What Is IT Outsourcing?

IT outsourcing is a well-known practice of subcontracting to third parties the responsibility to manage all or part of an organizational IT function. This allows the main organization to focus on core business functions. Meanwhile, the service contractors work efficiently on areas that might have been neglected or needed competent authorities in the parent organization.

Business Value of IT Outsourcing

Cost-cutting is the most common reason behind organizations, irrespective of company size, opting for IT outsourcing. Service contractors are now coming up with innovative ways to increase the business value of IT outsourcing. As of now, Deloitte’s 2016 Global Outsourcing Survey reports 35 percent out of the 25 surveyed sectors are looking for innovation from their service contractors. The survey further predicts that IT, finance, and HR will see considerable growth amongst all the other outsourced functions. Seventy-two percent are currently outsourcing IT functions, and there is a possibility of an overall increase of 31 percent in IT outsourcing. The following chart gives a detailed account of the values IT outsourcing adds to an organization’s business.

Types of IT Outsourcing

The business processes can be contracted out to onshore or offshore contractors, and to single-sourced or multi-sourced service providers. In fact, IT outsourcing has five different types.

Many IT functions can be outsourced:

• Application maintenance
• Help desk
• IT security
• Email
• Website hosting or operations
• Server or application hosting
• Infrastructure (hardware, software, network installation, and support)
• Disaster recovery
• Data center functions (data processing and storage)
• Database administration (data backup, recovery, and transfers)
• Strategic planning and asset management

The chart above is based on Computer Economics’s IT Outsourcing Statistics 2015/2016 report, wherein disaster recovery has the highest cost success rate when outsourced, a huge benefit for the client company.

News Flash

• Computer Economics’ IT Outsourcing Statistics 2016/2017 survey reports that the budget for IT outsourcing has risen to 10.6 percent in 2016, unlike the downward trend the practice was experiencing for the last four years.
• Small organizations are spending as much as the large organizations for outsourcing, as the service providers are willing to render better service in an economical rate.
• Due to the growing demand for cloud-based applications, 65 percent of companies are outsourcing a large portion of their in-house IT functions to lower costs and make use of SaaS applications.
• Statista, an online statistics portal, claims that IT healthcare outsourcing is going to grow with a 7.6-percent CAGR in the period 2013-2018. As more confidential data gets collected in their databases, they feel the need to strengthen their IT infrastructure.
• According to KPMG, within a span of two to three years, organizations will opt for IT outsourcing because of cost savings, quality enhancement, skill availability, economic flexibility, and reduced market time.
• Deloitte’s 2016 Global Outsourcing Survey reports 70 percent of global organizations are either executing robotic process automation (RPA) or debating on its use.
• As cloud computing is slowly taking the center stage, IT outsourcing is ushered into a new era of service delivery that consists of RPA, Internet of Things, and digital IT management.

The Impacts of Global Trends on IT Outsourcing

KPMG’s Global Sourcing Advisory 4Q2015 Pulse Survey is based on inputs taken from over 1,000 advisors of leading business, IT, and cloud service providers. The years 2014 and 2015 saw a dip in talents as well as talent management in North and South America. Talent shortages will keep on impacting IT outsourcing for the coming years, so outsourcing strategy needs to be remodeled to address this risk. There are concerns about the global economic depression and volatility of the consumer markets.

However, the use of innovative technology is on the rise, so companies that can leverage big data, RPA, and the cloud can stay afloat and prosper. Many organizations are yet to absorb new ideas and trends, so it is going to take a while before an organization hits the benchmark.

Critical Factors for a Successful Outsourcing Venture

IT outsourcing, when done right, opens up many opportunities for the clients as well as the service contractors or providers. The clients get access to skilled professionals without investing in in-house staffing, as well as newer technologies and scalable creativity. Expenses become more predictable due to predetermined fee structures between parties. Due to focused jobs, product launches are faster.

Along with multiple benefits, IT outsourcing carries along some challenges, too. Agreements need to be clarified at the very beginning of an IT outsourcing relationship. Otherwise, turnover can become high as days go by and the project might be put to a halt. Without proper research on the service providers, in-house confidential data might get compromised. A weak management structure might result in losing control over the project itself. If the service provider is located in a foreign country, language, geographical, and cultural distances might hamper the project as well. The following are some factors that must be considered before signing on the dotted line:

• Careful selection and regular monitoring of the business processes that have to be outsourced
• Thorough knowledge of service providers’ competencies and capabilities
• Detailed documentation or contract that should include risk mitigation steps as well
• Building a working relationship between client and service providers
• Ensuring services are measurable for mutual benefit and transparency

Conclusion

Every IT function is outsourceable, from infrastructure to software creation, upkeep, and support. To reap the benefits of IT outsourcing services, companies are learning from issues faced in-house or by other companies. Organizations are now making an effort to realize service transition, build credible service levels, carefully select vendors, establish a better VMO, broaden the scope of outsourcing, and audit service providers on a regular basis.

References

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