Cost-Effective Small Firm Software Offshore Outsourcing

Abstract: Offshore outsourcing of information technology functions and services in medium-sized and larger firms is common internationally. The usage of IT outsourcing in Sweden is significantly lower than for instance in the USA. It has been estimated that outsourcing constitutes less than one percent of the total value for purchased IT services and IT production in Sweden each year. In addition, the usage of outsourcing is even more moderate in smaller firms. One reason behind this is a belief that it is not cost-effective for smaller firms to use outsourcing. In this thesis, we investigate whether it is economically and practically viable for small IT firms based in Sweden to outsource their production directly to off-shore suppliers. To aid us in answering this question we document the outsourcing process of small firms, the relevant costs for implementation of offshore outsourcing for small firms and their mitigation, as well as the largest obstacles for small firms in the offshore outsourcing process. We have performed a number of interviews with representatives from the Swedish information technology industry and analysed the data using transaction cost theory and a nine-step process framework for IT outsourcing by E. A. Sparrow. The outsourcing process of small firms follows Sparrow’s framework to a large extent, but some steps are clearly more important to the small firms. Our conclusion is that offshore outsourcing is a viable production alternative after adaptation to the conditions of small firms. The most important process steps where the major parts of the costs are found were: identifying what projects to outsource offshore, developing the statement of requirements, choosing a service provider and managing performance. Costs mainly arise from management and developer resources, project communication and travel and accommodation expenditures. The costs are frequently reduced using a set of mitigation tactics, such as employing managers with outsourcing experience, contract standardization, encouraging cultural exchange and an extensive use of mail, instant messaging, videoconferencing, and common network platforms. Based on the theoretical framework, our analysis and conclusion, we have condensed our findings into an easy-to-use four-step model for cost-effective small firm software offshore outsourcing.