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What is outsourcing? Definitions, best practices, challenges and advice

Stephanie Overby | Nov. 8, 2017
Outsourcing can bring big benefits to your business, but there are significant risks and challenges when negotiating and managing outsourcing relationships. Here, we break down everything you need to know to ensure your IT outsourcing initiatives succeed.

outsourcing

 

What is outsourcing?

Outsourcing is a business practice in which services or job functions are farmed out to a third party. In information technology, an outsourcing initiative with a technology provider can involve a range of operations, from the entirety of the IT function to discrete, easily defined components, such as disaster recovery, network services, software development or QA testing.

Companies may choose to outsource IT services onshore (within their own country), nearshore (to a neighboring country or one in the same time zone), or offshore (to a more distant country). Nearshore and offshore outsourcing have traditionally been pursued to save costs.

 

Outsourcing benefits and costs

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

  • lower costs (due to economies of scale or lower labor rates)
  • increased efficiency
  • variable capacity
  • increased focus on strategy/core competencies
  • access to skills or resources
  • increased flexibility to meet changing business and commercial conditions
  • accelerated time to market
  • lower ongoing investment in internal infrastructure
  • access to innovation, intellectual property, and thought leadership
  • possible cash influx resulting from transfer of assets to the new provider

Some of the risks of outsourcing include:

  • slower turnaround time
  • lack of business or domain knowledge
  • language and cultural barriers
  • time zone differences
  • lack of control

[ Keep up to date with the 7 hottest IT outsourcing trends — and 7 going cold. | Know what you're getting when outsourcing with our SLA definitions, solutions and best practices. | Get the latest outsourcing and IT strategy insights: Sign up for our CIO newsletter. ]

 

Outsourcing services

Business process outsourcing (BPO) is an overarching term for the outsourcing of a specific business process task, such as payroll. BPO is often divided into two categories: back-office BPO, which includes internal business functions such as billing or purchasing, and front-office BPO, which includes customer-related services such as marketing or tech support. Information technology outsourcing (ITO), therefore, is a subset of business process outsourcing.

While most business process outsourcing involves executing standardized processes for a company, knowledge process outsourcing (KPO) involves processes that demand advanced research and analytical, technical and decision-making skills such as pharmaceutical R&D or patent research.

IT outsourcing clearly falls under the domain of the CIO. However, CIOs often will be asked to be involved in — or even oversee — non-ITO business process and knowledge process outsourcing efforts as well. CIOs are tapped not only because they often have developed skill in outsourcing, but also because business and knowledge process work being outsourced often goes hand in hand with IT systems and support.

 

Outsourcing IT functions

Traditionally, outsourced IT functions have fallen into one of two categories: infrastructure outsourcing and application outsourcing. Infrastructure outsourcing can include service desk capabilities, data center outsourcing, network services, managed security operations, or overall infrastructure management. Application outsourcing may include new application development, legacy system maintenance, testing and QA services, and packaged software implementation and management.

 

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