Question:
In recent years many companies chose to at least partially outsource their IT operations. They are of the opinion that the IT is not the core competence of the company and outsiders who will undertake to provide the IT operation as outside contractors will do a better and possibly cheaper job.
The financial manager must be able to assess the wisdom of the investment in technology, and in particular in IT, from the viewpoint of the shareholders. The basic question that one must try to answer is: would an investment in technology and IT raise the value of the shares and increase the wealth of the owners of the company - the shareholders? Would an outsourcing be more beneficial? Should the company lease (or outsource) these technologies or should it invest in developing new technologies? What impact would these decisions have on shareholders' value?
In this module we will be considering this investment decision with reference to IT outsourcing and its relation to capital budgeting and risk. Please review at least in overall terms the following documents relating to IT outsourcing:
Thor Olavsrud (2011). IT Outsourcing. Datamation. Retrieved from
https://itmanagement.earthweb.com/career/article.php/3875026/IT-Outsourcing.htm#IT_Outsourcing_Pros_and_Cons.
James Bucki (2011). Introduction to Outsourcing. About.com. Retrieved from
https://operationstech.about.com/od/costsavingstrategies/a/OutSrcDefine.htm.
James Bucki (2011). Top 7 Outsourcing Advantages. About.com. Retrieved from
https://operationstech.about.com/od/officestaffingandmanagem/a/OutSrcAdvantg.htm.
James Bucki (2011). Top 6 Outsourcing Disadvantages. About.com. Retrieved from
https://operationstech.about.com/od/outsourcing/tp/OutSrcDisadv.htm.
F. John Reh (2011). Offshoring - Outsourcing to Extreme. About.com. Retrieved from
https://management.about.com/cs/people/a/offshoring104.htm.
Dhanya Ann Thoppil (2011). IT Firms Split on Outsourcing Demand for 2011. IndiaRealTime. Retrieved from
https://blogs.wsj.com/indiarealtime/2011/02/17/on-outsourcing-demand-for-2011-indian-it-is-split/
Also read these document discussing managerial decision-making concerning return on investment, capital budgeting and risk.
Cresswell AM. Return on Investment In Information Technology: A Guide for Managers Retrieved Sept. 23, 2007 from
https://www.ctg.albany.edu/publications/guides/roi
Graham J and Campbell H (2002) How Do CFOs Make Capital Budgeting And Capital Structure Decisions? Journal of Applied Corporate Finance. Retrieved Sept. 23, 2007 from
https://faculty.fuqua.duke.edu/~jgraham/website/SurveyJACF.pdf
In addition, read this overview of the lease vs. buy decision and this article on such decisions in IT.
The background information has further material on using financial data to assess risks and comparatively evaluate the future possibilities for companies. In addition, you may wish to seek out further information through your own research. When you have reviewed the advice and the plans. please prepare a short response discussing:
Agree or disagree: Standard financial investment information and criteria are all that is needed to effectively evaluate IT outsourcing decisions. (When evaluating the options be sure to compare debt vs. equity)
Please carefully explain your reasoning, with reference to the appropriate financial and other information