Outsourcing Definition and Solutions

CIO —

Everything you need to know to avoid the pitfalls of onshore and offshore outsourcing—and more.

Compiled by Stephanie Overby

• What is outsourcing?
• Why outsource?
• ITO, BPO, KPO: What’s the difference?
• What about cloud computing? Is that outsourcing?
• Why is outsourcing so hard?
• How is outsourcing priced?
• What about bundling?
• What is an SLA?
• How long should an outsourcing contract last?
• Should I outsource everything to one vendor? Or should I use a best-of-breed approach?
• How do I decide what outsourcing vendor or vendors to work with?
• Should I get outside help with this decision?
• What's the best location to outsource IT?
• Do you have any tips for outsourcing negotiations?
• What is benchmarking, and when should I do it?
• What are the "hidden costs" of outsourcing?
• What do I need to know about outsourcing's transition period?
• I have an existing contract with an outsourcer. When new work arises, should I give it to my existing provider?
• How important is ongoing relationship management to outsourcing success?
• What if outsourcing doesn’t work out? Can I just bring the work back in-house?
• Can I sue my outsourcer?
• Should I fire my outsourcing vendor?

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 (IBM) or HP, 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. Offshoring (or, more accurately, offshore outsourcing) is, in fact, a small but important subset of outsourcing: It's where 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. Offshoring has proven to be a political hot potato 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. (For more on the politics of offshoring, see Prepare Now for Anti-Offshoring Legislation, The Politics Behind Offshore Outsourcing and The Growing Backlash Against Offshore Outsourcing.)

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
• increased efficiency
• access to specific IT skills
• 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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