OUTSOURCING IT OPERATIONS

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 t he 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 d ecisions 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 an d risk. Please review at
least in overall terms the
following documents relating to IT outsourcing:

Thor Olavsrud (2011). IT Outsourcing. Datamation. Retrieved from
http://itmanagement.earthweb.com/career/article.ph
p/3875026/IT-Outsourcing.htm#

IT_Outsourcing_Pros_and_Cons.

James Bucki (2011). Introduction to Outsourcing. About.com. Retrieved from
http://operationstech.about.com/od/costsa vingstrategies/a/OutSrcDefine.htm.

James Bucki (2011). Top 7 Outsourcing Advantages. About.com. Retrieved from
http://operationstech.about.com/od/offi
cestaffingandmanagem/a/OutSrcAdvantg.htm.

James Bucki (2011). Top 6 Outsourcing Disadvantages. About.com. Retrieved from
http://operationstech.about.com/od/
outsourcing/tp/OutSrcDisadv.htm.

F. John Reh (2011). Offshoring – Outsourcing to Extreme. About.com.
Retrieved from
http://management.about.com/cs/
people/a/offshoring104.htm.

Dhanya Ann Thoppil (2011). IT Firms Split on Outsourcing Demand for
2011. IndiaRealTime.
Retrieved from http://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 h ttp://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 Appl ied Corporate Finance. Retrieved Sept. 23, 2007 from
http://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 possibil ities 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 (3-5 page) paper 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.

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