Implementing IT Outsourcing in Indonesia :
a Smart Decision or a Big Mistake?

Robert Setiadi, S.Kom, M.SoftSysEng

Specialized companies normally have more knowledge and expertise in their field than other companies. As well as many other fields, information technology as a rapid growing technology also needs to be handled by the experts. Before the 1980s, companies tended to plan, develop, operate, and maintain their own information systems. This trend started to change since some companies in developed countries realized that they needed to focus more on their main business, and leave the IT related activities – like software programming, daily operational, maintenance, and some others – to professional IT companies (Yang & Huang, 2000).

Realizing that a new market was emerging, many western IT companies started to offer different range of IT services – such as tailored software development, IT consulting service, etc – so business companies were able to outsource their IT activities professionally. When many experts intensively debate the benefits of IT outsourcing, IT outsourcing in practice also face lots of challenges and difficulties. Lack of experience, false understanding, and communication problems with outsourcer often make IT outsourcing to be seen as wrong concept.

While IT outsourcing trend was a widely debated issue in most developed countries, this trend started to become popular in some developing countries – including Indonesia – in the late 1990s. Different from other parts of the world, implementing IT outsourcing concept in Indonesia has its unique problems and constraints (different characteristic of Indonesian companies, economic condition, human resource skills). This essay will argue that IT outsourcing in Indonesia is more suitable to be implemented in large to medium sized companies, which already have their business process defined precisely under long term corporate plan. Business companies in this essay are limited to manufacturing companies and trading companies.

Indonesia is an agricultural country in South-East Asia with thousands of big and small islands. Most companies are small to medium sized companies (less than AUD$ 500,000 income per year) with short term profit orientation. This trend is understandable since the economy in Indonesia has experienced several recession during the past 20 years. Many companies can not make large and long term investments since they are still struggling for their survival. The last Indonesian economic recession in 1997-1999 forced a very large number of companies into bankruptcy.

Business companies need IT systems – an integrated function of software, computer, human resource and operational rules – to handle various tasks of their activities; from sales transaction data to inventory information; from production data to cost calculation process; and from back-office data maintenance to front-office’s customer information. Many large companies in Indonesia have already implemented modern systems of information technology (online banking, internet based 24 hours customer support, etc) while some others still use outdated technology.

Implementing latest technology in a company is not a simple task. It requires a careful plan, skilled human resources and hardware investment as well as operational and maintenance cost to build a modern and reliable IT system. Sometimes even when all aspects have been arranged carefully, unexpected situations may occur – such as discovery of new and cheaper technology, technical difficulties, or unfulfilled deadlines – and increase the expense of IT system.

A lot of time and effort must be invested before an IT system can actually operate functionally. As one effect of globalization in the last decade of the 20th century, Indonesian companies also have to prepare themselves for global market competition. They started to re-plan and re-arrange their business costs to become more efficient. The fact that IT expenses can not be precisely predicted make many business companies in Indonesia start to consider IT outsourcing as an alternative.

There are various types and levels of IT outsourcing. Business companies can choose whether they want to outsource their whole IT development, maintenance and operations to a service provider company or they can also choose to do selective outsourcing, which is the most common method selected by many companies both in developed and developing countries (Sparrow, 2003). In this outsourcing, less that 80% of IT activities are transferred to a service provider (Sparrow, 2003).

To start doing IT outsourcing, a company needs detail preparations before choosing a supplier. One of the most important preparation is for the company’s key decision maker to understand the actual purpose and benefits of IT outsourcing. IT outsourcing is a long term investment which can only save costs if planned carefully.

If a company fails to do the initial planning for IT outsourcing, very little of the cost saving or technology advancement benefits can be achieved. A planner should also has the capability to identify all possible hidden costs of outsourcing to be considered in the plan (Misra, 2004).

A major issue in planning phase is to decide which part of IT activities should be outsourced, and which one should be kept in-house. Generally, IT activities which are closer to company’s strategic decision and require business skills should be kept in-house while others which are closer to the need of state-of-the-art technology may be outsourced (Aubert, Rivard, & Patry, 2004).

The company’s strategic decision – such as targetted market, future investment, internal business rules, etc – usually connected to the its long term plan in the future. As small companies in Indonesia usually tend to focus more on short term profit oriented – only few large to medium companies have the capability to make long term plan and long term investment – it is rather difficult for small companies to actually plan their IT outsourcing based on long term plan. The majority of unsuccessful stories of IT outsourcing in Indonesia come from a short term plan which expect to save money rapidly soon after a company sign an outsourcing agreement. This is considered to be one of the main reasons why small companies in Indonesia are – to some extent – still not yet ready to enter total or even partial IT outsourcing agreements.

After initial planning, a company needs to identify the right IT outsourcer. Depending on the type of IT activities to be outsourced, close communication needs to be established between outsourcee and candidate service providers. Outsourcing strategy should be unique for each company; an outsourcer should be able to mirror the corporate culture of its client – such as excellence of customer service quality, fast and reliable response, etc. A tailored outsourcing package would give more chance of success than a general package (Palvia, 2004)

A good company should have its business process defined precisely. The definition usually start from company structure and clear job descriptions for each positions, departments and divisions rights and responsibilities, type of business, detail standard operating procedures to run each business activities – from selling products or services, data input, data maintenance, and any other related activities.

Business companies need to communicate their long term corporate plan to their IT outsourcer. It is very important that IT outsourcing process should not cover the short term needs only, but also able to create synergy with client’s defined business process for further future.

Maintaining IT outsourcing relationship is very important. When everything is already well planned, a good outsourcer already selected, and initial communication process is already done smoothly, it is very adverse if both parties can not maintain the relationship. A failure to do so may lead to a contract cancellation which actually can cost more than the written value of the contract.

Successful IT outsourcing requires both outsourcee and service provider companies to work together and maintain good communication. Precisely defined business process and long term corporate plan of a company are essential factors of the communication. Basically IT outsourcing is not only about cost saving, it is more about partnership between IT and non-IT companies to achieve success. If the partnership can be maintained nicely under both managements’ supervision, then cost saving, advancement of technology, and better managed IT will automatically result.

It is not possible to generalize whether or not implementing IT outsourcing in Indonesia is a smart decision or a big mistake for all companies. Some large and well managed companies do have most conducive conditions for successful IT outsourcing. Some other companies still need to reorganize themselves and making better detailed corporate plans for long term period before they can implement IT outsourcing successfully.

In conclusion, not all companies in Indonesia are ready for IT outsourcing. Companies with solid financial condition and precisely defined business process - which most likely are large to medium sized companies – can really take advantage of a good outsourcing agreement. With IT outsourcing, they can focus more on their main business while at the same time providing high quality service for customers through an excellent information system.


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Any comments, questions, or suggestions can be sent to robertsetiadi@gmail.com