IT Outsourcing

The trend in outsourcing continues to grow – both in the number and value of outsourcing transactions and in the variety of services which are outsourced.

The pressures which lead organisations to outsource show no signs of slackening cost savings remains a major incentive. However, other factors are increasingly influencing the decision to outsource – access to innovation, increased speed to market, and service quality are equally as important as cost savings.

As the value of transactions has increased, so too has the range of outsourced services. Most non-core services which organisations have traditionally provided internally – IT , finance and accounting, HR and property management are now commonly outsourced. The locations from which services are provided have also changed – the attraction in outsourcing to offshore locations such as India,Pakistan has soared.

Reports show that the fastest growing sectors are business process outsourcing and business process management. For many large IT suppliers outsourcing and process management are one of the few areas to have flourished in the difficult market of recent years.

What is outsourcing?
Outsourcing involves transferring responsibility for carrying out an activity (previously carried on internally) to an external service provider. The service provider in turn provides services back to the customer against agreed service levels for an agreed charge. In many outsourcings the transfer of the activity involves the transfer of staff and assets (see the employment section below).

Outsourcing is not a new concept: many organisations are into their second or third generation of outsourcing. Traditionally the financial sector and the motor, defence and aerospace industries have dominated the outsourcing market. In the construction sector outsourcing is not unfamiliar but is a more recent phenomenon. Contractors have outsourced as customers to third party service providers. They have also, and increasingly, set themselves up to provide outsourcing/FM services to their clients, having identified outsourcing as a means of securing long term profit growth. In this briefing we look at contractors outsourcing as the customer and we focus primarily on IT outsourcing. We take a look at the pros and cons of outsourcing; employee issues and how to plan and prepare for a successful outsourcing.

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Outsourcing Origin

What are the pros and cons of outsourcing?The reasons for outsourcing IT are varied but some of the most frequently cited drivers include:

1. Reducing IT costs
2. Access to world-class IT skills, experience and resources
3. Removing non-core business
4. Minimising sizeable capital expenditure on IT infrastructure and
5. Certainty of future IT spend.

In practice the benefits of outsourcing tend to be spread across the above areas. Those seeking to outsource to achieve cost reductions alone may very well be disappointed.

The potential downsides to outsourcing include:

1. A loss of control over a crucial business service;
2. A lack of flexibility in the services received;
3. Damage to staff morale/culture clashes (between the service provider and customer).

The number of companies choosing to outsource continues to grow so, for many, it seems that the potential benefits outweigh the downsides. However the benefits of outsourcing will only be realised if the customer is well prepared, the outsourcing contract contains sufficient detail and the ongoing relationship is managed effectively.

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Outsourcing Advantages

Planning for an outsourcing
Outsourcing disasters get reported frequently but successful outsourcing deals rarely get the same press. Like any commercial transaction outsourcings can go wrong but the mistakes that contribute to their failures can be avoided. Investing effort in the early stages of the outsourcing and good management of the relationship once it is implemented can help to prevent an outsourcing disaster. For example:

• Have a robust business case to support the decision to outsource with senior executive backing


• Technically, know and understand your existing IT operation and what you seek by way of external IT services from the service provider.


• Commercially, know and understand your existing IT estate and its cost base in sufficient detail to enable you to evaluate whether the pricing model proposed by the service provider provides value for money.


• Conduct your own due diligence on third party contracts and licences to ensure that your third party software and hardware licences permit use by the service provider (either by way of consent or through assignment or novation of the contract) – failure to do so could lead to potential breaches of the contract or licence and additional charges from the third party vendor.


• Provide for the future – as the customer you have an interest in ensuring that at the end of the outsourcing the services can be transferred seamlessly back to you or to another service provider. Prepare and agree at the pre-contract stage and during contract negotiation an orderly transfer procedure – this will give you assurance that you are not locked in to one supplier and that termination is a practicable option;


• Legally, be prepared to negotiate the finer details of the outsourcing transaction so that the terms can be documented in the services agreement.

Managing the outsourcing relationship
Once an outsourcing deal has been concluded committed management of the outsourcing relationship is critical to its success. A successful outsourcing requires processes and procedures for managing the relationship between the customer and the service provider: for example, regular service meetings, agreed processes for reviewing the services (preferably involving benchmarking provision against other service providers), reporting procedures and a robust mechanism for escalating and resolving problems. An outsourcing services contract is not a contract which should be put in a drawer once signed—it is a live and operational document.

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Outsourcing Advantages

Companies that decide to outsource do so for a number of reasons, all of which are based on realizing gains in business profitability and efficiency. Principal merits of outsourcing include the following:

1. Cost savings
Many businesses embrace outsourcing as a way to realize cost savings or better cost control over the outsourced function. Companies usually outsource to a vendor that specializes in a given function and performs that function more efficiently than the company could, simply by virtue of transaction volume.

2. Staffing levels
Another common reason for outsourcing is to achieve headcount reductions or minimize the fluctuations in staffing that may occur due to changes in demand for a product or service. Companies also outsource in order to reduce the workload on their employees (freeing them to take on additional moneymaking projects for the business), or to provide more development opportunities for their employees by freeing them from tedious tasks.

3. Focus
Some companies outsource in order to eliminate distractions and force themselves to concentrate on their core competencies. This can be a particularly attractive benefit for start-up firms. Outsourcing can free the entrepreneur from tedious and time-consuming tasks, such as payroll, so that he or she can concentrate on the marketing and sales activities that are most essential to the firm's long-term growth and prosperity. "What an outsourcing partner really sells is focus," wrote Adam Katz-Stone in Baltimore Business Journal. "In accounting for instance, that is something that typically is seen as necessary but not essential, not the core of the business. So you bring in an outsourcing partner and then you don't have to think about that any more. You can focus your energies on sales, marketing, all the other things that matter more."

4. Morale
This is an often-overlooked but still notable benefit that can sometimes be gained by initiating an outsourcing relationship. "Often a business's lack of internal expertise or dedication to non-core tasks results in poor attitudes and ultimately poor performance," wrote Kevin Grauman in CPA Journal. "This can lead to overlap and duplication of internal efforts. An effectively designed and ongoing communication process emanating from one or more outsourcers can greatly reduce or eliminate these duplications."

5. Flexibility
Still others outsource to achieve greater financial flexibility, since the sale of assets that formerly supported an outsourced function can improve a company's cash flow. A possible pitfall in this reasoning is that many vendors demand long-term contracts, which may reduce flexibility.

6. Knowledge
Some experts tout outsourcing of computer programming and other information technology functions as a way to gain access to new technology and outside expertise. This may be of particular benefit to small businesses, which may not be able to afford to hire computer experts or develop the in-house expertise to maintain high-level technology. When such tasks are outsourced, the small business gains access to new technology that can help it compete with larger companies.

7. Accountability
Outsourcing is predicated on the understanding—shared by business and vendor alike—that such arrangements require quality service in exchange for payment. "Paying for a business service creates the expectation of performance," stated Grauman. "Outsourcers are well aware that this accountability is both practical and legal, with fiscal implications. The same cannot be said for internally provided functions."

Outsourcing Services Types

Type of Outsourcing services

They can be categorized in two categories:

1. BPO Outsourcing
2. KPO Outsourcing

The IT/BPO Company, for example, might outsource the services related to the information technology, business processing outsourcing and knowledge processing outsourcing. Typical BPO outsourcing services are like as multimedia & animation, bookkeeping and financial services, business consulting, CAD/CAM, call center, data entry, DTP, typesetting, Handwriting services, HR services, internet marketing, legal services, medical billing, proofreading, editing, software & technology, transcription, web design & web development and writing & Translation. Some of typical KPO services are like as knowledge processing outsourcing services, intellectual property research, animation & simulation services, data research & analytics, litigation Services, medical content & services, pharmaceuticals services, writing/content development services and database development services.

The outside firms that are providing the outsourcing services are third-party providers, or as they are more commonly called, service providers. Currently, outsourcing takes many forms. Organizations still hire service providers to handle distinct business processes, such as benefits management. But some organizations outsource whole operations. The most common forms are information technology outsourcing (ITO), knowledge processing outsourcing (KPO) and business process outsourcing (BPO). The challenges of outsourcing become especially acute when the work is being done in a different country (offshore), since that involves language, cultural and time zone differences.

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Outsourcing Disadvantages

Before deciding on outsourcing your company's business process, keep in mind the disadvantages of outsourcing:

1. Less managerial control - It may be harder to manage the outsourcing service provider as compared to managing your own employees.

2. Outsourcing company goes out of business - If your outsourcing service provide goes bankrupt or out of business, your company will have to quickly transition to a new service provider or take the process back in-house.

3. May be more expensive - Sometimes it is cheaper to keep a process in-house as compared to outsourcing.

4. Security and confidentiality issues - If your company is outsourcing business processes such as payroll, confidential information such as salary will be known to the outsourcing service provider.

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Oursourcing Origin

Outsourcing became part of the business lexicon during the 1980s and refers to the delegation of non-core operations from internal production to an external entity specializing in the management of that operation. Outsourcing is utilizing experts from outside the entity to perform specific tasks that the entity once performed itself.

The process of outsourcing formalizes the description of the non-core operation into a contractual relationship between the client and the supplier. Under the new contractual agreement the supplier acquires the means of production which may include people, processes, technology, intellectual property and assets. The structure of the client organization changes as the client agrees to procure the services of the outsourcer for the term of the contractual agreement.

The decision to outsource is often made in the interest of lowering firm costs, redirecting or conserving energy directed at the competencies of a particular business, or to make more efficient use of labor, capital, technology and resources.

Reasons For Outsourcing

Organizations that outsource are seeking to realize benefits or address the following issues:

1. Cost Savings:
The lowering of the overall cost of the service to the business. This will involve reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies through offshoring called "labor arbitrage" generated by the wage gap between industrialized and developing nations.

2. Cost Restructuring:
Operating leverage is a measure that compares fixed costs to variable costs outsourcing changes the balance of this ratio by offering a move from variable to fixed cost and also by making variable costs more predictable.

3.Improve Quality:
Achieve a step change in quality through contracting out the service with a new Service Level Agreement.

4. Knowledge:
Access to intellectual property and wider experience and knowledge.

5. Contract:
Services will be provided to a legally binding contract with financial penalties and legal redress. This is not the case with internal services.

6. Operational Expertise:
Access to operational best practice that would be to difficult or time consuming to develop in-house.

7. Staffing Issues:
Access to a larger talent pool and a sustainable source of skills.
Capacity Management. An improved method of capacity management of services and technology where the risk in providing the excess capacity is borne by the supplier.
Catalyst For Change. An organization can use an outsourcing agreement as a catalyst for major step change that can not be achieved alone. The outsourcer becomes a Change Agent in the process.

8. Reduce Time to Market:
The acceleration of the development or production of a product through the additional capability brought by the supplier.

9. Commodification:
The trend of standardizing business processes, IT Services and application services enabling businesses to intelligently buy at the right price. Allows a wide range of businesses access to services previously only available to large corporations.
Risk Management. An approach to risk management for some types of risks is to partner with an outsourcer who is better able to provide the mitigation.

10. Time Zone:
A sequential task can be done during normal day shift in different time zones - to make it seamlessly available 24x7. Same/similar can be done on a longer term between earth's hemispheres of summer/winter.