Outsourcing It Function

Outsourcing the IT function

As companies rely more on information technology (IT) to conduct business for example, accessing large market research databases to find new customers and using the Internet as a store front IT development and maintenance costs have exploded. It is easy to understand, therefore why companies consider transferring IT assets, leases and staff to third-party vendors that promise savings without losing ground to the competition

What is Outsourcing? 

Today, IT outsourcing generally is defined as contracting with outside vendors to do various IT functions such as data entry, data center operations, application maintenance and development, disaster recovery and network management and operations. Vendors may be individual IT professionals, consulting firms, employee leasing companies, full-service providers and CPA firms.

The logic underlying IT outsourcing follows from core competency theory, which argues that an organization should focus exclusively on its core business competencies, while allowing outsourcing vendors to efficiently manage the non–core areas such as the IT functions. This premise, however, ignores an important distinction between commodity and specific IT assets.

Commodity IT assets are not unique to a particular organization and are thus easily acquired in the marketplace. These include such things as network management, systems operations, server maintenance, and help-desk functions. Specific IT assets, in contrast, are unique to the organization and support its strategic objectives. Because of their idiosyncratic nature, specific assets have little value outside their current use. Such assets may be tangible (computer equipment), intellectual (computer programs), or human. Examples of specific assets include systems development, application maintenance, data warehousing, and highly skilled employees trained to use organization specific software.

Transaction Cost Economics (TCE) theory is in conflict with the core...