DEPARTMENT OF MANAGEMENT MBA PROGRAM
Course Title: Management information systems
Article title: Information Technology Outsourcing: Reducing
Costs or knowledge?
Authors: Satyendra Singh
Queen’s Business School Kingston,Ontario, Canada
Michael H. Zack
Queen’s Business School Boston, Massachusetts, USA
Individual Assignment Article Review
Name
ID Number
Gashaw Negasa
MGMT-PGW/013/13
Submitted To:-Mesfin. (PHD)
WOLISO, ETHIOPIA
JUNE,2021
Abstract
This theoretical paper reviews extant research to determine information technology
outsourcing: reduce cost or knowledge? The study is based on a review of 46 peer-reviewed
articles on outsourcing in relation to reduction of cost and knowledge. The literature used base
on three rationales are supported theoretically by transaction cost theory, resource based theory
and institutional theory. Also they react to knowledge based view and outsourcing strategy has
not investigated it directly or put enough emphasis on the strategic value of knowledge.
At the final paper makes various contributions to outsourcing practice. IT provides a
framework for practitioners that can be used in outsourcing decisions. The paper also makes
contributions to outsourcing research. The literature has mostly focused on outsourcing from
either a cost reduction or resource gap perspective (Costa, 2001), and has underplayed the role
of knowledge.
I
Introduction
The article “information technology outsourcing reduces cost or knowledge? ’Were written
by Michael H. Za Queen’s Business School from and Satyendra Singh from Queen’s Business
School.
The paper is started by give evidence when outsourcing information technology (IT) activities
started in business world. Since, the early 1950s (Costa, 2001; Due, 1992; Klepper and Jones,
1998). However, outsourcing has grown tremendously since Kodak outsourced its IT in 1989.
All decision evaluated relative to its effect on the firm’s knowledge and learning (Zack, 2003).
They focused, for example, is on knowledge partitioning of activities, not task partitioning
(Takeishi, 2002) Outsourcing the ability to maintain and enhance the knowledge associated
with an activity has a more profound effect on an organization’s long term ability to compete
than merely outsourcing the activity itself. This perspective is the essence of the knowledgebased view. They argue that firms must consider the value of knowledge and learning
associated with performing an activity before making an outsourcing decision.
IT outsourcing is generally embraced as an integral component of cost-reduction strategy.
However, to be an effective strategy, it must address various issues and ramifications regarding
enterprise knowledge resources. IT outsourcing reduce cost or knowledge? What strategies can
be implemented to reap the benefits of IT outsourcing while minimizing the risks of corporate
knowledge? The purpose of this article is to shed some light in answering these questions and
pave the way to further research studies in this important area.
Finally they present a brief discussion of general benefits and impact of IT outsourcing to
provide the context for the following discussion of negative side of knowledge outsourcing.
Also, a knowledge framework is presented to help identify various areas of IT outsourcing
impacts on the enterprise knowledge management. Finished by remarks and research and
practical implications of IT outsourcing as related knowledge and cost reduction.
II
The paper structured, methodology, evidence and conclusions respectively as follows: The
first, section presents the structure, methodology of the literature review, evidence, then
results and finally the paper terminates with conclusions.
STRUCTURE
The type of text is secodary source because they present their arguments on the other
researchers papers presented before . Since, the early 1950s (Costa, 2001; Due, 1992; Klepper
and Jones, 1998). So, second-hand information and commentary from other researchers.
It was a effective article. The article was very useful for the readers especially for those who
are in line of business and corporate world related knowledge outsourcing problem. The article
maybe one of the best references who wants to achieved a success in their business by
understanding cons of information technology outsourcing reduction knowledge. This can
provide them enough information to analysis aspect of time is that the line between what is and
what is not outsourcing moves over time based on accepted practice (Linder, 2004).
METHODOLOGY
Qualitative method is used by researcher to generate new understanding regarding IT
outsourcing in case of knowledge reduction ideas. They used qualitative method as a result; of
this they are able to present their view or even opinion on the matter.
Regarding the objective of the researcher, they focus on knowledge and learning holds, and in
fact address the dynamic by which activities may permanently.
The researcher used prior literature review (costa, 2011) and Due, 1992; Klepper and Jones,
1998. Literature reviews were included; e.g., Cost reduction has been the primary rationale for
outsourcing (DiRomualdo and Gurbaxani, 1998; Lacity and Willcocks, 1998; Takac, 1994).
Filling the gaps in IT resources is a second major rationale for outsourcing (Lacity and
Willcocks, 1998.used Several researchers (Aubert, et al., 1998; Beaumont and Costa, 2002;
Clark, et al., 1995; Duncan, 1998; Earl, 1996; McAulay, et al., 2002; McCray and Clark, 1999;
Willcocks and Lacity, 1998; Willcocks, et al., 1999) have identified the Knowledge-Based
View of Outsourcing knowledge. Arising from IT outsourcing reduction of cost and
knowledge.
REASON/EVIDENCE
The writers of the paper are used deductive reasoning also deductive logic is the process
of reasoning from more statements (premises) to reach a logical conclusion. They start by
question of information technology outsourcing reduce cost or knowledge? It’s clear
outsourcing reduce cost of the organization but, always outsourcing is may not reduce cost
sometimes purchase resource directly from free market is selectable. Also identifying what to
be outsourcing and not outsourcing in related to loose knowledge and difficult to survive in
business competitive world because lack specialization or knowledge.
1
Analysis of the Review
Among the 95 papers that were reviewed as reference, the earliest publication is from 1950 and
the most recent ones are from 2004. This underlines that the topic continues to be of significant
interest to researchers. The papers were published in general management, knowledge
management, and supply chain management journals. And Information technology systems.
They were used three rationales theoretically support to present their logical arguments such
ads transaction cost theory, resource based theory and institutional theory, respectively. The
following sections examine these theoretical approaches to understand the growing trend
toward outsourcing.
Transaction Cost Economics Theory
Cost reduction has been the primary rationale for outsourcing (DiRomualdo and Gurbaxani,
1998; Lacity and Willcocks, 1998; Takac, 1994). Transaction Cost Economics (TCE) (Coase,
1937; Williamson, 1975; Williamson, 1979; Williamson, 1985) provides a theoretical
foundation for addressing outsourcing from a cost perspective. Transactions are the exchanges
of goods or services between firms. TCE maintains that the allocation of economic activity
among firms depends on balancing each firm’s internal costs against the cost of transacting for
goods and services in the market (Alchian and Demsetz, 1972). This is the familiar make vs.
buy argument which proposes that firms buy services from other firms (via “the market”) if it
is less costly than producing those services in-house (via “hierarchy”). Conversely, when the
market “fails” then products and services must be produced internally; the reason why firms
exist according to TCE.
TCE addresses two types of costs: production and coordination (Alchian and Demsetz, 1972).
Production costs represent the costs of actually producing the goods or services, and would be
expected to differ among firms. Coordination costs are the costs of controlling and monitoring
workers if the goods are produced internally or vendors if purchased in the market. These costs
arise from the need to define, negotiate and enforce contracts, and to monitor and coordinate
activities across organizational boundaries. Buying in the market typically offers lower
production costs through specialization and economies of scale. However, markets have high
transaction costs because vendors tend to behave opportunistically and therefore require
monitoring of their activities. Hierarchies, on the other hand, may have higher production costs
because of their inability to achieve as great economies of scale. Hierarchies should have lower
coordination costs, however, because employees can be managed more effectively and
efficiently than vendors.
Resource-Based Theory
Resource-based theory views a firm as a collection of productive resources (Penrose, 1959) and
organizations compete based on having or controlling unique, valuable and hard-to-imitate
resources (Barney, 1991). Rather than competing from a specific product/market position, a set
of resources could be used to create various products for various markets. Advantage comes
from being the only organization with the resources needed to create and deliver those
products. Sustainability of the advantage depends on resource immobility, that is, the difficulty
for others to copy, acquire, or develop those resources (Rumelt, 1984). If competitors face no
significant cost disadvantage or obstacle in developing those resources, then the resources can
provide only a temporary ability to compete until they are copied by another firm. Firms need
to know more than competitors about how to integrate and deploy their resources, especially
those that are externally contracted for and thus commonly available (Zack, 1999).
2
Institutional Theory
The Eastman Kodak decision is regarded as a turning point in outsourcing’s history. Loh and
Venkatraman (1992b) examined the adoption of outsourcing before and after Eastman Kodak’s
decision to outsource and found that adoption of IT outsourcing was motivated more by
imitative behavior, than by external influence amongst user organizations. Outsourcing is often
an imitative response to the hype and publicity surrounding the subject - the so-called
“bandwagon effect.” (Hu, et al., 1997; Lacity and Hirschheim, 1993a; Lacity and Hirschheim,
1993b; Lacity and Willcocks,1998).
Institutional theory provides a theoretical foundation for explaining the imitative behavior
regarding outsourcing (Ang and Cummings, 1997; Hu, et al., 1997). Institutional theory posits
that organizations within the same organizational field grow increasingly similar. There are
three mechanisms of isomorphic changes. Coercive isomorphism is a result of formal or
informal pressures. Mimetic isomorphism is a result of organizations imitating other
organizations within their field that they perceive to be legitimate or successful. Normative
isomorphism is a result of normative pressures in the environment (DiMaggio and Powell,
1983). Thus, companies may make outsourcing decision based on other organizations that have
already outsourced. In addition, organizations may adopt outsourcing due to other external
factors such as the influence of vendors, consulting firms, trade periodicals and the general
business climate. And again, the impact of outsourcing on knowledge and learning is not taken
into account.
The Knowledge-Based View of Outsourcing
The researchers well accepted these above three theories .depending on those theory they the
little research that has taken the KBV of outsourcing has not investigated it directly or put
enough emphasis on the strategic value of knowledge and learning For instance, Willcocks et
al. (2004) suggested that both clients and vendors must make special arrangements to create and
capture knowledge in outsourcing arrangements. Poppo and Zenger (1998) found that TCE
provided a better explanation over knowledge based view in determining outsourcing decisions.
Zack (2003) suggests that a knowledge-based organization take a knowledge perspective for all
of its strategic decisions. Organizations often make outsourcing decisions based on task
partitioning (von Hippel, 1990) rather than knowledge partitioning (Takeishi, 2002). The two
perspectives are different because task partitioning relates to what tasks should reside within a
firm and what can be outsourced based on labor division, whereas knowledge partitioning
relates to what task should reside within a firm and what can outsourced based on what
knowledge should organization develop and preserve internally. Takeishi (2002) emphasis,
firms need to consider knowledge partitioning while outsourcing an activity. Penrose (1959)
pointed out the importance of knowledge and learning to understand the firm. Viewing the firm
as a repository of knowledge and experience, she argued, that knowledge is the critical factor to
explain the growth of individual firms. Generally they argue that all business organization
should be Consider a scenario illustrating above the importance of taking knowledge and
learning on outsourcing decisions.
3
Conclusion
This paper’s aim was to show the impact of outsourcing on knowledge. In order to reach this
aim, 46 peer-reviewed articles were analyzed by researchers as i have seen from reference.
Extant literature can be divided into two strands. One strand highlights the chances outsourcing
can bring organizations in relation to knowledge and learning; while the second strand stressed
the possible negative consequences of outsourcing with regard to knowledge and learning.
The literature has mostly focused on outsourcing from either a cost reduction or resource gap
perspective (Costa, 2001), and has underplayed the role of knowledge and learning. We have
argued that organizations must consider an opportunity for learning from an activity that is being
considered for outsourcing. While making no pretensions of comprehensiveness, the framework
and its concepts can guide future empirical research. The paper builds propositions, which
researchers in future can test through longitudinal case studies. Future work should expand the
framework, identify specific and testable constructs and propose and test hypotheses. Doing so
will contribute to an understanding of the current research and to improving future research and
practice while establishing a cumulative tradition for this work.
The research may be more effective if more accurate figures and tables are shown also needs to
improve the conceptualization and theoretical basis of the work. The research might consist of
much clear statement near the beginning. Further explanation, examples and research of the
subject to make the article much more effective to the reader. However, the research is good and
useful for the readers and for everyone.
REFERENCE
1.Beaumont, N., and Costa, C. "Information technology in Australia," Information
Resources
Management Journal (15:3), 2002, pp. 14-31.
2. Loh, L., and Venkatraman, N. "Diffusion of information technology outsourcing: Influence
sources and the Kodak effect," Information Systems Research (3:4), 1992b, pp. 334-288.
3.Zack, M. "Developing a knowledge strategy," California Management Review (41:3), 1999,
pp. 125-144
4. Takeishi, A. "Knowledge Partitioning in the Interfirm Division of Labor: The Case of
Automotive Product Development," Organization Science (13:3), 2002.
5.Willcocks, L.P., and Lacity, M.C. "The sourcing and outsourcing of IS: Shock of the new?,"
In Strategic Sourcing of Information Technology: Perspectives and Practices, L. P. Willcocks
and M. C. Lacity (eds.), Wiley, Chichester, 1998, pp. 1-41.
6. Poppo, L., and Zenger, T. "Testing alternative theories of the firm: Transaction cost,
knowledge- based, and measurement explanations for make-or-buy decisions in information
services," Strategic Management Journal (19:9), 1998, pp. 853-877.
7. DiMaggio, P., and Powell, W. "The Iron Cage Revisited: Institutional Isomorphism and
Collective Rationality in Organizational Fields," American Sociological Review (48:April),
1983, pp. 147-160.
8Alchian, A.A., and Demsetz, H. "Production, information costs and economic organization,"
American Economic Review (62), 1972, pp. 777-795.
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