Page 474 - Using MIS

442 Chapter 11 Information Systems Management

technology, then the hiring organization will be slow to attain benefits from that technology. An
organization can find itself at a competitive disadvantage because it cannot offer the same IS
services as its competitors.
Another concern is a potential loss of intellectual capital. The company may need to reveal
proprietary trade secrets, methods, or procedures to the outsource vendor’s employees. As part
of its normal operations, that vendor may move employees to competing organizations, and the
company may lose intellectual capital as that happens. The loss need not be intellectual theft;
it could simply be that the vendor’s employees learned to work in a new and better way at your
company, and then they take that learning to your competitor.
Similarly, all software has failures and problems. Quality vendors track those failures and
problems and fix them according to a set of priorities. When a company outsources a system, it
no longer has control over prioritizing those fixes. Such control belongs to the vendor. A fix that
might be critical to your organization might be of low priority to the outsource vendor.
Other problems are that the outsource vendor may change management, adopt a different
strategic direction, or be acquired. When any of those changes occur, priorities may change, and
an outsource vendor that was a good choice at one time might be a bad fit after it changes direc-
tion. It can be difficult and expensive to change an outsource vendor when this occurs.
The final loss-of-control risk is that the company’s CIO can become superfluous. When us-
ers need a critical service that is outsourced, the CIO must turn to the vendor for a response. In
time, users learn that it is quicker to deal directly with the outsource vendor, and soon the CIO
is out of the communication loop. At that point, the vendor has essentially replaced the CIO,
who has become a figurehead. However, employees of the outsource vendor work for a differ-
ent company, with a bias toward their employer. Critical managers will thus not share the same
goals and objectives as the rest of the management team. Biased, bad decisions can result.

Benefits Outweighed by Long-Term Costs

The initial benefits of outsourcing can appear huge. A cap on financial exposure, a reduction of
management time and attention, and the release of many management and staffing problems
are all possible. (Most likely, outsource vendors promise these very benefits.) Outsourcing can
appear too good to be true.
In fact, it can be too good to be true. For one, although a fixed cost does indeed cap expo-
sure, it also removes the benefits of economies of scale. If PRIDE demand takes off and it sud-
denly needs 200 servers instead of 20, the using organization will pay 200 times the fixed cost of
supporting one server. It is possible, however, that because of economies of scale, the costs of
supporting 200 servers are far less than 10 times the costs of supporting 20 servers. If they were
hosting those servers in-house, they and not the vendor would be the beneficiary.
Also, the outsource vendor may change its pricing strategy over time. Initially, an organiza-
tion obtains a competitive bid from several outsource vendors. However, as the winning vendor
learns more about the business and as relationships develop between the organization’s em-
ployees and those of the vendor, it becomes difficult for other firms to compete for subsequent
contracts. The vendor becomes the de facto sole source and, with little competitive pressure,
might increase its prices.
Another problem is that an organization can find itself paying for another organization’s
mismanagement, with little knowledge that that is the case. If PRIDE outsources its servers, it
is difficult for it to know if the vendor is well managed. The PRIDE investors may be paying for
poor management; even worse, PRIDE may suffer the consequences of poor management, such
as lost data. It will be very difficult for PRIDE to learn about such mismanagement.

No Easy Exit

The final category of outsourcing risk concerns ending the agreement. There is no easy exit.
For one, the outsource vendor’s employees have gained significant knowledge of the company.