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IT Outsourcing: Definition, Types, Pricing Structures, and More

Of course, companies can hire consultants to carry out some of this work, but consultants may have their own agendas. For this reason, we think the team should consist of a core of in-house people who can assess suppliers’ capabilities and determine which new technologies can best be applied to the company’s businesses. One alternative is to hire a supplier to team up with a company’s IT staff on the project. Such an arrangement enables the company to learn enough about the new technology that it can negotiate a contract from a position of strength if it does decide to outsource. Second, such companies gain a much deeper understanding of the costs of a given service and the best way to provide it. If they decide to outsource in the future, they will be in a stronger position to evaluate bids and to write a contract that serves their own interests.

  • Despite the fact that India and China place the leading positions in information technology outsourcing, Ukraine, Poland, Belarus and Romania are presenting a formidable competition.
  • Outsourcing is a practice usually undertaken by companies as a cost-cutting measure.
  • Analytic hierarchy process is a framework of BPO focused on identifying potential outsourceable information systems.
  • Outsourcing gives access to developers possessing world-class capabilities and technical skills.

The term outsourcing is often used interchangeably — and incorrectly — with offshoring, usually by those in a heated debate. But offshoring is a subset of outsourcing wherein a company outsources services to a third party in a country other than the one in which the client company is based, typically to take advantage of lower labor costs. This subject continues to be charged politically because offshore outsourcing is more likely to result in layoffs. Outsourcing is a business practice in which services or job functions are hired out to a third party on a contract or ongoing basis. First seen as a formal business strategy in 1989, outsourcing is the process of hiring third parties to conduct services that were typically performed by the company. Often, outsourcing is used so that a company can focus on its core operations.

What is outsourcing? Definitions, benefits, challenges, processes, advice

However, similarly to the onshore type, this option isn’t always profitable. Many managers assume that outsourcing vendors are inherently more efficient due to economies of scale. (The economies-of-scale theory says large companies can achieve lower average costs than small companies due to mass production and labor specialization efficiencies.) In the outsourcing arena, however, this model may not always apply. For example, small companies may have lower costs than large companies by employing older technology, offering below-market wages and maintaining tight controls and procedures. Even if you choose an onshore IT outsourcing model, you’ll still save on costs.

Companies began outsourcing because production rates had increased rapidly and businesses needed help, which led many to wonder what else could be outsourced. These benefits save your business time and money, detect network irregularities long before a virus wreaks havoc on your network, while also monitoring your servers around the clock. IT outsourcing services work as remote network monitoring using a process where a qualified team of experts controls and observes your local area network from afar. Your business expects and relies on your network and office equipment to perform at their best each day. Monitoring your company’s network is challenging at times for in-house IT staff, especially as they try to tackle other critical issues your business is facing.

IT Talent of the market and access a world-class Software

We found that most systems that managers consider strategic actually are not. In the companies we studied, only two systems differentiated the companies from their competitors. Managers often make the mistake of assuming that just because a function is strategic, the IT systems supporting that function are strategic, too. Many managers try to make a system strategic by investing in fancy equipment and customized software.

What is Outsourcing in IT

Outsourcing is a business practice in which specific tasks, operations, or jobs are given to a contracted third party to complete. A US-based company delegating software development service to an IT service provider in Mexico or a German client hiring a colleague in Ukraine are both examples of nearshore outsourcing on different scales. Is the practice of hiring an external organization to perform some business functions (‘outsourcing’) in a country other than the one where the products or services are actually performed, developed or manufactured (‘offshore’). Perhaps you have some IT-related projects that are integral to your core functions as a business, such as app development.

Indeed, semiconductor chips, automobile, and agriculture industries suffered a heavy blow. Outsourcing telecommunication tasks to outsources gives the advantage to improve offerings and keep customers satisfied. South Korea requires giving digital service even when «the user refuses to give permission for data or functions that are not necessary to the provision of the service».

The latter is called lock-in; flexibility may be lost due to penalty clauses and other contract terms. Historically offshore development concentrated on back office functions but, as offshoring has grown, a wider range of applications have been developed. Offshore suppliers have had to respond to the commercial pressures arising from usability issues by building up their usability expertise. Indeed, this problem has presented an attractive opportunity to some suppliers to move up market and offer higher value services. This pricing method is based on the value provided by the supplier beyond its typical responsibilities but deriving from its contribution and expertise. The gain-sharing approach is best for customers aimed at significant business improvements.

IT Outsourcing Guide: Definition, Types&Models, and Why to Use

Risks and threats of outsourcing must therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way, maximizing positive outcome, minimizing risks and avoiding any threats, a business continuity management model is set up. BCM consists of a set of steps, to successfully identify, manage and control the business processes that are, or can be outsourced. BPO vendor charges are project-based or fee-for-service, using business models such as remote in-sourcing or similar software development and outsourcing models. This can help a company to become more flexible by transforming fixed into variable costs. A variable cost structure helps a company responding to changes in required capacity and does not require a company to invest in assets, thereby making the company more flexible.

In-house teams require full-time salaries, benefits, and additional fees for resources and equipment. Not only will you not need to provide full-time salaries and benefits to a third-party team, but the vendor will also have its own infrastructure and resources that you won’t have to fund. Moreover, the provider will invest in the training and professional development of their team.


Nearshoring still has not overcome all barriers, but proximity allows more flexibility to align organizations. Software development nearshoring is mainly due to flexibility when it comes to upscale or downscale teams or availability of low cost skilled developers. The nearshoring of call centers, shared services centers, and business process outsourcing rose as offshore outsourcing was seen to be relatively less valuable. While outsourcing IT providers, you can also better use internal resources, as by delegating some of the projects to a third party, you allow your in-house employees to focus on more meaningful tasks for your company. To maintain productivity and steady growth of a company, you should find an optimal balance between outsourced employees and in-house specialists.

What is Outsourcing in IT

The rise of the middle class in China, India and other countries has created markets for the products made in those countries. Just as the U.S. has a Made in USA program, other countries support products being made domestically. Localization, the process of manufacturing products for the local market, is an approach to keeping some manufacturing offshore and bringing some of it back.

A company’s overarching objective should be to maximize flexibility and control so that it can pursue different options as it learns more or as its circumstances change. The way to maximize both flexibility and control is to maximize competition. To that end, managers should not make a onetime decision whether to outsource or not. Instead, they should create an environment in which potential suppliers—outside companies as well as internal IT departments—are constantly battling to provide IT services. India, China, Indonesia, Malaysia, Vietnam, Philippines, and Thailand have made it to the top of the index thanks to the strong blend of business environment conditions, prices, talent availability, and digital infrastructure. The costs of offshore software development outsourcing is their forte, but they lose points in the digital resonance score.

Benefits of Outsourcing Software Development

To make an informed decision, articulate what you want from the outsourcing relationship to extract the most important criteria you seek. It’s important to figure this out before soliciting outsourcers, as they will come in with their own ideas of what’s best for your organization, based largely on their own capabilities and strengths. Outsourcing can bring big benefits, but risks software outsourcing and outstaffing and challenges abound when negotiating and managing outsourcing relationships. Here’s what you need to know to ensure your IT outsourcing initiatives succeed. Operational risk summarizes the chances a company faces in the course of conducting its daily business activities, procedures, and systems. Investopedia requires writers to use primary sources to support their work.

How to select a service provider

With Small Business Packs, small business owners can now have a dedicated staff of highly trained professionals working to grow their business for a price that fits within any budget. Each of your team members will be assigned to your account on a continuing basis so they get to know you and your business. Our aim is for you to feel they are a seamless extension of your home office. Offshore outsourcing is a $76 billion dollar per year industry worldwide.

This pricing model encourages collaboration and creative problem solving as both parties work toward common business goals while working in an alliance. The gain-sharing approach also affords the IT suppliers greater freedom to determine how to achieve the best results. Offshore outsourcing of IT services refers to more distant destinations with time differences between countries of at least 5-6 hours. The core advantage of this type of outsourcing is cost savings, which are usually more pronounced than nearshore or onshore alternatives. For example, IT professionals in California, USA, can cost 2-3 times more than similar professionals in the Midwest. The downside of the offshore method is that specialists have to work after hours due to extreme time differences to provide the overlap needed for live collaboration.

A negotiating team should be headed by the top IT executive and include a variety of specialists—but not the CEO. Many of the worst contracts we saw were broad agreements negotiated by a CEO with the help of corporate lawyers who were equally unschooled in technical details. Although the CEO should not be involved in actual negotiations, he or she must provide the team with a mandate and thus authority with both internal groups and the supplier. Another way to maintain control over outsourcing arrangements is to withhold a piece of the business from a supplier and use that potential contract as a carrot, as Energen did with the telecommunications contract for its subsidiary.

To achieve strategic goals, keep current with market trends, and plan for the future, enterprises require solid and long-lasting relationships. However, IT outsourcing is not a panacea for all IT problems; in some situations, it may create as many problems as it is intended to resolve. Given the important implications of IT outsourcing, CPAs should carefully weigh the risks and benefits of this management practice when advising clients and working with IT vendors.

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