organization are first worked out before the job of outsourcing functions
take place. The risk are challenges not only the organization but the outsourcing partner.
(Benamati and Rajkumar 2008)
Outsourcing of Information Technology has become a common practice in the global
economy and it has opened a platform of risk management which incorporates the role of
both service providers and users. Offshore IT sourcing risks are studied in two different
perspectives i.e. client and service provider using the theoretical sampling data and case study
based grounded theory (Qin et al. 2012).The nature of outsourcing has changed , usually
small firms are more inclined towards outsourcing to acquire services and capacities that

were unavailable internally. However large firms with mature and efficient information
system department have also outsourced their IT system.
1.1 Background
Risk is a function of two important variables, vulnerability (Impact of risk)
and threat(likelihood). Decisions of outsourcing can effect each of these
variables and should necessitate risk assessments and security reviews
(Nduwimfura and Zheng, 2013).
The most popular functions in the companies that are generally outsourced are:
Human resources
Payroll -Health Insurance
Information Technology (Investopedia,2016)
The Australian IT outsources large volumes of data that exist in the form of Big Data in the
companies that need to be processed and made logical data for use. With the interconnected
markets and the complex nature of global businesses most people feel that outsourcing means
to be exporting business like goods from one country to another or a back to back export
which of course is not the case with IT outsourcing (Gupta,2015).
According to the National Institute of Economic and Industry Research that was released in
October 2015, found that more than 20,000 Australian jobs had been outsourced offshore
annually. From these figures the institute claims that anything between 700,000 to a million
jobs will be outsourced in IT in the next 20 to 30 years. The warning provided by the institute
in its report is that Australia will get into a vicious cycle of outsourcing their IT functions that
will deplete the skills and competencies of its domestic economy which leave Australia worse
off.
Some of the larger Australian companies are seen to be as laidback but the companies in
Australia that have understood the global trends have gone ahead and worked out their
outsourcing plans on a long term basis. The outsourcing culture that exists between the
contracting parties is seen as affecting the culture of both the company that is outsourcing the
work and the company where the work is being outsourced. Regardless of the fact the IS
outsourcing is growing at a significant speed, there are specific risks involved in every
outsourcing process, these risks have been changing with the changing tends of information
Technology (Nduwimfura and Zheng, 2013).
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Some research studies on outsourcing that have been reviewed are mentioned below:
Aubert, B.A., Rivard, S. (2016) A Commentary on the Role of Transaction Cost Economics in
Information Technology Outsourcing Research, Journal of Information Systems
Laaty,M.C., Khan, S.A.(2016) Cost Economics on Trial Again! A Commentary on the Role of
Transaction Cost Economics in Information Technology Outsourcing Research A Meta
Analysis, Journal of Strategic Information Systems
Raajeian,M.M. Cater-Steel,A.,Lane,M.(2016) IT Outsourcing Decision Factors in Research
and Practice: A Case Study, Journal of Information Systems
1.2 The Research Problem
1.2.1

Risks in Outsourcing the IT Sector

The risk from changes in regulation and pilferage from competition for business intelligence
is also minimized as the database is stored in server farms that are not in the location of the
company providing the much need safety from remote access possibilities. With the
outsourcing of job growing year by year at a rate of 11% per year it is evident that more and
more work is being outsourced to increase the profit margins of companies and lower the
costs of operations. (Prof.Jackson,Shelly,2016).
Majority of Australian companies are outsourcing their information system functions. In most
of the cases the client have a loss of valuable knowledge and have excessive dependence on
the service provider. These critical risks needs to be taken into account by an organization
while taking the decision of Is Outsourcing. Organizations needs to manage these risks as
outsourcing may results in failure of the whole outsourcing endeavour.
The other facts that come to light for which the research is being conducted is that despite a
slow economic program in the country, it is now showing growth in business and incoming
businesses from overseas which is why the volumes have increased and it makes it simpler
and less expensive to outsource the processing functions to an outsourcing company or else
the overheads would be so high there would be no profit margin on the services or the
products therefore making the product or the service a loss making venture. The method of
outsourcing to companies off shore also provides services from the companies that can be
sued and paid for only on the usage of the services which makes it cheap to use the
6

information technology offered s against the cost of a LAN or a private cloud for a large
organization.
1.2.1.1 Loss of skills and competency
The loss of competencies and critical skills is another problem. When a service is outsourced
by an organization, the customers loses his understanding of the service. Although the service
provider provides innovation and creative services to the customers , a huge part of new
knowledge remains in the hands of the service provider , moreover the organization loses its
capacity to remain up to date with new technological advancements.
1.2.1.2 Compliance with service provider
The service provider may lack compliance of the contract. This risk is inherent to any
contract. Whenever a service provider perform a task for a principal, the principal always
runs the risk of not completing the task as expected. If the compliance is not met according to
the expectation customers needs may not be met and an inadequate task priority may formed
because the service provider does not know what the business is all about.
1.2.1.3 Cost-Benefit Relationship
A cost-benefit relationship might exist in the information system outsourcing. Analysis of
cost-benefit relationship is not an easy task to perform i.e. translate and compare the services
of the supplier , measuring the consequences of outsourcing if the supplier is failed to deliver
the expected product. Generally, organizations admit that the decision of outsourcing is based
on cost associated with outsourcing and not on its benefits.
1.2.1.4 Hidden costs
The primary objective of outsourcing is to control the information system costs, but there are
hidden costs associated with outsourcing i.e. transferring and dismissing staff, transfer of
licences by software suppliers. These costs occur due to an unclear and vague contract e.g.
poor recruitment practices , defining the IT requirements. Hidden costs of information system
outsourcing could be; vendor search and contracting, transition costs after outsourcing and
costs related to provider management.
1.3 Research Rationale
The research is being conducted to understand the consequences and risk
factors involved in outsourcing a information system . As mentioned above , Loss of skills
and competency , Compliance with service provider, Cost-Benefit Relationship and hidden
7

costs , these risks are always inherent in outsourcing process irrespective of the size of the
organization.
From the above it can be defined that the objectives of the risk are to analyze the risks of
outsourcing information technology function.
The second major objective is to be able to understand the impact of the risk on the
performance of the companies that outsource the information technology functions.
1.4 Aims/Objectives
The main objectives of the study is to understand that with the support of the IT outsourcing
facilities the risks that develop create an impact on the business of the outsourcing companies
due to the conceptual vulnerabilities in outsourcing.
There are off shore outsourcing risks involved in outsourcing jobs off shore and these will be
studied to see if the benefits outweigh the risks of outsourcing. Depending upon the type of
risks that will be identified during the course of the study the risk mitigation strategies will
also be studied to ensure that the risks are lowered for an organization and that the risk
mitigation possibilities can be used commercial at low cost to secure the data of an
organization during the outsourcing processes.
A review of related literature will be done to show the results of the related study in the risk
identification, risk analysis and the risk mitigation strategies that are used when business
processes are outsourced to companies.
The secondary objectives are:
Evaluate the need for outsourcing which has made it a popular strategy despite the
risks that surface
The evaluation of the risk impact that outsourcing has on a business
Study the outsourcing processes and understand the way it works to mitigate the risk
factors in outsourcing
Analyze the impact of the risk factors socially, commercially and economically of
outsourcing business processes
Identify the limitations on the full mitigation of the risks that are identified

1.5 Research Questions

In view of the above details that have been placed and the justification of the research
rationale it is evident that there is a need to study the risk phenomenon further. Outsourcing is
a growing phenomenon and risk factors attached with it can affect an organization
performance, skill development of employees , effect of dependency on vendor and security
issues.
The aspect that provides the reasons for the study is the advancement of technology and how
it will cope with the future requirements of large scale data which is growing annually every
year making it difficult to process the data without any complexities and increasing the level
of risks and risk impact of business data from pilferage, penetration, intrusion, surveillance
and hacking.
Outsourcing of the information system poses some exceptional problems, with the
persuasiveness of the IT functions in most of the organizations. Outsourcing have a number
of drawback i.e. vendor access to the company's confidential information (including personal
information of employees and customers). Overall business strategy may affect by emerging
technologies, lack of it resources may force an organization to outsource the IT business unit
and limit an organization to compete. Moreover, outsourcing may results in a deterioration of
organizational activities and competencies , if the resources of IT are shared with a huge
number of subunits.
Taking all the above considerations into account the hypothesis to be tested is that has been
formulated to be tested is:
Hypothesis 1: The future of all global businesses will be based on its outsourcing capacity
only if the risk factors can be identified and mitigated.
Hypothesis 2: The risk factors associated with the outsourcing affects the performance of the
Australian organizations.
The above two research hypotheses are relevant to the study because it is hard to understand
why information technology is developing with new versions and modification at such a
rapid speed. This would not be taking place unless it was obvious that there is plenty of scope
for higher levels of business and there is a forecast of very large quantities of data that will
9

need to be processes in the future therefore the need to be able to prepare now and crate the
groundwork for the need to survive in the future.- but the risks also increase in proportion to
the advanced outsourcing technology and the research studies in this area need to be done
continually to identify the risk involved in outsourcing business off shore.
Prior researches conclude that the adoption of an outsourcing strategy could increase pressure
on the management to remain competitive by accomplishing more with less. Through IT
outsourcing the primary focus of the organization to achieve effectiveness , efficiency and
productivity with strategies of downsizing, reengineering and restructuring activities.
According to the National Institute of Economic and Industry Research that was released in
October 2015, found that more than 20,000 Australian jobs had been outsourced offshore
annually. From these figures the Institute claims that anything between 700,000 to a million
jobs will be outsourced in IT in the next 20 to 30 years. The warning provided by the Institute
in its report is that Australia will get into a vicious cycle of outsourcing their IT functions that
will depleted the skills and competencies of its domestic economy which will leave Australia
worse off.
So far the details that have been place in this introductory chapter is that outsourcing is a
phenomenon that needs to be studied in greater depth and detail as it is one of the processes
that is evolving and increasing in businesses.
1.6 Interview Questions
To study the impact of the risks on outsourcing information technology business processes
interviews will be conducted with:
Four Client Based Companies
Four Vendor Based Companies
During the interview with the companies the following interview questions have been
designed.
1.
2.
3.
4.
5.
6.

Why do you outsource your business processes?

Which processes do you outsource?
What benefits have you gained from outsourcing the functions?
Why did you decide to outsource the business processes?
Has it lowered the operational risks of the business?
Has it lowered the penetration attacks on the business database?
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7. What is the level of internal threat in the company

8. Has the level of the internal threat decreased since outsourcing the business
processes?
9. What method of risk surveillance issued in the company for risk identification?
10. Who works on the risk that is identified the company or the outsourcing partner?
11. Have the issues in customer relationships increased or decreased with outsourcing
functions?
12. If they have increased what risks have impacted the increase?
13. If decreased what risks have been resolved to lower the customer relationship issues?
14. Have the company experienced any penetration since outsourcing in the data base?
15. Has the company experienced any intrusion in their financial data?
The aim of the questions is to analyze:

The risks that surface

The types of risks that surface
Where the risks are identified
Who resolves the risks issues
The impact of the risk factors on the relationship with the customers
The actual level of internal threat from risks to the company
Whether the level of risks have decreased or increased with the advent of advanced

outsourcing technology
Do the risk factors have an impact on the financial data of a company

11

Literature Review
Outsourcing is a business strategy by which a company lowers the costs and increases the
profit margin by giving the jobs to other companies for a lump sum amount to process rather
than increasing the costs of the company though internal processing. Basically it a cost saving
process that is popular especially in IT sectors in the worked because of the immense saving
by outsourcing the large volume processing work that wastes time and manpower and
increases the costs of operations for the company.
Outsourcing also helps companies to focus on more important matters in order to be able to
increase business by not wasting time on the type of work that is repetitive and can be done
by an outside company without being a threat to the confidentiality of the company. It has
shown that it can improve the efficiency of the companies better quality of work and turns
around times more so because of the increased competitiveness sin the outsourcing sector to
gain as many contracts forma as many companies as possible from around the world. The two
main considerations in outsourcing is that companies get expert labor at cheap rates and gain
access to advanced information technology without having to maintain an infrastructure for
it. The most popular functions in the companies that are generally outsourced are:
Human resources
Payroll Health Insurance
Information Technology (Investopedia,2016)
According to a survey conducted by ITNewcom, the survey concludes that Australian firms
continue to outsource their software applications and technology infrastructure. More than

75% firms in Australia outsource their software applications and more than 85% outsource
their infrastructure. Specifically, public sector organizations in Australia shows greater
intentions to outsource the information system rather than the private sector counterparts.
The Australian IT outsourcing is the large volumes of data that exist in the form of Big Data
in the companies that need to be processed and made logical data for use. With the
interconnected markets and the complex nature of global businesses most people feel that
outsourcing means to be exporting business like goods from one country to another or a back
to back export which of course is not the case with IT outsourcing (Gupta,2015).

12

Generally, Australian companies outsource their IT functions to enhance their services

consistency. Service quality can be improved through outsourcing because organizations
choose vendors which fulfils company expectation. Vendors provide high quality services
that a company could achieve alone because vendors have specialized personnel and
equipment(Gonzalez, Gasco and Llopis, 2006)
According to the National Institute of Economic and Industry Research that was released in
October 2015, found that more than 20,000 Australian jobs had been outsourced offshore
annually. From these figures the Institute claims that anything between 700,000 to a million
jobs will be outsourced in IT in the next 20 to 30 years. The warning provided by the Institute
in its report is that Australia will get into a vicious cycle of outsourcing their IT functions that
will depleted the skills and competencies of its domestic economy which will leave Australia
worse off.
Since outsourcing of information system has received much attention and become a
widespread global phenomenon both in the public and the private sector. Australian firms are
the key players in the worldwide outsourcing arena , Australian firms are playing a role of
outsource globally. The focus on outsourcing has been increased tremendously from 2008.
Up till now managing risk in outsourcing is not well researched, there is a need for more
research in this field. Our research is an attempt to explore the risk factors of outsourcing .
2.1 Australian Work Culture
Some of the larger Australian companies are seen to be as laidback but the companies in
Australia that have understood the global trends have gone ahead and worked out their
outsourcing plans on a long term basis. The outsourcing culture that exists between the
contracting parties are seen as affecting the culture of both the company that is outsourcing
the work and the company where the work is being outsourced.
2.2 Australia Information Technology Sector
Australia information and communication technology market is the fifth largest market in
Asia and 14th in the world. Total number of employees associated with IT industry reached to
155,000. A survey conducted by an IT recruitment firm, Greythorn suggests that Information
technology sector of Australia is heading towards a skill shortage The respondents of the
survey was aged under 30 working in IT department of different organizations was only 6% .
A similar survey was conducted in 2011, concludes that employees aged below was 18%.
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It sector of Australia generates more than $43 billion in the national economy every years, but
still there is a potential for growth.According to the workforce or productivity agency of
Australia, in the next three years more than 22,000 information and communication
technology are expected to open, but there is a shortage of It professionals in the industry.
2.2 The Expected Trends in Australian Outsourcing
The Efficiency Drive
For the companies that are looking for a higher level of efficiency and the reliable
outsourcing the visible signs are automation in almost all the businesses in some way or the
other. The evidence of this that2015 provided is:
Accentures revised BPO arrangements with Deutsche Bank
This efficiency focus is going to increase in 2016 and the Australian businesses are going to
try and make more efficient arrangement and contract to attain quality services of the service
providers.
With the predicted global trends in businesses the companies are opting automation of a
number of processes:

The simplification of IT
The development of an affordable cost structure
Importance is being placed on reusable service delivery platforms
Increasing - scalability
An automated environment that leverages new software tools the implementation of a

process
Quantifying, managing and controlling processes from within
2.2.1

Low Hanging Outsourcing

The major areas for outsourcing have been service -support and help-desk and applications,
according British firm Kable. This wills not that wont change in 2016. There are around 17%
of companies that have not outsourced their business functions these according to Kable will
do so in the next 2 years.

14

2.2.2

Flexible contracts

Australian firms are providing more flexible contracts to the buyers where
the legal and the commercial conditions will be beneficial for both partiesthe buyer and the provider. The flexible contract includes the ability to
scale up and down throughout the contract life. As of 2016 it is a buyers
market, the Australian market is now providing multi-souring services
which is a new trend. The main purpose of multi outsourcing is to
integrate all the services in one area and be able to provide all the information from
one place for a customer query.
2.2.3

Big Data Outsourcing

There has been plenty of talk and publicity of Big data and the kind of volumes that the
Australian businesses generate especially in the government, health and the retail sector,
makes it necessary to have to process large volumes rapidly and this is only possible by
processing the Big Data in the technology that has been developed for been developed for
Big Data processing.
The service providers that have moved to the cloud have an added advantage of winning the
deals in the outsourcing market because of the various features of real time processing and
accessing. This make files from different locations at the same time and the ability to be able
to work on the same tasks in the same files .the service models improves, the processing is
faster and the data input for storage is also equally fast.
2.2.4

Cloud providers have an edge

Telstra has slashed 411 workers from its call centers across Australia, blaming falling profits.
This was the announcement made by the company even though it told the investors that the
revenue growth projections for 2016 remained at $27 billion.
2.2.5

Market Share of Companies in Outsourcing

There is no company that has a major dominating market share in this industry.
The revenue in this industry = $31 billion
The annula growth rate that has been recorded i=2.2%f rom 2011 till 2016.
15

The number of workforce = 248269

The number of businesses that have outsourced = 23899
2.3 Industry -Analysis of Outsourcing
In the coming years organizations are more likely to focus on their IT strategies to address
issues like system and data integration, data security, It system and governance. The current
growth rate of the industry is 2.2%. It suppliers are focusing on centralizing their IT delivery
system to increase productivity, minimize cost and improve service quality. Industry experts
predict that by 2018, more than 50% of the global IT spending forecast is to be cloud based
and more than 52% of enterprises are expected to partner or create with cloud platforms.
2.4 Goals of the Research
Information Technology and Communication had become more advent and complex enough
since few decades, where development and maintenance of the respective projects is
globalized and decentralized in nature. Again, offshore outsourcing of Information
Technology (IT) has become a prevalent practice over the global economy and thus opened a
platform of risk management which incorporates the role of both service providers and
clients. Offshore IT sourcing risks are studied in two different perspectives i.e. client and
service provider using the theoretical sampling data and case study based grounded theory
(Qin et al. 2012)
Service providers will be considered as the primary source to evaluate the offshore IT Risks
in the perspective of service providers and Australian firms will be consulted to analyze the
impact of offshore IT risks against the client perspective (Orberg Jensen 2012). Further
objectives and sub objectives considered for the current research are discussed in the later
section
All organizations in all industries are facing a shift towards offshore IT outsourcing risks, due
to risks associated with infrastructure and resource maintenance, still risks are prone in other
forms while outsourcing the crucial and sensitive information to the third party service
providers.
The outsourcing of business functions is a better alternative after it is integrated the functions
into the IT systems of outsourcing companies. Analysis of offshore IT outsourcing risks is
16

done over literature and primary focus was either on the client risks or third party risks.
There, is no specific model or theory that supports the overall outsourcing process risks,
which includes the role of both clients and third party service providers. Current research will
focus on these aspects and proposes a comprehensive risk mitigation strategy using the
research data gathered from various sources (Lacity and Willcocks 2016)
The return on investment that is made, when a business outsources to IT companies is greater
and instead of the knowledge of one technocrat in an organization. There is scope to
maximize the benefits for an organization with the lower operational costs, increased
information and maximize the benefits from restructuring by outsourcing the IT functions
that deal with sensitive information and controls (Kuri and Fabre 2011).
The goal of the study is to identify the risks associated with the information system
outsourcing in Australia. The trends of IT outsourcing in Australia are growing , the study
will help in addressing the critical risk factors which can affect the outsourced business unit
of an organization. Gonzalez et.al (2004) proposed that the characteristics of a firm i.e. size of
the firm determines that which risks cab be seen as more relevant. The research concludes
that outsourcing a complete business unit is more dangerous as the organization is completely
dependent on the vendor services. The primary concern organizations face is the complete
dependency on the service provider. The study suggest the information system managers
adopts alternatives such as selective outsourcing and multiple provider approach. The goal of
this paper is to identify the consequences of outsourcing on the overall business performance.
Outsourcing is considered as one of the most integrated part of strategic management. The
involvement of risk in the processes of Australian organizations has been increased due to
an increase trend in adoption of outsourcing approach. The goal of this study is to highlight
the importance of a comprehensive approach which need to be followed by the IS managers
to manage the risk involved in outsourcing.
Academic research was done in many aspects covering the offshore IT outsourcing risks
associated with client, still a proper and significance coverage is scare with respective to both
the clients and service providers. Management insights inbuilt with IT outsourcing risks are
mostly comprehensive in nature and lacks proper alignment to build the required framework
in impact analyzing and development of mitigation plan. Mitigation strategies as adopted by
most of the client and service provider firms has given clear classification of risks and the

17

main significance of this study is to impose a IT outsourcing risk analysis against relational
due diligence of risk mitigation (Liu and Yuliani 2015)
Strategic theories of firm level IT outsourcing risks will be analysed and evaluate to build the
comprehensive risk management framework, that considers the high level and detailed level
issues related to both service providers and clients. Study of IT outsourcing risks also
considers the economic theories as applied over both the countries, where the clients and
service providers are located. Few assumptions related to bounded rationality and
opportunism will be considered for the current research, where the further objective will
cover the empirical investigation in terms of shirking approach, renegotiation and vendor
behaviour (Gunasekaran et al. 2015)
Outsourcing has some minimal risks like lack of control of data, employee morale, getting
locked in to the outsourcing system and security risks but there are ways provided through
outsourcing have a greater impact in a positive manner than the negative impact of the risks.
Organizations that outsource have access to the latest technology, the technological flexibility
is available which otherwise is not possible in an internal system and there is a lower level of
stress and burn out among employees which makes it easier to provide high quality
performance. (Gorla,Tony,2014)
Another goal of the research study is to study the offshore IT outsourcing risks which are
primarily categorized into three dif ferent types like Macroeconomic risks, relationship
specific risks and project specific risks. Existing tools and techniques related to the project
specific and relationship risks have in depth discussion over literature, still economic
perspective lack prior attention. Any risks analysis and mitigation model might require
SWOT and PESTEL analysis as well, to identify the process level issues those might factor to
the offshore IT outsourcing risks. This type of analysis is done in a single perspective i.e.
either the client or service providers. Still, a proper process to mitigate the offshore IT
outsourcing risks should always focus the roles of technical, business, economical and social
factors. (Mathew and Chen 2013)
A report in Salmat shows that80% of the businesses using IT outsourcing have retained their
local staff and even increased their local staff because of the growth in the business
processes. The study also attempts to understand why there is a growth in local staff despite
outsourcing the IT functions in a company. The report called Beyond Borders also states that
18

there has been a 200% increase in the growth of the local employees of a company in
Australia. According to the Gartner Forecast report there is a large Australian market for
outsourcing which has risen because of the large businesses that have been increasing their
collaborations with Australian companies.
The larger companies have been using the outsourcing facilities for a long time but the goal
of this study is to see the new, trends that have developed among small and medium
enterprises in Australia. Some of the basic reasons for the outsourcing trends have been:
Stiff competition
The increasing costs of employment
The flexible business concepts and models that have emerged
The variety of facilities that have been offered in the form of service products for the
Australian companies
It appears that the increase in the IT outsourcing from Australia companies has been
driven by the market conditions as mentioned above.
From the study into the goals of IT outsourcing and the goals of the research study what has
emerged is that lowering the cost of operations is not always the primary concern for
Australian companies.
Australian firms are outsourcing their business units because of faster and better services,
increased productivity and efficiency, save costs on technology and infrastructure and access
to cheap skilled force. As there are advantages of the outsourcing enjoying by the Australian
firms accordingly they have to manage the risk factors which are inherent in the process of
outsourcing (Guido Carli and Clarioni, 2013)
The above findings have been supported by the Deloitte Report that was released in March
2016 where the need for servicing clients has become more important than lowering the costs
of operations for the outsourcing companies and this trend is likely to remain the same for the
next 12 months.

19

The factors that have been taken into account are the business competencies that are available
in the business the skills requirements to do their businesses and the analysis of whether it is
available in house or not. The IT outsourcing has undergone new positive changes to
stimulate the IT business in Australia. As per the current statistics that is available on
Australian outsourcing 60 top executives of companies that spend the most in IT outsourcing
75% outsourced some of their business applications and in 85% of the cases the businesses
outsourced their infrastructure as well.
The areas that are outsourced the most in IT are:

The development of specific solutions for work force management

The asset management
The Management of real estate
The hospitality industry
The banking industry functions
Payroll Management
HR Management
The Mortgage & Loan- Application

The prediction for Australian IT outsourcing that it will grow to $17.6 billion as an
outsourcing business by 2017 and the compounded annual growth rate is expected to be3.2%
for the next five year period, these figures show the future of the Australian companies IT
divisions and the outsourcing potential in the Australian market.(Bandt,2014)
2.5 The Aims and Objectives of the Study
Following are the primary and sub objectives of the current study
The primary objective of the study is be to understand how IT outsourcing helps in lowering
the costs of operations and increase the efficiency of an organization. Offshore IT
Outsourcing have many potential risks and their mitigation strategies are still counting due to
globalization, technology, management and security. Following are the sub objectives
considered for this object over the current study
Critically review the necessity of outsourcing any technology and understand the impact of
business, management and employment due to outsourcing of Information Technology

20

Analyze and evaluate the offshore IT outsourcing process and the respective theoretical
frameworks and models associated with respective to both clients and third party service
providers

Figure (1) Statistics of outsourced services in Australian Source: Outsourced Media,2016

Evaluate the potential benefits of outsourcing IT and analyze their advantages in terms of
economic, social, political, technical and management aspects
Study the operations and management theories associated with offshore IT outsourcing and
evaluate how it impacts the overall efficiency of the client operations or management
objectives

21

Second objective of current study is to evaluate offshore IT outsourcing risks associated in

the perspectives of clients and service providers. In general, IT outsourcing risks falls under
various categories
The second primary objective is to be able to understand how an organization lowers its risk
level with IT outsourcing and how it helps in lowering the costs of operations and increase
the efficiency of an organization. Process of offshore IT sourcing will give a comprehensive
framework of analyzing the risks and the sub objectives are as listed
Conducting data analysis as gathered from various case studies and qualitative techniques and
evaluate the categories of service provider risks and client risks
Analyze the project specific risks, relationship specific risks and macroeconomic risks
associated with IT outsourcing in the perspectives of clients and service providers
Develop offshore IT outsourcing risk mitigation strategies based on the data analysis as
gathered from both primary and secondary sources using qualitative and quantitative research
methodologies

22

Research Methodology
As mentioned in chapter 1 the research study that is being undertaken is the outsourcing of IT
jobs by Australian firms which pose a risk in outsourcing. The problems that are going to be
discussed are the two hypotheses that have been mentioned earlier.
Hypothesis 1: The future of all global businesses will be based on its outsourcing capacity
only if the risk factors can be identified and mitigated.
Hypothesis 2: The risk factors associated with the outsourcing affects the performance of the
Australian organizations.
The research methodology that has been chosen is based on the research rationale which has
been provided in chapter 1 of the study. The research methodology that will be used is known
as the Research Onion which was developed by Saunders et al in 2007. It shows the stages in
a research study that needs to be covered step by step for the research strategy that will be
used in the study. It illustrates the progression of the design of the research methodology that
is used in a research study. As per the illustration provided in illustration (1) the first step is
the research philosophy, the second step is the is the research approach that is used in a study,
the third step is the research strategy that is adopted in a study the fourth step is the
identification of the time line and the fifth step is the layer in which the method of data
collection is used is specified.

23

3.1 The Research Onion

Illustration (1) The Research Onion, Source: Institut Numeric,2012

As shown in the illustration the core of the research opinion is the data that is collected. The
next layer is setting the time frame for the study. The third layer from the inside is the
research strategy that will be followed from the options and choices available. The fourth is
the research approach and the outer most layer of the research onion is the research
philosophy. (Saunders et al,2007)
3.2 Research Philosophy
This is the beliefs and the concerns that a researcher has from initiating the study which has
already been provided in the research rationale of the study. The research philosophy defines
the knowledge based on which the research questions are formulated and the study has been
undertaken. The assumptions in a research study are developed based on the research
philosophy of the study that is undertaken. There are 2 types of ontology in the research
philosophy:
Empiricism
Interpretivism

24

Even though the research philosophies are dissimilar a research study beliefs can combine
both for a study depending upon the types of assumptions that surface for the study. This is
because the research philosophy justifies the reason for the research study being undertaken.
3.3 Research Approaches
The two types of research approached that are there in the onion research methodology are:
3.3.1

Inductive Approach

The inductive is the reverse progression of the deductive approach as it shows the progression
from a generalized event to a specific one. The start of this research approach is based on
physical observations there is no pre formatted framework for this approach and the
framework can be structured after the collection of data. Here the analysis of the data that is
collected is sometimes done to fit into the pre existing theory to prove the theory.
3.3.2

Deductive Approach

The hypothesis is created based on the existing assumptions and pre-existence of a theory,
this is a suitable method to used for the examination of any observed phenomenon; it is suited
for the empirical or positivist approach of the research philosophy of a research study. It
shows the progression form a general event to a particular type of event that can be
generalized from the results.
3.4 The Research Strategy
The two types of research strategies that are in existence in the Onion research methodology
are:
The Qualitative Research Strategy
The Quantitative Research Strategy
These strategies provide the pointers as to how a researcher is going to conduct the study.
There are sub-categories of research strategies that are categorized under both qualitative
research strategy and quantitative research strategy. These are:
Experimental- Research
Action -Research
25

Case -Study Research

Interviews
Surveys
Systematic Literature Review (Podsakoff et al,2012)

In experimental -the results are researched based on experiments carried out which creates
the research pattern on which the deductions are made of the study. The relations between the
factors of the study are studied, examined against the theoretical expectation of the study
before arriving at a conclusion.
Action research is a practical approach to a specific problem. It involves examining the
practices to establish the best approach. It involves reflective- practice, which is a systematic
process of assessment. This is a strategy that is used in studies were an assessment is made.
The Grounded theory is a qualitative method that draws on the inductive approach where
patterns are captured from the data as a precondition for the research. The groupings of the
data are done on the commonalities of the factors which show that the results that are derived
are done so after the full completion of the study. No results are considered to be final when
the data is examined to show the establishment of the pre existing theory. This type of
strategy is used mainly in social science studies
The archival research strategy is where the research is conducted from existing data. The type
of research can involve a literature review, where patterns in existing research are collected,
compared and a summation is created to establish the sum total of the knowledge that has
been captured in a on a particular subject that is relational to the variables in the study and the
specific research problem that is being investigate., or to examine the application of existing
research to specific problems. Archival research can also extend to the studies where the data
is mined and which exists as in historical data and archaeological data types.
(Bryman,Bell,2011)
3.4.1

Qualitative Approach

This is an approach that is used in subjective research studies where the aims and objectives
may be clear but it does not provide any numerical results at best it provides a range of
statistical results on which the assessment of the study is done. (Silverman,2013)

26

3.4.2

Quantitative Approach

This is the approach where numerical results are available or any type of empirical results are
available ,basically the results and the data captured from such a study can be quantified to
provide a numerical value to the results of the study.
3.4.3

Sampling Techniques

This is the methodology of using the technique that will be used to sample the data required
for the research study. It also determines the size of the samples used in the study,
Random sampling is when the population size is large and the sample participants are shown
randomly, random sampling sometimes creates an uneven distribution of the samples.
Stratified sampling can also be used which is a technique to ensure that the there is no uneven
distribution of the samples that have been selected for a study and that is provides a
representation of the actual population which is being studied.
Convenience sampling can also be done where the sample is taken from an existing structure
or framework, when it is used in specific institutional studies he characteristics of the
convenience sampling method provide significant effects on the results of a research study.
For a study to be successful it is necessary that the sampling methods is selected which is
appropriate for the study to provide significance to the results that are obtained and helps to
understand the population that is being studied though the samples that have been selected.
Sampling is a vital stage in a research study for one can follow the methodology perfectly
with the wrong data samples and eventually land up with results that are technically correct
but research wise wrong because of the wrongs selection of the sampling method that is used.
(Bryman,Allen,2011)
3.5 Research Participants
The participants of the research will be the employees working in IT departments of the
Australian companies that outsourced their business operations to third party. The type of
sampling method that will be used in this study is the convenience sampling so that the
hypotheses that has been formulated and placed above can be fully tested before the
generalization of the risks that have been assessed are made.

27

The research participants will be the Australian companies that outsource their jobs. The
research participants will be placed under a combined research methodology mix of the
qualitative and the quantitative approaches in the study so that not only can the risk
assessments be quantified but the qualitative analysis will yield the actual level of
risks(Bryman,2012)
The Grounded theory is a qualitative method that draws on the inductive approach where
patterns are captured from the data as a precondition for the research. The groupings of the
data are done on the commonalities of the factors which show that the results that are
derived are done so after the full completion of the study. No results are considered to be
final when the data is examined to show the establishment of the pre existing theory. This
type of strategy is used mainly in social science studies.
This will help in the categorization of the variable commonalities in the different types of risk
that are expected to emerge during the study and these can be grouped together to define the
actual risks and the level of the actual risks that existence in outsourcing IT jobs.
The approach that will be used on the research participants is a deductive approach which
will form the base of the research methodology. (UK Essays,2015)
The entire research study is wrapped in the core of the onion with the belief that there are
risks that pre exist in outsourcing the IT jobs off shore for Australian companies therefore the
both the ontological types in the onion research methodology will be used for the study which
are:
Empiricism
Interpretivism

28

3.6 Research Evaluation

Illustration (2) The Evaluation Process, Source: BC,2016

In research there five basic steps to the process of evaluation:

First the inquiry has to be segmented and positioned

Second when the inquiry is positioned the planning has to be done
Third in order to complete the planning the data collection has to be completed
Fourth when the data collection is the analysis and the synthesis of the data is done
Fifth is the communication of the findings from the evaluation process

The purpose of using this evaluation approach is because it combines both the formative
and the summative evaluation types which are both necessary for this research study. The
sub categories of the two evaluation methods that will also be required for the study are:

Proactive Evaluation
Clarificative Evaluation
Interactive Evaluation
Measurement Evaluation (BC,2016)

29

3.7 Analysis for the Research

The aim is to be able to categorize and organize the data in a thematic manner for analysis
which will help to carry out scientific and systematic reviews of the data that has been
collected and the viewed of the sample participants that will be collected. It will also simplify
the stage of Meta-analysis of the data and to obtain the results from the research synthesis.

Analysis by data triangulation

Analysis by investigator triangulation
Analysis by theory triangulation
Analysis by methodological triangulation

The above mentioned types of analyses are the ones that have been considered for the study.
The selection of the types of data analysis that has been done are:
Analysis by data triangulation
Analysis by methodological triangulation (ET,2016)
The justification for selecting the above two types of analyses is because it is best suited for
the study that is being undertaken. Data analyses have several different approaches that can
be used and the four types of analyses are used for different types of research study but for
this one that is being undertaken the methodological and the data triangulation are the best
methods. The analysis will be based on the following data that will be captured and structured
during the course of the study:

Mined data
Modelled data
Data from business intelligence
Data from statistical applications
Data from descriptive statistics
Data from exploratory sources
Data from integration
Data from visualization

3.8 Summary
The details of the research study have been provided above and the research methodology
that has been selected has been placed above. The

selected methodology has also be

explained above after which the use of the methodology in the study has also been provided
30

and described justification the selection of the details that have been placed in this chapter.
The different types of data that will be captured and studied have been mentioned, the process
of evaluation that will be used is also mentioned above and the reasons for which the type of
evaluations being used is explained above. Considering the risks of outsourcing is a large
topic and the sample participants will have to be large to arrive at accurate results, the
approach that is being used for the study is the Grounded Theory Approach and the type of
strategies that will be used as sub categories for findings and analysis have been placed above
in the chapter. The above methodology has been chosen since the main risks that are seen in
IT outsourcing as mentioned in chapter (1) are:
Cheap Labour
Literacy Rate
Lowering the Costs of Operations
The cost of labour are escalating in Australia, and using immigrant students labour which is
cheap has come under fire from the human rights and employee welfare associations,
outsourcing to lower overheads and operational costs appears to be the most logical business
decision to take.

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