Outsourcing is a new trend in this digitalised world. It can bring massive benefits, but risks and challenges are inevitable. Hence, it is important to identify these risks and challenges while negotiating and managing outsourcing relationships. In this guide, we will learn how to ensure the success of your IT outsourcing practices and disclose the possible benefits and risks associated with IT outsourcing.
What is Outsourcing?
Outsourcing is a business practice in which a third party is hired to perform a particular service or function on a contractual or regular basis. An IT outsourcing project with a technology provider can include a variety of operations, from the entirety of the IT function to discrete, easily defined components like disaster recovery, network services, software development, or QA testing.
Organisations may select to outsource services onshore, nearshore, or offshore. Nearshore and offshore outsourcing have historically been used to save expenses.
IT Outsourcing Services
Business process outsourcing (BPO) is an overarching term for outsourcing a business process task, like payroll. BPO is generally categorised into two segments- back-office BPO, which involves internal business functions like billing or purchasing, and front-office BPO, which involves customer-related services like marketing or tech support.
IT outsourcing is a subcategory of business process outsourcing and historically falls into one of two segments: infrastructure outsourcing and application outsourcing. Infrastructure outsourcing can involve service desk capabilities, data center outsourcing, network services, managed security operations, or entire infrastructure management.
IT outsourcing can also involve relationships with software vendors, infrastructure, and platform-as-a-service. Conventional outsourcing suppliers and global and niche software vendors increasingly provide these cloud services.
Why IT Outsourcing?
Outsourcing started to enhance organisational bottom lines. Given different work cultures or labour laws in various regions, organisations involved in outsourcing may look for partners who would take less money for outsourced services than it would cost to employ in-house.
However, since outsourcing has become integral to management culture, some organisations will outsource IT or other functions to cut costs. They may also want to benefit from the expertise of the partnered firms instead of developing that knowledge in-house. Organizations are thus choosing IT outsourcing to improve efficiency, effectiveness, skills, and core business. They are also outsourcing to access cutting-edge technologies and achieve business transformation.
Top IT Outsourcing Firms
Outsourcing Accelerator, the worldwide marketplace, presented the annual OA500 report, evaluating the top 500 outsourcing firms across the world. Among them, here are the top ten IT outsourcing firms:
- Accenture
- Teleperformance
- Concentrix
- Wipro
- Capgemini
- Cognizant
- HCL Technologies
- Infosys
- CGI
- Tech Mahindra
Benefits and Risks of IT Outsourcing
The business case for outsourcing depends on the situation. However, some of the common benefits and risks of IT outsourcing include:
| Benefits of IT Outsourcing | Risks of IT Outsourcing |
| Cost cutting- Low labour costs and economies of scale | Surged complexity and management overhead- struggling to manage several vendors |
| Access to key skills and expertise- get capabilities unavailable in-house or expensive to gather | Possible loss of control, less direct insight into operations, data, and security |
| Improved efficiency and focus- focus on core business activities | Communication and cultural shocks- linguistic differences, time zone, and different work cultures |
| Better flexibility and scalability- efficiently scale resources | Hidden expenses- unexpected costs, mainly for data movement |
| Access to innovation and transformation- advantages of technologies and best practices | Security risks and data governance challenges- attack-prone surface, and difficulties in policy enforcement |
| Low capital investment- low ongoing expenses for internal infrastructure and equipment | Lack of skills- dependence on external expertise can affect the skill development of the in-house team |
IT Outsourcing Models and Costs
The right model for an IT service is explained by the service provided. Most IT outsourcing contracts have depended on a time and materials or fixed price basis. However, since outsourcing services have expanded to include strategic transformation and innovation initiatives, contractual approaches have changed to integrate managed and outcome-based services.
The most commonly ways to manage an outsourcing engagement are as follows:
| Pricing | Engagement Details |
| Time and materials | Here, the customer pays the providers considering the time and resources required to complete a task. Previously, this has been used in long-term app development and maintenance contracts |
| On-demand pricing | The providers determine pricing ranges for a specific level of service, and the customer pays based on the service’s usage. |
| Fixed pricing | The price is decided in the initial stage. This can work well with fixed requirements, objectives, and scope. This makes the costs more forecastable. However, the fixed price may remain fixed even when the market pricing decreases. |
| Variable pricing | The client pays a fixed price at the low end of the service provided by the supplier. However, this approach allows for variance in price based on the level of services offered. |
| Cost-plus pricing | The client pays the supplier for the expenses and a predetermined profit percentage. This plan does not allow room for flexibility. |
| Performance-based pricing | The financial incentives motivate the supplier to perform best. This type of pricing requires suppliers to pay a penalty for unsatisfactory service. |
| Gain sharing | This price depends on the value offered by the vendor, apart from the usual responsibilities. |
| Shared risk/reward | The provider and the client jointly invest in the new product development. |
Outsourcing vs Offshoring
The word ‘outsourcing’ is generally used interchangeably with offshoring. However, offshoring is not the same as outsourcing, but a part of outsourcing wherein an organisation outsources services to a third party in a nation other than the home country to exploit the potential of low labour costs. This offshoring continues to be dominated politically since offshore outsourcing is more likely to lead to layoffs.
How to Select an Outsourcer for IT Outsourcing?
Deciding on a service provider is a challenging decision, and no particular outsourcer can be a good fit for the business’s needs. Hence, evaluation is essential.
Understand what you need from the outsourcing agreement to realise the most crucial criteria to make an informed decision. It is essential to find out this before deciding on outsourcers, as they will bring their own ideas on the basis of their capabilities and strengths.
Some of the questions that you need to ask regarding outsourcing decisions are:
What is more important to you- time or cost?
Do you want broad capabilities or expertise in a particular service?
Do you want low, fixed, or variable cost plans?
After defining and prioritising the needs, you can make better decisions.
Concluding Thoughts
IT outsourcing is a significant trend driving the world today. However, this decision has both its benefits and drawbacks. Outsourcing the IT services helps in saving costs and time for the organisations. However, the hidden costs and possible loss of control are concerns associated with the outsourcing decision.
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