If you’ve been around IT long enough you know that talk of IT outsourcing generates heated debate among IT professionals! Whenever organizations consider the use of outsourcing, various arguments are put forward in favor of, and against, the use of outsourcing. In this post I examine some of the more common pros and cons of IT outsourcing.
1. IT Outsourcing Enables the Organization to Focus on its Core Business
Many organizations today see the use of IT outsourcing as an integral element of their overall business strategy. Any organization needs to address these questions if it is going to secure a successful future for itself:
- What do we do best?
- How can we do it better?
- What distinguishes us from our competitors?
- What value do our customers derive from our products and services?
- What competitive advantage could outsourcing provide?
Some IT operations consume a lot of resources and management attention but do not help distinguish a company from its competitors. By outsourcing these activities, an organization can better focus on what it does best and what it needs to do tomorrow. IT professionals that remain in the organization can concentrate on strategic developments and supporting the business as it moves forward. Using IT outsourcing in this way also helps change the emphasis from operations, maintenance and problem solving to thinking about how IT can be used most profitably or to the greatest benefit of its end users.
2. Quality and Service Improvements
Companies that outsource do so in anticipation that their chosen service provider will offer a world-class service. IT outsourcing suppliers can offer a track record of achievements in other organizations and can help improve the image of IT services by their general reputation.
3. Access to Technical Expertise
This is a very important factor in IT outsourcing. IT outsourcing suppliers specialize in IT – it is their core business. They are able to offer extensive investment in technology, methodologies and people. Individual in-house IT departments are rarely able to match this level of technical expertise. Outsourcing to an IT service provider potentially offers the following advantages:
- Access to new technology, tools and techniques.
- Introduction of more structured methodologies, procedures and documentation.
- Access to more IT professionals with a wider span of technical knowledge and experience.
- Application of better tools and techniques for estimating costs of new solutions.
- IT service providers are well equipped to handle negotiations with multiple suppliers and can use volume purchasing agreements.
- Better IT career opportunities for those who transfer to the IT service provider.
- Can be used for implementation of leading edge technology to help minimize losses if the technology fails to take off.
- IT Outsourcing enables an organization to use obsolete technology beyond its normal life span. The IT service provider may have several customers who use the old technology and may do its own maintenance rather than relying on the original supplier as an internal IT department might have to do.
- Avoids high costs of continually re-training in-house IT professionals in the latest technologies.
- IT outsourcing provides the back end technical and managerial support of an entire organization.
4. Financial Advantages
Cost reduction is the single most important tactical reason for outsourcing IT. Experience has shown however, that if cost reduction is the sole or prime focus, outsourcing is less likely to succeed. The financial advantages of outsourcing fall into two major categories:
- Cost reduction:
- An outsourcing supplier can reduce costs by economy of scale, by specializing in IT services and by spreading research and training costs over a larger staff. It is also more economical for an organization to buy technical expertise as and when required rather than invest in specialized technical training that is seldom used.
- Few IT departments take into account the “hidden” costs of: recruiting, hiring, retention, mis-hires and turnover. Some of these costs include:
- Mis-hires cost anywhere from 14 to 24 times the salary! (Topgrading by Bradford D. Smart, Ph.D.)
- Based on an average of 2.5 years on the job, the average cost of a hire is 21% of salary (Topgrading by Bradford D. Smart, Ph.D.)
- Benefits are typically 15-20% of salary.
- Many outsourcing suppliers provide their customers with backup resources who are fully trained in their environments, mitigating any loss time and productivity when an outsourced staff member is out sick or on vacation.
- Predictable costs: an organization can achieve more predictable costs by negotiating and agreeing upon costs for specified service levels.
5. Flexibility and Control
- Buying IT services as and when required gives greater flexibility and enables organizations to increase or decrease capacity without the effort and delays that are inevitable in recruiting more staff.
- Some organizations also feel that poor performance can be confronted more immediately and effectively with an external outsourcing supplier. Action against an under-performing internal IT department may be seen to require more time and the problems may be difficult to resolve. The contractual obligations of an outsourcing arrangement mean that accountability is better defined, whereas internal accountability may be seen as less definitive and therefore less effective.
6. New Business Development
Companies need to continually develop if they are to survive. Introducing technology in support of new business and implementing new technology can be difficult to run alongside daily operations that support current business activities. Outsourcing can help in two ways:
- By freeing up resources, outsourcing helps organizations to focus on strategic new developments.
- Outsourcing can be used selectively to introduce new technology or applications (i.e. During the introduction of e-commerce, website design and setup, online order processing and integration of back office activities all required specialist skills which were in short supply in IT departments.)
7. Assisting Major Reorganizations
From time to time all companies and IT departments undergo major reorganizations, which inevitably take a great deal of time and effort. IT outsourcing can be used to help make the transition smoother and quicker.
For IT service providers, IT is their core business. Over the years, many have reorganized so that they can offer IT services most effectively and profitably. Companies can tap into this expertise by outsourcing their IT departments. This requires less management effort and time than reorganizing an internal IT department.
In our next installment, we’ll talk about the cons of IT outsourcing and what to look out for.