The document summarizes the key risks and rewards of IT outsourcing and insourcing based on a review of 10 pieces of literature. For outsourcing, the primary risk identified is contract/trust issues, while the primary reward is reduced costs. For insourcing, complacency and resistance to cost reduction are key risks, while lower costs and improved service levels are rewards. Selective sourcing is presented as a better alternative to minimize risks compared to total insourcing or outsourcing.

1. Tim Kelly
112337801
IS6137
Word Count: 1,452
Risks and rewards of IT outsourcing and
insourcing to an organisation

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Executive Summary
The purpose of this research is to provide a detail summary of the risks and rewards for IS/IT
outsourcing and IS/IT insourcing to an organization. It seeks to explain and educate each
topic to various stakeholders within the organization.
In order to properly assess each topic, 10 pieces of literature were evaluated for their most
prominent points on the topics, if a topic reoccurred within another piece of literature it was
documented in summary tables with the most reoccurring topics to be discussed. For
example, there are summarised pie charts which highlight the primary topics.
The key findings include:
 Reduced Costs as the primary reward for insourcing and outsourcing
 Contract/Trust Issues as the primary risk of outsourcing
 Complacency and resistance to cost reduction are prominent in insourcing
 Selective Sourcing as a better alternative to insourcing or outsourcing
 Lack of research and understanding of insourcing
 The various perspectives of stakeholders impact the view of the risks and rewards of
IS/IT insourcing and outsourcing.
The most prominent risks and rewards of IS/IT insourcing and outsourcing can be briefly
summarised using the below framework:
Contract Issues
Trust Issues
Reduce Costs
Complacency
Resist Cost
Reduction Strategy
Lower Costs
Improve Service
Levels
IT
OutsourcingInsourcing
Risks Rewards

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Table of Contents
Executive Summary...................................................................................................................1
Table of Contents.......................................................................................................................2
Risk and Rewards of IT Outsourcing.........................................................................................3
Risks and Rewards of IT Insourcing..........................................................................................5
Limitations of research...............................................................................................................7
Conclusion .................................................................................................................................8
References................................................................................................................................10
Methodology............................................................................................................................11

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Risk and Rewards ofIT Outsourcing
Risks:
Contract Issues:
Ill-defined contracts with vendors particularly mega-deals can be more expensive than IT
(Lacity et al, 1996). Barthelemy (2001) argues that excluding the vendor, the contract is
probably the most important part of outsourcing. As a poorly defined contract may leave
open questions which could contribute to disaster (Barthelemy, 2001) which may lead to IT
managers to terminate the contract and rebuild the internal IT organization (Hirschheim &
Lacity, 2000).
Due to the complex nature of contracts, they often rely on mutual interest and commitment
(Lee et al, 2003). Earl (1996) discusses how organizations should avoid contracts which are
set in stone such as long term contracts which may hinder the growth of the organization.
Short-term contracts have proven to be more successful (Lacity & Wilcocks, 1998). They are
able to motivate vendor performance, allow quicker recovery from mistakes and helped to
ensure a fair market price.
Trust Issues:
According to Lee et al (2003) mutual trust is key to a long term successful partnership in
outsourcing. For example, an organization could specify a looser contract which allow for
more feedback and agile improvement. (Barthelemy, 2001).
Nevertheless, it would be naïve to presume that the relationship would remain constant and
that the vendor would willingly adapt under the spirit of trust even if it was not specified in
the contract (Lacity & Wilcocks, 1998). These “CEO handshake” deals often managed to
save money in the short term but the relationship would continue to deteriorate as the effects
of a poorly negotiated deal came to life.
Rewards:
Reduced Costs:
Outsourcing is believed to lead to reduction of costs for a business organization (Lee et al,
2003). Researched conducted by Lacity & Willcocks (1998) indicated that cost reduction is
the prime reason for outsourcing with 80% of their participants citing it as a major influencer.

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Bartholemy (2001) discusses how IT is one of the most expensive aspects of an organization
to establish and maintain. However, large vendors with many clients will be able to operate at
a scale which most organizations cannot compete with. This will generally lead to better
negotiated deals with software and hardware suppliers.
For example, when British Petroleum and Mobil outsourced their activities to PWC, they
saved over 46% in cost savings in the first year (Quinn, 1999).

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Risks and Rewards ofIT Insourcing
Risks:
Complacency:
Lacity et al (1996) warns a key risk of insourcing is creating an environment of complacency
in the organization. This is primarily due to ignoring the external market altogether thus
cutting off more cutting edge technology. Furthermore, the complacency created may reduce
IT managers desire to cut costs as there is a legacy of complacency (Lacity & Willcocks,
1998)
Resist cost reduction strategy:
In many cases, users may reject or resist cost reduction strategies implemented by senior
management (Lacity et al, 1996). In comparison to outsourcing, IT does not have the
influence to implement unpopular tactics such as software standardisation, this in turn leads
to uninhibited users to drive up the cost. In fact, insourcing has led to lower costs but only
after internal I.T managers were authorized to act as outsourcing vendors by senior
management (Hirschleim & Lacity, 2000).
Lacity & Willcocks (1998) have previously discussed how internal users resist cost reduction
strategy such as consolidating two data centres under the assumption that one data centre was
superior to another.
Rewards:
Lower Costs:
IT managers in recent years have opted to propose internal bids as opposed to outsourcing
(Lacity & Willcocks, 1998). In many cases, senior management were often surprised by the
low cost bid. Furthermore, when cost reduction is the major objective, IT managers can often
replicate the success of vendors (Hirschheim & Lacity, 2000).
As previously discussed, IT managers must be enabled by senior management to behave like
an outsourcing vendor in order to produce results. For example, a US food manufacturer’s
internal departments once resisted internal IT budget cuts until threatened by outsourcing.
When the IT manager was enabled by senior management, IT costs promptly dropped by
45% (Lacity et al, 1998).
Additionally, research indicates that empowering IT managers’ bids may exceed their
proposal resulting in greater cost savings (Hirschheim & Lacity, 2000).

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Improved Service Levels:
Hirschheim & Lacity (2000) research indicates improved service levels when insourcing
occurs. Outsourcing vendors tend to focus on maximising profit by reducing staff, pushing
key staff members to entice new organizations and failing to introduce new technologies. As
such, users grew dissatisfied with the service and IT managers are able to successfully
leverage dissatisfied customers as justification to keep IT insourced.
Service excellence is a key requirement for end users and insourcing is a proven way to
improve service (Currie & Gallier, 1999; Hirschheim & Lacity, 2000).

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Limitations of research
It is important to note there have been three areas of limitation in the research conduction: 1.)
Lack of research in insourcing; 2.) Ignoring selective sourcing; and 3.) Whose perspective is
the research for? Therefore I will briefly discuss each area and note their limitations.
1) Lack of research in insourcing
Despite insourcing being a proven method of cost saving, very little literature seeks to better
understand insourcing. Hirschheim and Lacity (2000) discuss how research neglects
insourcing and instead literature focuses on understanding the motivations and benefits of
outsourcing.
2) Ignoring Selective Sourcing
The research discussed in this paper reflects only on total insourcing and total outsourcing
instead of focusing on selective sourcing. Selecting sourcing allows organizations to select
the most capable and efficient vendors to handle some IT responsibilities which would allow
the organization to focus and develop their own core competencies (Lacity & Willcocks,
1998).
Currie & Galliers (1999) refer to selective sourcing as right sourcing due its treatment of IS
as a portfolio and it has proven to have higher success rates than either total insourcing or
outsourcing (Lacity & Willcocks, 1998).
Lastly, selective sourcing is able to meet customer needs and minimize the risks of traditional
outsourcing approaches (Lacity et al. 1996).
3) Whose perspective is the research for?
This assignment is based on the presumption that the evidence gathered is for an
organization. However, different stakeholders within the organization will have different
opinions on what the primary risks and rewards of insourcing and outsourcing are. For
example, senior management may focus on cost minimization as the primary objective while
end users focus on service excellence (Currie & Gallier, 1999). As a result, there is a
cost/service trade off:

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Conclusion
In summary, there are numerous risks and rewards of both insourcing and outsourcing
approaches. The primary focus of both insourcing and outsourcing is to reduce costs for the
organization especially for senior management. However, users are more interested in service
excellence and as such IT often acts as a balancing act between cost/service:
Furthermore, the concerns discussed by various literature and the reoccurrences are illustrated
below in these four pie-charts:
Rewards of Outsourcing
Reduce Costs
Focus on Core Competencies
Higher Capacity
New Technology
Skilled Workforce
Agile
Risks of Outsourcing
Hidden Costs
Business Uncertainty
Rebuild IT
Outdated Technical Skills
Contract Issues
Loss of Skills

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As evidenced by the pie-charts, there is an apparent discrepancy between the research
undertaken for both insourcing and outsourcing.
Lastly, the purpose of this research was to underpin the most prominent risks and rewards of
insourcing and outsourcing, and use literature to expand upon these thought and provide a
simplified summary. Therefore, the research aimed to explain each topic thoroughly for the
intended audience.
Rewards of Insourcing
Lower Costs
Enable Business Operations
Track and Access IT
Improve Service Levels
Risks of Insourcing
Complacency Resist Cost Reduction

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References
Barthelemy, J., 2001. The hidden costs of IT outsourcing. MIT Sloan management review,
42(3), p.60.
Djavanshir, G.R., 2005. Surveying the risks and benefits of IT outsourcing.IT
professional, 7(6), pp.32-37.
Earl, M.J., 1996. The risks of outsourcing IT. MIT Sloan Management Review, 37(3), p.26.
Hirschheim, R. and Lacity, M., 2000. The myths and realities of information technology
insourcing. Communications of the ACM, 43(2), pp.99-107.
Lacity, M.C. and Willcocks, L.P., 1998. An empirical investigation of information
technology sourcing practices: Lessons from experience. MIS quarterly, pp.363-408.
Lacity, M.C., Willcocks, L.P. and Feeny, D.F., 1996. The value of selective IT sourcing. MIT
Sloan Management Review, 37(3), p.13
Lee, J.N., Huynh, M.Q., Kwok, R.C.W. and Pi, S.M., 2003. IT outsourcing evolution---: past,
present, and future. Communications of the ACM, 46(5), pp.84-89.
Kishore, R., Rao, H.R., Nam, K., Rajagopalan, S. and Chaudhury, A., 2003. A relationship
perspective on IT outsourcing. Communications of the ACM, 46(12), pp.86-92.
Wendy Autor Currie, Robert D. Galliers (1999) Rethinking Management Information
Systems: An Interdisciplinary Perspective, United States: Oxford University Press,
Incorporated.
Quinn, J.B., 1999. Strategic outsourcing: leveraging knowledge capabilities.MIT Sloan
Management Review, 40(4), p.9.

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Methodology
In order to properly assess the risk and reward of both IT outsourcing and insourcing, I
created a table to represent the authors/ years and the primary risk and rewards as described
by the literature. I marked X when a key point matched an identified risk or reward in
literature before summing up the accumulated X’s.
I then chose the identified area with the most risks as the topics to be discussed. However if
one topic was identified 4 times and another was identified 4 or 3 times, I choose to discuss it
as it consistently reoccurred throughout the readings. If one topic was identified and the
closest was 6, I only discussed the 9 as it reoccurred far more throughout the literature.
Risk and Rewards of Outsourcing:
Risks and Rewards of Insourcing:

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