Case Study: Outsourcing good or bad?

With the recent economic downfall in the United States, many companies have turned to a fast grown tactical plan. These organizations, in-order to save money have turned to outsourcing work. This is most evident in the information technology sector, because unlike many other sectors in the IT sector the client vendor relationship can be completely virtual. According to a finding by Halogen Corporation, the largest jobs outsourced are within the information technology sector (28%). But while these companies save money are they putting themselves at risk? Does the cons of outsourcing out-way the pros? In this paper we will

better understand and discuses the benefits and cons of outsourcing. We will focus on outsourcing in the information technology sector. In order to do justice to this concept we must first understand what is outsourcing. Contrary to common believe, outsourcing doesnt only encompass organizations doing business overseas or in different counties, it also encompass organizations doing business within the same country. With this we can define two types of outsourcing; in-sourcing (within the same country) and off-shoring or outsourcing (overseas or within different countries). Outsourcing can be defined as a practice of having certain job functions done outside a company instead of having an in-house department or employee handle them; these functions can be

outsourced to either a company or an individual1. These functions can be both small tasks as well as complete projects. One of the greatest benefits of outsourcing is the amount of money saved by an organization when it outsources the work. According to the U.S Bureau of labor the average salary of a computer programmer is $74,690, whereas in India their salary is about $20,000 thus saving the organization about $50,000 a year per programmer. If we consider other resources, such as money saved on equipments, office space, man-power this number increases significantly. In some case

companies save an estimated 30 to 75 percent paying a person in Asia then paying a person in the United States for the same task2. Sunil Mehta, VP NASSCOM in India, estimates that U.S. companies saved up to $11 billion in 2004 and will continue to save3. One key disadvantage of outsourcing is the lost of significant, or sensitive data and security. An interesting case in which outsourcing was the source of lost sensitive data is the Chinese Ballistic

1 2

http://www.entrepreneur.com/encyclopedia/term/82610.html# http://www.auerbach-publications.com/dynamic_data/3228_1978_offshore.pdf 3 http://www.auerbach-publications.com/dynamic_data/3228_1978_offshore.pdf

missile incidents in February of 1996. A Chinese rocket carrying a US satellite to outer space exploded and that incident underwent excessive analysis. Thus both the Chinese government and Hughes Electronics Corp. were given access to the finding of that report. Afterward its was found that classified data was reported within that report and that the U.S national security was harmed as a result of that classified data being compromised4. Another key case in which outsourcing led to the lost of sensitive data was that of the New York State Office of Children and Family Services in 2004. A hired subcontractor posted the names, birthdays, and daily whereabouts of hundreds of upstate New York children on the internet. That information remained publicly available for weeks until MSNBC.com notified authorities. This incident clearly shows the effects outsourcing can have on individuals. This information had
Figure 1. Day care data made public.

been passed on through three layers of subcontractors before becoming public. The information was posted on RentAcoder.com by a subcontractor who was having formatting issues with the database (see figure 1)5.

4 5

http://kevinhaw.com/Documents/ProtectingData_Licenced.pdf Bob Sullivan, Government agency exposes day-care data: Daily whereabouts of hundreds of children posted on public Web site. MSNBC, Feb. 8, 2004, http://www.msnbc.msn.com/id/4186130.

Finally the last and most astonishing case of lost data due to outsourcing is that of the banks in Europe. In 2005 a British undercover reporter from The Sun, was sold the bank account, credit card, passport and driving license details of 1,000 UK customers by a call centre worker in India for 4.25 each6. This led to an investigation into the incidents however due to jurisdictions the British government was unable pursue legal actions; they forwarded their claims to Interpol. While this is astonishing, we at the United States need not feel safe

because within the same year it was reported that $35,000 was stolen from the accounts of Chase customers from a call centre in India7. Some other risks or cons of outsourcing include; loss of talent, loss of intellectual property, loss of jobs, and final loss of performance. In his speech at the Information Technology Association of America lunch in New York, CGS president and CEO Phil Friedman predicts that within the next ten years we will not have the skills to support our own infrastructure8. This can have devastating effects on the United States, because of our current reliance on software. The United States job market has suffered due to outsourcing; in 2008 there was a loss

6 http://www.silicon.com/special-features/offshoring/2005/06/23/banks-face-prosecution-over-indiancall-centre-leak-39131387/ 7 http://www.silicon.com/special-features/offshoring/2005/06/23/banks-face-prosecution-over-indiancall-centre-leak-39131387/ 8 http://www.informationweek.com/news/15200264

of about 250,000 jobs in IT. That number today according to Forrester Research, Inc has doubled and will continue to grow9. In conclusion we can see that while outsourcing does save money, manpower, and resources, it can also lead to unprecedented lost of sensitive data. Thus when we have to decide wheatear to outsource work or not we must take this into consideration. We must first investigate the companys integrity that will be doing the work. We must consider if the data is lost or compromised how much effect will it have on our organization. Also while the organization does save money, it will lose in the long run. That organization will be bounded to the software provider for any updates, training, changes etc. to the software.

John C. McCarthy, Near-Term Growth of Offshoring Accelerating, Forrester Research, Inc., May 14, 2004