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ABC: An Introduction to Outsourcing

By Stephanie Overby

CIO —

Everything you need to know to avoid the pitfalls of outsourcing.

Compiled by Stephanie Overby

• What is outsourcing?
• Why outsource?
• ITO, BPO, KPO—what’s the difference?
• Why is outsourcing so hard?
• What about bundling?
• What is an SLA?
• What is the best length for an outsourcing contract?
• Should I outsource everything to one vendor? Or should I use a best-of-breed approach?
• How do I decide what vendor or vendors to work with?
• Can I get outside help with this decision?
• Do you have any tips for negotiations?
• What are the "hidden costs" of outsourcing?
• What do I need to know about the transition period?
• How important is ongoing relationship management to outsourcing success?
• Where’s the best place in the world to outsource IT?
• What if outsourcing doesn’t work out? Can I just bring the work back in?

What is outsourcing?

There are as many definitions of outsourcing as there are ways to screw it up. But at its most basic, outsourcing is simply the farming out of services to a third party. With regards to information technology, outsourcing can include anything from outsourcing all management of IT to an IBM or EDS to outsourcing a very small and easily defined service, such as disaster recovery or data storage, and everything in between.

The term outsourcing is often used interchangeably—and incorrectly—with offshoring, usually by those in a heated debate. But offshoring (or, more accurately, offshore outsourcing) is, in fact, a small but important 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, primarily to take advantage of lower labor costs. This subject has proven to be a political hot potato (see Offshore Outsourcing: The Politics and Offshore Outsourcing: The People) because unlike domestic outsourcing, in which employees often have the opportunity to keep their jobs and transfer to the outsourcer, offshore outsourcing is more likely to result in layoffs.

Why outsource?

The business case for outsourcing varies by situation, but reasons for outsourcing often include one or more of the following:

• lower costs (due to economies of scale or lower labor rates)
• variable capacity
• the ability to focus on core competencies by ridding yourself of peripheral ones
• lack of in-house resources
• getting work done more efficiently or effectively
• increased flexibility to meet changing business and commercial conditions
• tighter control of budget through predictable costs
• lower ongoing investment in internal infrastructure
• access to innovation and thought leadership

 

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