Not your grandfather’s outsourcing

Outsourcing has become a bit of a dirty word this election season, too often used synonymously with offshoring, which is really only one of many outsourcing strategies. However,  from a CIO’s perspective, outsourcing may be in fact what enables U.S. companies to compete, thrive, and otherwise move the economy out of the doldrums.

Too big for one “mechanic”

While the outsourcing of past eras was a cost-cutting tactic, these days companies are just as likely to outsource IT functions for agility’s sake for the simple reason that the number of complex technologies they’re leveraging is burgeoning beyond the ability of in-house management. Think of the evolution of IT in terms of the automobile. Initially it was pretty straightforward, and one mechanic could handle all of your needs. As it grew in complexity — i.e. transmission, air conditioning, electronics, etc. — one service department was no longer sufficient. The addition of onboard computers added a new layer of complexity, making the maintenance of a single car a task for a broad team of experts that are rarely found under a single roof (except at the dealership, but service fees are ridiculous).

Similarly, IT — admittedly more complex than a car from its outset — has grown from a relatively well-defined, straightforward function into an entity with its hands in literally every facet of business. The recent addition of flexible technologies such as cloud, mobile and social, has blown the lid off of all previous limits to to technology adoption. Implementations that used to take years and cost millions now take days or weeks, and cost a fraction of what they used to. If companies can adopt technologies with a tenth of the resources that it required a few years ago, it follows that they’ll be leveraging 10 times the number of technologies — and that’s exactly what they’re doing.

I daresay that even the most well-funded in-house IT department cannot be reasonably expected to manage the sudden explosion of technologies that are making their way into everyday work life at most organizations. To do so would be akin to running a garage that serviced everything from oil changes to collision damage.

Outsourcing to tame the beast

Cloud computing is no small contributor to this phenomenon, as the technologies delivered via the cloud often do not require the same level of maintenance that on-premise software demands. Conversely, when they do require attention, the skills needed are often extremely difficult to come by. An outsourcing model, therefore, enables CIOs to manage a set of technologies that they’d otherwise not be able to govern with full-time staff. To the point, my firm recently conducted research which showed that, on average, 48% of outsourcing budgets are allocated towards application services.

Furthermore, some IT functions are so specialized that they’re really not practical for most departments, regardless of size. In our research, for example, we also found that companies are commonly leveraging managed services as an outsourcing strategy to handle such functions as disaster recovery, web/e-commerce and IT security services.

The new outsourcing, therefore, has much less to do with saving a buck through cheap labor, and much more to do with what has been described as the human cloud. Just as cloud-based resources are “elastic,” so are the teams that most effectively manage them. This also has implications for small-to-medium-sized businesses who, thanks to the cloud, can actually compete on a much more level playing field now that they can essentially outsource their tech needs.

Sending jobs overseas: not inevitable

Before you start thinking about jobs going overseas, let me clarify that the term “outsourcing” simply refers to leveraging an external provider for a previously internal function. Under this broader definition, even SaaS can be considered a form of outsourcing, because all the hosting, maintenance and upkeep is done externally.

You may argue that outsourcing inherently implies offshoring, because someone overseas will always be able to undercut domestic professionals, pricetag-wise. This would be true if cost were the sole driver of outsourcing. Our research also showed, however, that while productivity and profitability are still major drivers, CIOs are also likely to employ outsourcing strategies for the flexibility to turn resources on and off, and for access to experts and hard-to-find talent. Such talent, I daresay, is highly coveted and sought after, regardless of where they hang their hat. Domestically-based experts, who don’t have cultural, linguistic or temporal hurdles to overcome, will be well-positioned as companies increasingly look to contractors to deliver agility.