Emergence of web 2.0 paradigm opened windows for Information Technology (IT) business outsourcing and off-shoring (Garner, 2004). Outsourcing has developed mainly due to changes in the market and industry conditions. There has been a common boost in outsourcing of information processes within business cycles. The needs and expectations of customers in different markets are becoming more specific and highly demanding on businesses. This increase is a result of the need to constantly generate value and develop competitive advantage. This has led to a general appreciation of outsourcing as a cost cutting mechanism and strategy to ensure professionalism in delivery of products and services (Jae-Nam, 2008).
Gibb and Buchanan, (2006) claim that IT outsourcing involves organization outsourcing of computer based tasks or internet based tasks to an external company or consultant. Companies commonly outsource IT tasks like programming and software development. Yeaple (2006) advanced the argument that IT outsourcing is a subset of business process outsourcing (BPO) that involves outsourcing of organizational tasks that need less technical skills. an organization outsources for a variety of reasons for instance lack of adequate technical and human resources, lack of enough resources to support implementation of a functional IT department or need to reduce costs and maximize on marginal revenue (Adeleye, Annansingh, & Nunes, 2004). Doh (2005) argues that IT outsourcing increases organizational flexibility through increasing lead times, throughput and turnaround times that reflects positively on business processes. IT outsourcing is dependent on efficiency of organizational supply chain management (SCM).
Lall and Narula (2004) determined that IT outsourcing results in the transformation of business fixed costs into variable costs, which contribute into an organization’s management of its costs structure and capability to manage its marginal returns. Through achievement of capability to manage variable costs, Cuadros, Orts & Alguacil (2004) claim that an organization reduces opportunities for investing in assets which makes an organization to have the potential to respond timely to market changes and hence focus on managing its core competencies and capability to sustain its competitive advantage in a competitive market. Investment in IT outsourcing by an organization has been determined to make it possible for employees to reflect on rationale for restructuring, redesigning and developing business core competencies (Adeleye, et al., 2004). For example, customer engagement, development of customer relationships, and improvement of business operational processes towards increasing customer interactivity and achieving sustainable customer relationships, This forms a basis for building lasting customer loyalty brand engagement and positive customer engagement.
Organizations are currently under increased pressure to improve their performance and gain a competitive advantage along with continuous review of their operations with the aim of addressing threats emanating from changes in the external environment and harnessing the opportunities (Mani, Barua & Whinston, 2010). IT outsourcing and business off-shoring by firms is driven by various challenges that firms face such increased operating costs, need for innovation and improvement of business processes. The ability to outsource has been enhanced by advanced technology and globalization. In spite of the ability of firms to outsource, outsourcing and off-shoring brings with it many challenges that affect effective business operations while the positive effects of outsourcing. Adeleye et al. (2004) argues that outsourcing firms face numerous challenges such as incapacity of outsourced human capital to deliver customer expected service value, lack of clarity of contractual terms that reduce motivation and increase employee turnover (Tenner, 2011). IT outsourcing has led to the emergence of homogeneous organizations that have equivalent core competencies resulting to loss of business core competencies through exploitation of best practices in IT competitive advantage (Gibb & Buchanan, 2006). Lastly, risks and information insecurity associated with IT outsourcing and off-shoring have increased leading to a loss of customer loyalty. For instance, IT outsourcing has been associated with security risks that are characterized by communication networks for instance non-encrypted networks, technical threats like unauthorized system access that leads to insecurity of customer data. There has been increasing threats that IT outsourcing cannot be implemented across continents because of threat of data access by unintended users, threats of virus and lack of device interoperability (Rist, 2008).
In spite of these challenges, outsourcing and of-shoring firms have reported some benefits that result from outsourcing. According to Cuadros et al. (2004), outsourcing companies have been able to reduce their operating costs through improved business processes that result in improved competitive advantage and performance. IT market competitiveness has provided opportunities for firms to improve the quality of provided services and goods through innovativeness that leave customers satisfied. Customer satisfaction leads to customer loyalty, increased market share and profitability. In the light of these positive and negative factors, this study seeks to examine the impact of outsourcing and off-shoring to firms.
Purpose of the Study
The purpose of this quantitative descriptive study is to examine IT outsourcing as applied in multinational corporations. Therefore, the research would seek to establish the relationship between IT outsourcing and business performance regarding their operations, cost reduction and profitability. Furthermore, there is a knowledge claim that IT business outsourcing and off-shoring has advantages. Therefore, the study will be conducted with an aim of probing into this knowledge claim, to come up with dependable evidence that truly supports this claim. IT business outsourcing comes with some risks that could mean something to an organization that makes a decision to adopt the usage of IT business outsourcing and off-shoring. The usage of IT business outsourcing has some public opinion about its usage, as a result, the study will be conducted with a purpose of discovering the kind of public opinion that the users have (Yeaple, 2006).
The study will cover the current and previous IT consultants in outsourcing and off-shoring, business individuals using outsourcing, consultants or sellers of the technology and the public. In particular, previous and current employees of organizations that use outsourcing would be studied. The study will use structured questionnaires in providing direct insight on the advantages as well as the limitations associated with this trend. The questionnaires will be administered to the employees of these businesses and to the general public that have knowledge pertaining to the use of these two trends. The importance of administering the questionnaires is to cover a wider scope of contributions to the study (van den Bergh, 2009).
In this study, the two types of quantitative research questions will be employed, descriptive and predictive. Descriptive research questions will be utilized to seek answers pertaining to queries asking the frequency at which IT outsourcing and off-shoring in businesses takes place. Predictive quantitative research questions could strive to determine whether a variable can be utilized in foreseeing some future results. Causal queries are meant to evaluate the various fluctuations of particular phenomenon, especially in endeavoring to classify causes of something.
Many organizations in the modern business environment have adopted the use of IT business outsourcing and off-shoring. Advances in any technology come with intended purposes but other side effects are attached to their usage. IT business outsourcing and off-shoring may not be left out since its adoption could be associated with gains as well as losses. Therefore, questions such as the ones presented below will be answered in this study.
- Q1. Is there a significant relationship between IT outsourcing and off-shoring and its drivers such as cost minimization and improved business processes?
- Q2. What is the existing relationship between risks firms experience and IT outsourcing and off-shoring?
- Q3. Does IT outsourcing and off-shoring lead to information insecurity?
- Q4. Is outsourcing and off-shoring lead to reduced innovation and poor customer relationship in outsourcing firms?
- Q5. What are the benefits of IT outsourcing? Does IT outsourcing and off-shoring contribute positively to the performance of the firm?
- H1. There is a significant relationship between IT Outsourcing and its drivers such as cost minimization and company processes.
- H2. IT outsourcing and off-shoring are positively correlated to outsourcing risks.
- H3. There is a significant relationship between IT outsourcing and information insecurity
- H4. IT outsourcing and off-shoring are positively correlated to the performance of an organization.
Brief Review of the Literature
Information technology is an important factor in the modern world given the advance in technology. It helps firms innovate and produce high quality products that meet customer needs and demands. Due to changing business environment, firms have found it necessary to reduce operating costs while exploiting the comparative advantages of human IT skills offered by other countries (Manaschi, 1998). Therefore, companies have opted to outsource critical IT skills from other firms from other nations that are endowed with the expertise. In spite of the benefit of cost reduction and improved operations, IT outsourcing poses security and generic risk issues to the firm (McKendrick, 2010). If these issues are well managed, the outsourcing firm is likely to benefit through increased innovativeness and high product quality that could positively improve customer satisfaction hence increasing customer loyalty. This study examines outsourcing and explores outsourcing as applied in IT organizations.
Outsourcing is the act in which a company or an organization pays another firm to produce goods or offer services on their behalf (Blokdjik, 2008). In many cases, the company could have produced the goods or offered the service themselves but sometimes it involves higher costs. Off-shoring on the other hand is a business process that companies use when they decide to relocate their operations to lower cost locations, mainly overseas (Trojahn, 2009).
The requirements and expectations of customers in different markets are becoming more demanding. Businesses are therefore required to take appropriate actions in order to satisfy the demands of a certain market. Value addition to products has for a long time been used as a means of creating a competitive advantage by many businesses, however these strategies are not enough in themselves, thus outsourcing was embraced. Outsourcing and off-shoring has been around for many decades and companies seek these services due to a number of reasons. No matter what the reason, the rate at which companies are outsourcing and off-shoring their services are steadily increasing. This has led to the globalization of services, consequently boosting trade and commerce all over the world (McKendrick, 2010).
The level of trade has grown remarkably over the last few decades because of the advancements that are being experienced in the field of information, communications and technology (ICT) (Jovanovic, 2011). These advancements have also increased the number of tradable services in the field of IT and ICT, which have made the outsourcing and off-shoring of services to be that much easier. The ease in the tradability of these services coupled with the increased independence of the location has contributed to the off-shoring of services by many companies in the west (Kapila, 2009). Companies are now outsourcing services such as support, customer care, research and consultancy. The main reason behind this is that outsourcing for services is much cheaper and the result is desirable (Tenner, 2011). The development in IT and ICT has motivated organizations to outsource their products and services all over the world. India is the country, which provides most of these services (Blokdjik, 2008).
India is a prime location for IT outsourcing and off-shoring (Blokdjik, 2008).It has a strong labor force that is comprised of personnel who are skilled and talented. Their high population increases the competition for employment. This has made the country to have a workforce that is comprised of relatively cheap labor force. India also has a high number of competent personnel in almost all the fields of the economy. These individuals are highly educated, professional, have many experiences, knowledge and skills, which are required to execute their respective tasks effectively and efficiently. This group can also speak and write fluent English, an aspect that makes them stand at a competitive edge over rival countries such as China, Singapore, and Malaysia (McKendrick, 2010).
With the revolution in IT and ICT, location is not of a high concern as it used to be. The advancement in technology has made the transmission of inputs and outputs to be much easier. These processes can now be conducted digitally and transmitted via electronic means. Companies have therefore off-shored much of their services especially white-collar jobs to improve their sustainability and efficiency. The customer care for the giant computer manufacturer Dell, for example is located in India (Kurtz, 2010). When local residents call the customer care, they are being served with an operator who is located in India (Tenner, 2011).
Despite the benefits accrued from outsourcing and off-shoring, there has been a lot of debate on the effectiveness and sustainability of this new trend. It is evident that outsourcing and off-shoring benefits both the origin and destination country. The destination country enjoys increased rates of employments and free trade. The origin country on the other hand enjoys the availability of goods and services. The mutual relationship between these two countries is beneficial since both of their Gross Domestic Product (GDP) will increase in the short run and in the long run (Jae-Nam, 2008).
Outsourcing and off-shoring has been referenced with success, effectiveness and efficiency. As a result, many companies have adapted these mechanisms. However, some analysts claim that such companies may lose the control of their overseas organizations, an occurrence which maybe very risky (Plunkett, 2006). IT market competitiveness has provided opportunities for equivalence of service level, which result into loss of brand identity, and brand community and decreased market share (Plunkett, 2006).
These criticisms of outsourcing and off-shoring raise many questions as to the effectiveness and efficiency of outsourcing. Outsourcing and off-shoring has increased trade to a new level, enhanced globalization, and improved the operations of organizations all around the world (Doh, 2005). These outcomes have only been experienced in the short run. The sustainability of outsourcing and off-shoring remains a big mystery. This is because there are a number of drawbacks that are coupled with outsourcing and off-shoring of IT services. These drawbacks affect the free market by changing the balance of trade. A study should therefore be conducted to investigate the viability and sustainability of IT outsourcing and off-shoring (Lacity, Willcocks & Feeny, 2004).
Drivers of Outsourcing
According to Jae-Nam (2008), every organization in a given industry aims at various goals. However, major objectives include maximizing profit or revenues earned from sales. In order to achieve this objective, the management focuses on reduction of all costs incurred by the firm. A study conducted by Oshri (2011) established that firms outsource IT services to other firms in different countries and regions in order to minimize operating costs. Since costs are important factors in profit determination, the organization use various strategies to minimize costs, one of them being outsourcing among others such as large-scale production.
The theory of factor endowments that was put forward by Heckscher and Ohlin postulates that countries have different factors of production that enable them to poses the comparative advantage over other nations (Manaschi, 1998). This theory could be used to explain the pressure for companies to outsource IT services from other countries. Countries that have enough skilled IT expertise have a comparative to countries that do not have the expertise. Therefore, organizations operating in such deficient countries tend to outsource the services from well-endowed nations in order to improve their competitive advantage. Therefore, outsourcing is a form of international trade occurring because IT skill differentials between countries. Tenner (2011) supports this theory as applied in outsourcing by noting that organizations that outsource IT expertise obtain best skills for the right cost and at the right time. Organizations have identified IT talent limits within their employees and talents from outside the region best fill the gaps. Lastly, Plunkett (2009) notes that outsourcing IT expertise enables an IT firm to be nimble in the quest to fulfill business unit requests especially operations that are likely to run behind schedule.
Generic Risks in IT Outsourcing and Off-shoring
Adeleye et al. (2004) notes that every organization gets an outsourcing and off-shoring collaborate that it deserves. Therefore, firms that experience inefficiency in IT management end up getting incompetent outsourcing partners. On the contrary, organizations that do efficient management of their IT departments always obtain competent IT outsourcing partners. In addition, other firms that do not conduct enough research in determination of outsourcing partners are worse off because they may end up overhauling their better IT expertise for worse outsourced expertise. In addition to these risks, there are many others, for instance, outsourcing requires best management skills. Organizations that lack good management skills may not reap maximum benefits from outsourcing.
According to Varadarajan (2009), some companies have difficulties in managing their IT departments. Such organizations may face challenges of maintaining outsourcing. Other corporations that do not undertake market testing for IT outsourcing have the risk of missing the benefits of IT outsourcing.
Overreliance on this factor is not necessary since most of the benefits of IT outsourcing are not transparent. The supply of un-updated technology is another risk common with firms that are engaged in long term IT outsourcing contracts. This may result in unfruitful relationship between the two companies. It is evident that IT skill outsourcing can reduce operating costs of a firm. However, this can only be realized if the company can manage its IT management costs (Yang, et al. 2007).
Security concerns have been raised concerning outsourcing and off-shoring of IT expertise from other countries. According to Tenner (2011), outsourcing firms run risks of information security hence there is need for auditing and restricting system users for the organizations. Not all foreign software coders could be trusted by outsourcing firms. It is important that outsourcing firms conduct proper background investigations of foreign software coders. Given that only few firms conduct such investigations, outsourcing corporations are not safe since their confidential information could be compromised (Mani, Barua & Whinston, 2010).
The reactions of customers regarding company products vary depending on the overall effects of outsourcing. To begin with, outsourcing can be preventing the innovative nature of the firm. As noted by Gibb & Buchanan (2006), companies usually have high expectations of outsourcing including innovativeness at lowest costs resulting to unrealistic expectations. However, innovation requires that the firm provide the necessary resources, flexibility and in-house competency (Couto, et al. 2007). Due to these inadequacies, the firm may be disappointed hence disappointing the clients in terms of quality of produced goods. The customers may react by finding alternative products. On the contrary, the benefits of outsourcing could result in increased innovativeness, low costs, high product quality and customer satisfaction and loyalty (Garner, 2004).
According to Mitra & Ranjan (2010), it is difficult for firms to decide on what to outsource and what not to outsource. A rule of thumb is the basis of many outsourcing contracts in IT. This rule postulates that firms should outsource non-strategic IT functions while strategic IT functions should be left to the internal IT team of the firm. Firms initially outsourced all IT functions from one vendor leading to lack of variety and low quality services hence reduced differentiation in the products offered by the company. However, this trend has changed over time with organizations distributing the outsourced IT functions to different corporations. For instance, British Petroleum (BP) decided that the company no longer needed to own the technologies that provide business information to its employees. With that decision, BP outsourced its IT expertise and functions from different firms from different regions (Nambiar, n.d.).
Following outsourcing of IT functions, the firm was able to benefit in many ways. Bhalla et al. (2008), notes that firms outsourcing strategic IT functions are in position of bringing about necessary organizational cultural change needed for creation of competitive advantage. The business processes are also improved because outsourcing enables firms to improve their operations. For instance, outsourcing encourages business managed budget development and controlled project expenditure. Thus, firms are encouraged to outsource latest IT technologies that can enable them properly budget and manage undertake projects. Another benefit that firms realize is the cost management controls. According to Doh (2005), outsourcing and off-shoring helps firms to minimize expenditures while increasing company savings. In a survey conducted by Lall & Narula (2004), it was noted that outsourcing and off-shoring is able to reduce costs incurred by an organization up to 20% of the annual budget. Although many organizations dispute outsourcing costs, IT costs could have risen for corporations in the industry.
Doh (2005) examined the implications of outsourcing to multinational IT corporations. He began by examining multinationals and their international ventures in order to assess the elements of theories that could explain internationalization of firms. The survey was conducted among multinational corporations that outsource IT technology and personnel from other countries. The survey found out that most concerns of outsourcing raised by outsourcing firms could be mitigated by international labor, environmental standards and corporate codes.
The data collected during a study by Garner (2004) is vital for the relevance of the study. In a survey conducted by Garner to measure the economic impact of off-shoring on IT firms, a study population comprising of all outsourcing firms was selected. However, only a small sample of the study population was selected for the purposes of the study. The sample selected was by stratified sampling technique. Similarly, this survey would examine a population of all off-shoring firms in the U.S. However, a sample of 200 firms would be selected using stratified sampling technique to represent the entire population.
Lacity, Willcocks & Feeny (2004) revisited the importance of strategic partnership and outsourcing to commercialization of the back office at Lloyds in London. Their survey collected data on the importance of outsourcing to the firm. Data was collected using questionnaires and interviews. The two methods are important in collecting data for a survey since they enable respondent to provide all his/her has concerning the study topic without bias or prejudice. The interviewer should not provide lead questions to the respondent to avoid biasness. This would grant the study findings credibility and reliability.
Mani, Barua & Whinston (2010) conducted a study that sought to establish the impacts of information capability on the ability of a firm to outsource IT technology and personnel. The survey measured service satisfaction as applied in other outsourcing studies. It was established that satisfaction is a proxy for perceived effectiveness of outsourced technology. Following their survey, this study would measure several variables that would include effectiveness of outsourced technology, cost reductions, satisfaction and innovativeness. The data in the variables would be collected using interviews and questionnaires as explained above. The coding process would take place in preparation for analysis by SPSS.
A study conducted by Mitra & Ranjan (2010) focused on the impacts of off-shoring on unemployment. In their survey, they established that in a two-sector labor market, an increase in off-shoring of IT skills given labor mobility would result in increased wages and reduced unemployment. They used questionnaires to collect data on the level of outsourcing in the different sectors. The questionnaires were subjected to pilot studies to establish their effectiveness. Similarly, this survey would subject formulated questionnaires to pilot studies to establish their effectiveness in collected the required data for the study.
Outsourcing is the ability of firms to seek human capital from other nations. Many firms operating in different fields have been reported outsourcing different skilled human capital from different countries. One of the most significant skills sought is IT, outsourced by IT firms. The outsourcing of IT personnel is driven by many factors including need to minimize costs while maximizing on the profits, need for innovation, inadequate skills in IT locally among other reasons. IT outsourcing is good for IT firms because it enables the firms obtain rare skills that cannot be obtained locally, ability to minimize operating costs and improved business processes among other benefits. In spite of the benefits, outsourcing poses some generic risks to the firm (Shachaf, 2008). The outsourcing firm is likely to obtain incompetent IT personnel or obtain IT technology that has not been tested. In addition, untrustworthy vendors that may also compromise the security of confidential information of the firm may exploit the firm. It is therefore important that the outsourcing firm conduct enough investigation regarding IT technology vendors before outsourcing (Bhatt, et al. 2010).
Organizations have resorted to carrying out IT business outsourcing and off-shoring by pursuing the advantages that comes with it. To the contrary, this process may not be entirely what it brings assessing it by its word value. This research shall therefore bridge the gap of the knowledge claim of the advantages or disadvantages of IT business outsourcing and off-shoring. The design chosen will help interact with people with knowledge in this field thus providing required information that will be used to validate the findings. Since analysis shall purely be done, using categories there will be little in the conclusions made pertaining to the population at large (Safizadeh, et al. 2003).
This study examines the drivers, impacts and usefulness of IT outsourcing to an organization business processes and operating costs. The suitable research method that is employed in the study is a quantitative research method. Quantitative research method is closely related to numerical and statistical data. The method involves collection of quantifiable data that can be subjected to statistical treatment. The collected data is analyzed using mathematical tools such as regression analysis. Quantitative research method can be descriptive, experimental or causal depending on the nature of the study. This quantitative study on the impacts of outsourcing on firms would be descriptive in nature because it will examine the existing situation in IT outsourcing and off-shoring. Moreover, the study examines all attributes of outsourcing and off-shoring based on observation and the exploration of the correlation between its application in firms and the outcome experienced in terms of improved business processes, costs and performance.
There are three aspects of this study that include reasons for emergence of IT business outsourcing, risks associated with its use and the public opinion about its use would be explored. The method is suitable for this study because it will enable the researcher to obtain first hand data that will increase the reliability and validity of the study hence making the study valid for any user (Tashakkori & Teddlie, 2010).
Quantitative study gives the possibility and convenience of applying statistical tools like standard deviation, mean and correlation analysis that enable the researcher establish the existing relationship between various variables of the study such as IT outsourcing and business process improvement. This will provide for the measurement of variables in the business entities (Pollard & Pollard, 2005). Other statistical tools used include mode, percentages, probability, and statistical table tests. They are indispensable in testing the level of significance. The level of significance is vital in treating the study hypothesis. A properly designed and implemented study is pertinent in making a convincing argument about the meaning and significance of research findings. Quantitative method avoids the generation of abstracted empiricism. This can be attributed to inconsequential descriptions instead of an indictment of a descriptive research itself.
The effectiveness of any study device calculates in terms of consistency, validity and sensitivity as well as specificity. These impressions will as well be useful in this quantitative study since it is imperative for the researcher to establish the consistency of the study. To facilitate the development of figures for quantitative investigation (facts), a measurement procedure should take place. Alternatively, the canvasser in this study will translate a few human phenomena precisely into statistical figures. The procedure of changing observable facts into data is referred to as measurement. In the social sciences, much of what is endeavored to be calculated is biased such as conceptions including physical health, which have furry descriptions (Grover, Cheon & Teng, 1996). Consequently, measurement turns out to be a tricky and multifaceted subject, and clamor is forever formed in the information because of imprecision in the procedure of measurement. Therefore, it is imperative to reduce clamor by utilizing consistent and suitable techniques of measurement.
The achievement of whichever study tool is typically measured in terms of consistency, soundness and sensitivity in addition to specificity. These ideas will also be useful in this study. The researcher employs them to determine the reliability of the researcher. Clarke suggests that consistency is the capability by which an investigation is competent enough to generate results that are reliable and firm over a specified period of time and given comparable state of affairs (Clarke, 1998). A variety of validities subsists, which consist of interior validity and exterior validity. Interior validity pertains to the relationship between objects when measured on a range. At whatever time that an investigation offers equivalent outcomes after the use of two diverse measures, the result is alleged to be corresponding.
Validity is the point at which a specified tool is calculated to measure. The validity of a research can fluctuate in dissimilar illustrations employed. In one state of affairs, an investigation can be convincing whereas in other state of affairs, it may possibly not. The validity of a research is calculated by what the research alleges to measure and the accessibility of coherent errors in the conclusions gotten from the exploration. Crotty (2003) argues that interior validity is the scope to which it is feasible to make self-regulating orientation from the conclusion of a study particularly if the independent variable controls the dependent variable. It is possible to measure variables in this study since IT outsourcing and off shoring, being a dependent variable is controlled by other variables such as the availability of finances to undertake it and the accessibility of skilled labor. Conversely, outside validity is the universal submission of the results of a study to other sceneries. The findings on IT outsourcing and off shoring are critical to the improvement of business performances in the global market (Jennex & Adelakun, 2003).
The measurement of the hypothetical construct of an exploration is calculated using construct validity while convergent validity makes judgment between the achievements that are attained from diverse apparatus that are utilized in the exploration. Unlike convergent validity, divergent validity compares the instruments used in the study that calculates conceptions, which are conflicting. Due to the above validity and reliability, the exploration is convincing and consistent for application by several individuals or calculated branches (Clarke, 1998).
Organizations have resorted to carrying out IT business outsourcing and off-shoring by pursuing the advantages that comes with it. To the contrary, this process may not be entirely what it brings assessing it by its word value. This research shall therefore bridge the gap of the knowledge claim of the advantages or disadvantages of IT business outsourcing and off-shoring. The design chosen will help interact with people with knowledge in this field thus providing required information that will be used to validate the findings. Since analysis shall purely be done using, categories there will be little in the conclusions made pertaining to the population at large.
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