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Influence of Buisness Strategy

Influence of Buisness Strategy

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Published by api-3798769
Presented by: Nitin kumar
Presented by: Nitin kumar

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Published by: api-3798769 on Oct 17, 2008
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A RESEARCH PAPER TO ASSESS THE INFLUENCE OF BUISNESS STRATEGY AND
FINANCIAL CONSIDERATION ON OUTSOURCING POLICY AND ITS IMPACT ON
PRODUCTIVITY

Prepared BY: NITIN KUMAR
MMS::5Yrs.(7TH SEMESTER)
IM-98-38
Introduction

With nearly one-half of U.S. corporate capital being invested in information technology (Keen
1991) and IS expenditures representing the third largest corporate expense (Benko 1992), the IS
function has become the prime target for outsourcing.so here it has been looked upon in the context
of the Indian companies for which data has been collected from publication from business today

magazine last year issue as well as from computer express and last but not the least from computer
world website. The outsourcing of IS is so popular among communications companies, computer

vendors, and semiconductor firms that an industry report notes that the "computerless computer
company will soon dominate the industry" (Rappaport and Halevi 1991). Several organizations are
considering outsourcing as one of the key options for improving information systems performance
(Due 1992). Similar developments suggest increased relevance of IS outsourcing and outsourcing
policies to IS research as well as IS practice.

IS outsourcing policies define the criteria that organizations utilize to decide upon the scope [of
specific capabilities and degree of reliance for each capability] of their dependence upon external
sources for meeting their IS needs. There is an ongoing debate on the pros and cons of the
information systems outsourcing policies being pursued by different organizations and the rationale

for those policies (Bettis, Bradley & Hamel 1992, Davis 1992, Due 1992, Lacity and Hirschheim
1993a, Sharp 1993). Among several factors responsible for firms' increased drive toward
outsourcing of IS, financial considerations and business strategy have been discussed as the two
major reasons (Hopper 1990, Huber 1993, Quinn and Hilmer 1994, Sue 1992, Thames 1992). Most
controversy on outsourcing of the IS functions has revolved around the issue of increasing the
productivity of the information systems (Brynjolfsson 1993, Due 1994, King 1994). In this context,
the study of the interrelationships between IS outsourcing policy, the business and financial
strategy considerations and IS productivity, is increasingly relevant for providing a more balanced
perspective to the ongoing debate.

The conceptual framework proposed here is expected to facilitate the two primaryObjectives of
this study: (i) to assess the influence of business strategy and financial conditions on IS
outsourcing policy, (ii) to evaluate the relative importance of financial considerations and IS
outsourcing policy as determinants of IS productivity.

This following section provides a detailed perspective of the IS outsourcing policy decisions with
specific focus on the financial considerations and business strategy. Section 1 delineates the
conceptual framework used for the study, the structural form of the model and the
operationalization of the constructs used for the study. Section 2 discusses the factor analysis
results used for determining the factors underlying the variables used in the study. An overview of
the various regression analyses used for determining the structural equation parameters and the
solutions of those equations is provided in section 3. The concluding section includes a discussion
regarding the operationalization of the study, an analysis of the findings and their limitations, and
implications for future IS research and practice.

Characteristics of I/S Outsourcing Decisions
Encouraged by the projections of phenomenal cost savings, manyFortune 500 firms are jumping

on to the "outsourcing bandwagon" (Lacity and Hirschheim 1993b). A survey of
LEADERS(CEO\u2019S) shows that 42% of communication firms, 40% of computer manufacturers, and
37% of semiconductor companies rely on outsourcing from foreign firms. These same CEOs expect
the figures on outsourcing to exceed 50% before the mid-2005 Yet, despite its growth, outsourcing
is frequently perceived to be poorly controlled, high in cost, and a drain on quality and service
performance

Cost savings has often been cited as the main driver for the IS outsourcing decision (Due 1992, Loh
and Venkatraman 1992a).On the other hand, the short-term focus on financial performance without
consideration of the strategic implications has also been criticized (Davis 1992). Another driving
force for outsourcing is management's perception that by surrendering control of its IS to an
external supplier it can better focus on its core business (Grover and Teng 1993, Huber 1993,
Quinn et al. 1990). A third motivating factor relates to the perception of the IS in the organization --
companies consider outsourcing when the internal IS function is perceived to be inefficient,
ineffective or technically incompetent (Lacity and Hirschheim 1993a). Based on their case studies,
Lacity and Hirschheim (1993a, 1993b) suggest that the outsourcing decision may be a result of
rational consideration or it may be a product of organizational politics, conflicts and compromises.

They conclude that organizations engage in outsourcing evaluations because outsourcing is
inherently about creating a perception concerning the efficiency (and perhaps effectiveness) of the
internal IS function.

Some critics (Due 1992, Lacity and Hirschheim 1993b) argue that IS outsourcing can result in loss
of control over IS/IT assets, threat of opportunism [from the supplier], the loss of IS expertise and
corporate memory, and a decline in the morale and performance of the remaining employees. They
also suggest that the anticipated cost savings might also be achieved internally, i.e., without
sourcing externally (Benko 1992, Carlyle 1990, Davis 1992, Due 1992, Lacity and Hirschheim
1993a, Sharp 1993). Evidently, most controversy regarding IS outsourcing remains around the
issue of balance between strategic implications and financial returns.

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