by Eric Berkman

History of IT Outsourcing

Nov 01, 20013 mins

Why do businesses outsource?

Apart from saving money, the central idea behind outsourcing is that an enterprise should focus on what it does best (make cars, cakes or sell insurance)?its core competency?and hire someone else to do what they[i] do best (make steel, food coloring or cut checks). A business should outsource only what does not[i] differentiate it in the marketplace. This is the simplest way to look at how and why managed service providers (MSPs) emerged this year.

In the 1980s, the earliest days of IT outsourcing, huge outsourcers such as EDS and IBM dominated. Running a mainframe data center was not a differentiator, so why go to the expense of running it in-house?

?Those outsourcers gained from economies of scale,? says Sheldon Laube, former IT director at PricewaterhouseCoopers and now chairman and CEO of Centerbeam, a PC-services company in San Jose, Calif. ?They could open huge data centers and have people in common who could serve the machines of multiple customers.? Technologies?and outsourcing?have become more diverse since then. EDS and IBM are still there to take over huge chunks of IT operations, but the emergence of the Web has made it feasible to parcel out more specific functions, like payroll or accounts receivable. But whatever companies decided to outsource, they?ve usually kept it away from their core competencies.

Until the late 1990s, that is.

That?s when ASPs burst on to the scene, claiming they could take a company?s most strategic functions and run them remotely on their own applications. A business wouldn?t need to maintain an expensive IT department to build its own applications; it could just rent the functionality over the Internet or a private network. This appealed to dotcoms with venture cash, business plans and little else, and also to some established, brick-and-mortar retailers that wanted to start making money quickly on the Web. As it turned out, ASPs could not deliver on all their promises. In order to be profitable, they had to limit the number of applications they supported. And if you?re selling dog food, you can?t run your business on the same platform as the guy selling jet engines.

ASP customers have learned this the hard way.

And when several major ASPs went bust, their customers suddenly found themselves without the applications they needed to run their businesses.

The bottom line: IT execs, especially those in highly specialized businesses, won?t go there anymore.

Analysts say MSPs represent a step toward sanity, providing a conservative, scalable form of outsourcing. A business can outsource the broad monitoring of all apps and networks, or restrict the contract to a single server or router. And since MSPs operate remotely, they never possess sensitive corporate or customer data, thereby alleviating some of the security concerns surrounding ASPs.

Which brings us to the present.