Agree or disagree: Standard financial investment information and criteria are all that is needed to effectively evaluate IT outsourcing decisions

Standard financial investment information and IT outsourcing decisions

2007 Standard financial investment information

And IT outsourcing decisions

Introduction

Attractiveness of a business immediately attracts many corporations to enter a market as suggested by Porter 's five forces analysis . However once many corporations enter a business there will be an intense competition among corporations that soon drive companies to compete in many issues like quality of products , rate of innovation , and price

The fierce competition in business has driven corporations to focus on their core competence in to explore their internal

resources into their fully potential while eliminating unnecessary costs . While there are many ways that companies take to reduce their costs , currently , many of them conduct the so-called outsourcing that give out non-vital jobs to outsourcing providers

Concerning the outsourcing issues , this will examine whether the use of standard financial investment information and criteria is enough to evaluate IT outsourcing decisions . The discussion will assess both from financial and non-financial factors

Organizational Performance

When dealing with examining a corporate performance , usually people look at the financial indicators . While this approach is justified , it does not reflect a complete figure of an investment or business decisions including the outsourcing matter

According to Shaw (1999 , there are six parameters of organization performance as shown in the table 1 . The table shows that financial information only represents one element of organizational performance assessment

Table 1 Six Parameters of Organizational Performance

Performance Dimensions Types of Measures

Competitiveness Market share , Sales achievement , Customer bases

Financial Performance Liquidity , Profitability , Capital Structure debt measures

Quality of Service Availability , Responsiveness , Competence Reliability , Satisfaction etc

Flexibility Specification , Speed , and Volume of Delivery

Resource Utilization Productivity , Efficiency , etc

Innovation Performance of the innovation process

Source (Fitzgerald et .al

Financial Analysis of Outsourcing Results

The main benefit of conducting outsourcing is to reduce costs . To justify this , we can employ several financial analysis indicators . For instances , when companies outsource their IT department , they will have better efficiency by calculating the inventory turnover and average payment period , to name a few

The financial benefits of outsourcing can also be obtained through assessing the profitability measures that describe a corporate ability to operate efficiently and are of concern to owners , creditors , and management (ROE , Profit margin etc and the debt measures (debt ratio and debt-to-equity ratio etc

In the calculation of profit margin , for instances , personnel costs becomes one component of costs of good sold . Therefore , when outsourcing several jobs , the company will raise the profit due to the decrease of costs of good sold

Non-Financial Analysis of Outsourcing Results

When discussing the outsourcing matter , the images refer to advantages that organizations obtain , especially refers to costs reduction However , the benefits of outsourcing do not merely the cost reduction Figure 1 shows six main reasons of carrying out outsourcing in an organization

Figure 1 Reasons of Outsourcing

Source : Outsourcing World Summit

Therefore , using standard financial analysis does not enough to assess the benefits of IT outsourcing decisions since there are many...