Impact of ICT Solutions: Outsourcing on Organizations Performance in Telecom Sector

2013, TextRoad Publication ISSN 2090-4304 Journal of Basic and Applied Scientific Research www.textroad.com Impact of ICT Solutions: Outsourcing on Organizations Performance in Telecom Sector Erum Naz 1, Bakhtiar Ali 2, Tabbasum Naz 3, Ayesha Sadiq 3 1 Business Development, Pakistan Telecommunication Company Limited, Islamabad, Pakistan 2 Department of Management Science, Shaheed Zulfikar Ali Bhutto Institute of Science and Technology, Islamabad, Pakistan 3 Department of Computer Science Department, COMSATS Institute of Information Technology, Lahore, Pakistan ABSTRACT The recent advancement in information and technology (ICT) forced the world to embrace the phenomenon of outsourcing and encouraged the world to adopt the outsourcing principals which enable companies to focus on their core activities and grow in markets. This paper measures the impact of outsourcing on organizations performance of telecom sector of Pakistan. Direct and indirect association between outsourcing constructs and organization performance has been analyzed. The direct association reveals that cost effectiveness, flexibility, access to skill and technology has positive impact on organization performance. This study reveals that the strong communication between vendor and client reduces the negative impact of outsourcing risks on employee and organizations performance. The result of indirect association shows that employee performance acts as a positive mediating variable and improves the organization s performance. Outsourcing increases the efficiency of an employee as employee gets an access to current knowledge, skills and technology. The findings also suggest that knowledge transfer should be from both sides rather only from vendor to client. KEYWORDS: IT Outsourcing, Cost effectiveness, Employee Performance, Flexibility, Outsourcing, Organization Performance, Outsourcing Risks. I. INTRODUCTION The recent advancement in information and technology (ICT) forced the world to embrace the phenomenon of outsourcing and encouraged to adopt the outsourcing principals which help companies to expand in markets. In today s world outsourcing is becoming more and more important to look new ways to generate business value [9].Outsourcing came into business since 1960 in corporate America for number of reasons. Outsourcing is defined as "the process of purchasing goods and services from external service provider rather than producing the same goods or providing the same services within the organization" [20]. External service provider is known as vendor and the organization hiring the vendor is known as client. Outsourcing is a strategic decision of management and the main element in the hierarchy of decision is to decide which set of capabilities to develop in-house and which set of activities is to develop among partners. This decision and proper planning of outsourcing process helps in maintaining the relationships between vendor and client [3]. Every type of work that you may consider a business process can be outsourced. Outsourcing can be divided into three categories that are Knowledge Process Outsourcing (KPO), Business Process Outsourcing (BPO) and Information Technology Outsourcing (ITO). KPO covers the area of research, consultancy, and analysis. BPO is the process of outsourcing the organization s back office projects. Outsourcing of IT Services and Software comes under the umbrella of ITO. [13]. With the advent of internet and development in telecom sector, it is becoming necessary for companies to use decent, speedy and scalable computer system and software with highly adaptive environment. Therefore, it is very crucial to select right vendor to develop the requirements [14]. Previous researches focused on outsourcing from all domains for example HR, Finance, procurement and marketing whereas this research focused on outsourcing of ICT solutions in telecom sector of Pakistan. New questionnaire is also developed in this study according to ICT solutions outsourcing keeping telecom sector in view. The objective of the study is to examine the impact of outsourcing on the organization s performance. Since the organization Performance and Employees performance are highly related and interdependent, this study also examines the impact of outsourcing on Employee s performance and the impact of employee performance on organization performance. The rest of the paper is organized as follows. Section II provides a literature review. Adopted methodology is described in section III. In section IV, results and findings from the research are given. Results are discussed in detail in section V. Scientific contributions of the paper are given in section VI. Section VII contains implication. Limitations and future work is described in section VIII and IX respectively. Finally, section X concludes our work. *Corresponding Author: Dr. Tabbasum Naz, Computer Science Department, COMSATS Institute of Information Technology, Lahore, Pakistan, Email: tabbasum.naz@ciitlahore.edu.pk 683

Erum Naz et al., 2013 II. LITERTAURE REVIEW The fast emerging business world of today has enabled organizations to outsource their process and activities to expert companies who can perform the tasks more efficiently, professionally and less costly [14]. With the global economic crisis, managers especially IT managers are facing the challenge of cost cutting which increases the need of outsourcing. This aggressive need of outsourcing forcing companies to outsource their secondary activities so that they can concentrate on their core business and activities. In order to meet the new technologies the vendor s architecture plan as well as client s current and future IT architecture planning and the task of taking advantages from evolving technologies should be the responsibility of client. By envisioning the future needs of the company, effective organizational structures should be adopted [17]. CIO must keep an eye on upcoming requirement of the company and partnership/contract should be managed in such a way that advantages must be taken from emerging technologies, both internally and within the outsourcing suppliers. There are operational cost savings and economy of scales exists while outsourcing but one can not deny the transaction cost [21]. Unanticipated costs may incur in project when outsourcing is not properly planned and this can have an effect on the effectiveness of the outsourcing decision [15]. Cost uncertainties can be avoided if the contract services are purchased at fixed cost [3]. Cost reduction is the process of maximizing profit by using cost effective methods. Cost curtailing is done from assumed economy of scale. Economies of scale are advantageous to both vendor and client in terms of money. Vendor has expertise and access to new technologies and equipment so it is cheaper to buy the services rather than developing in house. This would save the infrastructure building cost (capital investment) and reduces the opportunity cost. If the contract services purchased at fixed cost then cost uncertainties may be avoided. [3] [16]. Outsourcing is a strategy which is used by many organizations to reduce costs and increase value. Outsourcing also has some risks. Several studies agree about the main objective for IT outsourcing that is the need to cut cost and increase efficiency. According to neoclassical economy theory, cost curtailing is done from assumed economy of scale [2]. Economies of scale are advantageous to both vendor and client in terms of money. For common application, especially in BPO, vendor can update and supply software once for all and can distribute cost among many clients [4]. Economies of scale help in saving money. As the vendor have expertise and have up-to-date software and hardware which helps in building software more cheaply as compared to building in-house. This also helps in maintaining strong and successful partnership [14]. Organization Performance reflects on achievement or accomplishment of an organization which is achieved by the employee involvement in the particular task. For the larger firms internal reorganization and better business focus is the benefit from outsourcing, whereas for smaller firms easy access to resources and flexible workforce is the big benefit from outsourcing [5]. The concept of flexibility is same as that of scalable i.e., expanding and reducing according to the requirement or it is the process of responding accordingly to the changes. Organizations are spending a lot to cover an unbalanced workload. We can move between vendors to get the considerable savings from workload peaks. Outsourcing brings flexibility in an organization which helps in designing a small responsive organization these smaller responsive organizations in turns responds quickly to the changing business environment along with access to the resources and experts. As the vendor handles IT functions for the client organization, thus client gets an access to the vendor s resources. Vendor resources can helps in producing innovation, and this innovation brings long-term existence of the client s organization. Organization must control environment and technological changes before practicing or implementing outsource strategy. Outsourcing effect firms in different perspective and those effective factors are, Organizational Performance, Knowledge Sharing, competitiveness, and risk of pursuing outsourcing [11]. Skills are an efficient use of knowledge to obtain desired results or solutions in minimum time and resources. Skills are defined as the efficient use of knowledge, expertise, proficiencies and experience required to accomplish the business task. In an unusual situation organization need highly specialized skills or specialists. Specialists are available in almost every field. Only big companies can employ them as they are expensive as no small company can afford them after completion of particular task. Client organizations by outsourcing can meet the unusual situation; get access to new technologies, process, material and help in inventing and measuring service requirement by using skills of vendor organization [7]. Canada and India are the two leading countries to provide outsourcing services. In the outsourcing of computer hardware and software world China is the market leader [18]. These days it is has become imperative for organizations to O/S their departments and the areas which are primarily focused are; call centers and utility bill processing systems, in the current times there are some other important departments which are emerging in the field of outsourcing and play an important role in an organization are also being focused which are administration, human resources, payroll and accounting management system and services. However, it would take some cultural shift for administration, human resources and accounting services to be outsourced, but the first two can start immediately [12]. 684

Outsourcing is a risky proposition and the rule of thumb, "high risk, high return," outsourcing has its warnings and in some cases outsourcing is a game of faith as organizations not only moves people and services to external vendors but also transfer its functions, applications and processes in hopes of improving overall competitiveness. A warning from outsourcing advocates that negative consequences may be greater than the benefits achieved [14].High transaction costs, high monitoring and management costs, loss of control, loss of skills and experience as disadvantages of outsourcing [10]. The proposed conceptual framework has motives for evaluating, describing and explaining the reasons for outsourcing, identifying the activities and functions that organization outsource and examines the impact of outsourcing on the organization s performance. This study also examines the impact of outsourcing on cost effectiveness, flexibility, access to specialized skills & technology and outsourcing risks. This study explores the impact of outsourcing on employee and organizations performance in telecom sector; gather or search data on demographics of Telecom Companies of Pakistan and identifies the activities and functions that organization outsourced. H 1 : Cost effectiveness gained through outsourcing has a positive impact on Organizations Performance. H 2 : Flexibility gained through outsourcing has a positive impact organizations Performance H 3 : Access to specialized skills and technology gained through outsourcing has a positive impact on organizations Performance. H 4 : Outsourcing Risks come as a result of outsourcing has a negative impact on organization performance. H 5 : Employees Performance mediates the relationship between cost effectiveness and Organizations Performance. H 6 : Employees Performance mediates the relationship between flexibility and Organizations Performance. H 7 : Employees Performance mediates the relationship between access to specialized skills and technology and Organizations Performance. H 8 : Employees Performance mediates the relationship between outsourcing risks and Organizations Performance Figure 1. III. Conceptual Diagram METHODOLOGY A. Instrument Development Questionnaire was developed by reviewing the literature [9][3][22]. Content and face validity is used to test the questionnaire. Initial draft of questionnaire was discussed with Project Managers, Directors and Top Management of the telecom sector. Initially questionnaire contains seven variables and 55 items. After content validity the instrument reduced to five variables and 42 items. The developed questionnaire was then pilot tested and two items were omitted. B. Data Collection The targeted population for this research is the top management of Telecom Sector of Pakistan. The respondents must have outsourcing experience and working in telecom sector of Pakistan. A web based questionnaire floated among the Project Managers of telecom companies to find out impact of the cost effectiveness, flexibility, access to specialized skills & technology and outsourcing risks on employee and organization performance. Each question was a statement followed by a 685

Erum Naz et al., 2013 five point Likert scale ranging from Strongly Agree (coded as 5 ) to Strongly Disagree (coded as 1 ). The questionnaire also gathers data on demographics of organizations. C. Testing Methods Numbers of tests and tools have been used to analyze the data. Descriptive analysis has been done to gather the demographics of response. MS Excel is used to calculate percentages of demographic variables. Cronbach s alpha and factor analysis is calculated to measure the reliability of items and variables by using SPSS 17. Correlation was done to determine the relationship between variables and linear regression is performed to test the hypothesis using SPSS 17. IV. RESULTS AND FINDINGS As the research was targeting the project managers, project directors and top management of telecom sector so a total of 54 responses were received through internet survey. Sixteen responses were discarded as the twelve respondents do not have the outsourcing experience and four responses were not from telecom sectors. Now, all the result and analysis will be on the basis of 38 responses. A. Descriptive Results This research obtained data on demographics of telecom companies in terms of type of outsourcing and name of organization. The large number of sample received from PTCL (36.8%), followed by Telenor (18.4%).13.2% came from Zong, 13.2% from Mobilink and 10.5% from Ufone and 7.9% from Warid Telecom. The descriptive analysis about the respondents department that is 34.2% responses are from IT Department, 31.6 % from technical, 18.4% from commercial, 10.5% from HR and 5.3% from Finance. Above result shows that Telecom Sector of Pakistan is outsourcing its technical and IT Services. B. Item Testing The reliability or the cronbach s alpha for all variables were obtained. The coefficient alpha for this study was above 0.65 [18] which is presented in Table I. However alpha of outsourcing risk is 0.661 which shows low internal consistency reliability so item no. 4 has been removed and alpha reaches to 0.680. TABLE I. RELIABILITY TEST Reliability Statistics Variable Name Cronbach s Alpha Cost Effectiveness 0.707 Organization Performance 0.939 Flexibility 0.840 Access to skills and technology 0.880 Employee Performance 0.900 Outsourcing Risks 0.661 The factor analysis was satisfactory. The items having factor loadings less than 0.40 were omitted from subsequent analysis. Principal component analysis with Varimax rotation was conducted to assess the underlying structure of the items of the questionnaire. Only two items were mapped onto more than one factor. One item from organization performance item no 3 and one item from outsourcing risks item no 5 was excluded because of low commonality i.e., 0.364 and 0.110 respectively. Assumption was tested by exploring correlation between variables. Correlation finds the connection between two variables and determines the extent to which values of two variables are proportional to each other. Correlation between flexibility and organization performance (.751), cost effectiveness and access to skills & technology (.492),flexibility and access to skills & technology (.408), employee performance and organization performance (.884), flexibility and employee performance (.709) and access to skill & technology and employee performance (.502). Strong correlation means all above variables have a strong tendency to vary together on 1% level of significance. Outsourcing risks has weak correction with organization and employee performance that is -0.096 and -0.248 respectively. C. Hypothesis Testing Linear regression analysis is tool to measure relationship between two variables. Table II shows ΔR 2 = 0.100, ΔR 2 = 0.662, ΔR 2 = 0.127 meaning that 10%, 66% and 12% of the variance in organization performance can be predicted from cost effectiveness, flexibility and access to skills & technology respectively. The t value and significance indicate that cost effectiveness, flexibility and access to skills & technology is significantly contributing to the equation for organizations 686

performance from whole set on independent variables. The t value and significance of outsourcing risks indicate that outsourcing is not significantly contributing to the equation for organizations performance from whole set of independent variables as shown in Table II. HYPOTHESIS TESTING TABLE II. Hypothesis 1-4 - Results of Regression Analysis for impact of Independent variables on organization performance Hypothesis R 2 Adjusted R 2 β t p H1 0.124 0.100 0.35 2.262 0.030 H2 0.564 0.662 0.75 6.819 0.000 H3 0.151 0.127 0.38 2.529 0.016 H4 0.009-0.018 0.09-0.577 0.568 *p<.05 Multiple Regressions analysis has been followed for analyses and interpretation of the effect of employee performance (mediating variable) on organizations performance. The association between cost effectiveness, flexibility, access to skills & technology and outsourcing risks with employee performance and the association between employee performance and organizations performance was measured by using Barren and Kenny method. This method is widely used in various management research studies. There are four step of regression analysis to examine/measure the effect of role mediating variable [1]. Four step of Barren and Kenny method was implemented on hypothesis 5, 6,7 and 8. Table III shows the result of hypothesis 5,6,7 and 8, which depicts that magnitude of estimated coefficient for independent variable (cost effectiveness) and t- statistic were increased (β =.353 vs β =.888 and t = 2.262 vs t = 10.236), and over all fits of model is improved (ΔR 2 = 0.657). Magnitude of estimated coefficient for independent variable (flexibility) and t-statistic were decreased (β =.751 vs β =.106 and t = 6.819 vs t = 6.791), and over all fits of model is improved (ΔR 2 = 0.248). Magnitude of estimated coefficient for independent variable (access to skills & technology) and t-statistic were increased (β =.388 vs β =.921 and t = 2.529 vs t = 10.153), and over all fits of model is improved (ΔR 2 = 0.634). Magnitude of estimated coefficient for independent variable (outsourcing risks) and t-statistic were increased (β =.096 vs β =.916 and t =-0.577 vs t = 11.646), and over all fits of model is improved (ΔR 2 = 0.788). TABLE III. REGRESSION ANALYSIS FOR MEDIATING VARIABLES Hypothesis 5-8 - Results of Regression Analysis for Mediating Variables Hypothesis R 2 Adjusted R 2 β t p H5 0.781 0.768 0.888** 10.236 0.000 H6 0.812 0.801 0.106** 6.791 0.000 H7 0.785 0.772 0.921** 10.153 0.000 H8 0.797 0.785 0.916** 11.646 0.000 V. DISCUSSION The multiple regression result indicates that cost effectiveness, flexibility, access to skill and technology has positive impact on organization performance. High correlation exists between employee performance and organizations performance which indicated that there is a strong tendency to vary together. The findings suggest that the additional flexibility to processes and services, access to state of the art technology, access to current knowledge and products, professional trainings, reduced capital investment, reduced operating cost and reduced headcount positively impact the employee performance, which improves the organization performance. Strong relationship between flexibility and organization performance showed that outsourcing allow companies to focus on core business, company can respond quickly to the competitive threats. As vendors are better equipped than clients so sufficient flexibility exist to respond to market changes. This study also find that outsourcing improves service level, performance, quick decision making, increase customer satisfaction which improves the employee and organization performance. Findings in this study complement previous studies [4][6][8][19]. The effect of risks factors, have positive impact on the organization and employee performance which negates the previous researches. Responses also reveal that in Pakistani culture outsourcing becomes the vendor s responsibility which increases the communication among vendor and client for the better implementation of the outsourced activity and as vendor has access to skills and technology so the efficiency increases. VI. SCIENTIFIC CONTRIBUTION 687

Erum Naz et al., 2013 The scientific contribution of this paper includes that major reason of outsourcing is to minimize cost and improve performance by getting benefit from the vendor s knowledge. It is also added in the research that outsourcing involves some risks. Specially, when client organization shares the confidential information with vendor organization then trust is the major concern. Implication in next heading will elaborate that what needs to be considered before going to outsourcing. VII. IMPLICATION This study reveals the several implications for managers in Pakistan. Project managers need to design detailed requirement document to better implement the outsourcing activity and to get the desired resource. Project managers should identify the gap and knowledge transfer should be from both sides rather than from vendor to client. VIII. LIMITATION This study discussed the different dimensions of outsourcing and its impact on performance. Due to shortage of time and resources this study was limited to telecom sector of Pakistan. The responses were taken from an employee who has at least one outsourcing experience in telecom sector as a project manager. Responses were also gathered from top management of telecoms of Pakistan. In order to generalize the study responses from operational employees should also be considered. IX. FUTURE WORK This paper analyses how employees and organizations performance affected by outsourcing arrangements and what are the factors effecting the performance. Only the client perspective of outsourcing and its impact on organizations is discussed in this study. In future, vendor selection method, impact of supply chain issues and vendor s perspective should also be analyzed. X. CONCLUSION In order to compete with today s challenges outsourcing emerged as a competition tool. Outsourcing allows companies to focus on their core activities. Finding in this study concluded that cost reduction, flexibility, access to specialized skills & technology are the basic constructs of outsourcing which increases the efficiency of the employees and improves the organizations performance. Outsourcing improves the service level, employee performance, continuity of services and reduces headcount, delivery time and capital investment. All above mentioned factor increases the performance of telecom sector of Pakistan. It is also concluded that top management can freely focus on business strategies by contracting non-core activities with vendor. Outsourcing helps in performing correct and timely decision. Training provided by the vendors improves the employee performance which has positive impact on organizations performance. REFERENCES [1] Ali, B. 2008. Critical success factors for effective knowledge management in corporate sector. Doctoral dissertation, National University of Modern Language, Islamabad, Pakistan. [2] Ang, Soon and Detmar W, Straub. 1998, Production and transaction economies and IS outsourcing: A study of the U.S. banking industry, MIS Quarterly, Vol 22, No. 4, pp. 535-552. [3] Antonucci, Y.L., Lordi, F.C. and Tucker, J.J. 1998, The pros and cons of IT outsourcing, Journal of Accountancy, Vol. 185, No. 6, pp. 26-31. [4] Beaumont, N. B., and Sohal, A. 2004, Outsourcing in Australia, International Journal of Operations and Production Management, Vol. 24, No. 7, pp. 688-700 [5] Behara, R.S., Funderson, D.E. and Capozzoli, E.A. 1995, Trends in information systems outsourcing, International Journal of Purchasing and Materials Management, Vol. 31,No. 2, pp. 45-51. [6] Benko, C. 1993, Outsourcing evaluation: a profitable process, Information Systems Management, Vol. 10, No. 2, pp. 45-50. [7] Casale, F. J. 2000, The Outsourcing Revolution, editorial for Outsourcing Index 2000: Strategic Insights Into U.S. Outsourcing, [Online] Available at: http://www.outsourcing.com/ OI_Agreements/OI_Index.pdf 688

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