Background

Outsourcing is subcontracting a specific process, such as manufacturing or product design, to a third-party company that has expertise in performing the process. It involves the transfer of the management and/or day-to-day execution of an entire business function to the external third-party service provider on an ongoing basis. IT outsourcing, or Information Technology outsourcing, can be plainly described as the outsourcing of computer or Internet related work, such as programming or software development, to third-party companies that specialize in IT. It is the fastest growing area for outsourcing in the present day. Examples of IT outsourcing include contracting with an organization to operate a computer centre, support a telecommunications network, or staff a computer support help desk.



In the 1970s, IT executives adopted the idea of outsourcing as they began to supplement their IT staff with contractors and consultants. This eventually led to a trend where companies started outsourcing entire IT business units to organizations such as Accenture, Electronic Data Systems, and IBM, which undertook the operation of data centres and many other IT functions. As the use of outsourcing is rapidly increasing in the IT industry, large pools of experienced IT professionals are readily available throughout the whole world as IT professionals can do much of their work anywhere, on a company’s premises or many miles away in a foreign country.

According to an annual survey conducted by Ernst & Young, outsourcing is now used by 70% of European companies. The survey highlights that 70% of the respondents have already outsourced at least 1 function of their businesses, with 20% set to increase their level of outsourcing in the next 2 years, as more companies view it as a mean of gaining a competitive edge.

Why? Why is outsourcing so remarkably popular among companies these days? So much so that even Microsoft Corporation, the Colossus of the high-tech world, had outsourced its worldwide management and operation of their 16,000 computers and computer networks to Entex Information Services, Inc. Why do companies outsource their processes and functions to third-parties? There are several reasons attributed to this question. According to an annual executive survey conducted by The Outsourcing Institute, the top 10 reasons why companies outsource were namely to:
· Accelerate benefits of re-engineering. Re-engineering aims for histrionic improvements in critical measures of performance such as cost, quality, service and speed.
· Gain access to world class capabilities.
· Seek cash infusion.
· Redirect internal resources for other purposes.
· Function difficult to manage or out of control.
· Improve company focus.
· Make capital funds available.
· Reduce and control operating costs.
· Reduce risks.
· Resources are not available internally.

In earlier periods of outsourcing, cost savings or reduction were the most common reasons to outsource. However, in today’s context, organizations are turning towards more strategic drivers, focusing on carrying out core value-adding activities in-house where they can best utilize their own core competencies. Although it has its advocates, outsourcing is also often a subject of criticism and some of those issues will be covered later.

Sunday, January 18, 2009