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 labour costs.
It’s difficult
There’s no debate about it. Outsourcing is difficult. The failure rate of outsourcing relationships remains high. Depending on whom you ask, it can be anywhere from 40 to 70 per cent. At the heart of the problem is the inherent conflict of interest in any outsourcing arrangement. The client is seeking to get better service, often at lower costs, than it would get by doing the work themselves. The vendor, however, wants to make a profit. That tension must be managed closely in order to ensure a successful outcome for both client and vendor.
Another cause of outsourcing failure is the rush to outsource in the absence of a good business case. Outsourcing is increasingly pursued by organisations as a "quick fix" cost-cutting manoeuvre rather than an investment designed to enhance capabilities, expand globally, increase agility and profitability, or bolster competitive advantage.
That said, according to a recent study by CIO magazine and MIT’s Center for Information Systems Research, some outsourcing arrangements are easier to make work than others. Transactional outsourcing deals, in which a company outsources discrete processes that have well-defined business rules, are successful a whopping 90 per cent of the time.
Co-sourcing alliances, in which client and vendor jointly manage projects (usually application development or maintenance work that goes offshore) are successful only 63 per cent of the time. And "strategic partnerships", in which a single outsourcer takes responsibility for a big bundle of IT services, works only half the time.
Whatever the type of outsourcing, the relationship will succeed only if both the vendor and the client achieve expected benefits.
Best place
You’d probably expect to hear that India is the best place to send work. And indeed, India remains the locus for offshore outsourcing. But again, it depends on what you’re outsourcing, why, and your in-house capabilities for managing the relationship.
In fact, the best place in the globe in terms of people skills and availability for IT services remains the United States, according to A.T. Kearney Global Services Location Index 2005. The index contains some other eye-opening stats. Top financial structures to support outsourcing? Philippines and Ghana. Best IT services business environment? Singapore.
India and China (to a lesser degree) still dominate for IT services in the Asian region, although turnover in India and intellectual property issues in China (and rising wages in both locations) remain significant concerns. Central and Eastern Europe are attractive destinations, but costs are rising there, too. Offshoring is actually increasing in Africa and the Middle East, but political instability poses ongoing challenges there.
