IT Outsourcing: An Increasingly Important Strategic Option

Topic: Web Hosting Business |

Print This Article |

Email This Article | 81 Views

(No Ratings Yet)

Loading ...

Outsourcing is not a new business model. In the 1970s, many manufacturing corporations moved their operations to countries like Mexico and Malaysia where the lower labor costs allowed them to produce more efficiently.

For the same reasons, IT companies started moving parts of their business offshore in the 1980s. The massive reprogramming efforts required in relation to the Y2K transition boosted the process. Today, outsourcing is quickly becoming a standard practice, growing at a rate of 10-15 percent annually according to Cutter Consortium. Leading this trend, IT outsourcing reached $56 billion in 2000 and is expected to top $100 billion by 2005 according to IDC.

The traditional drivers of outsourcing haven’t changed much in 2001. In The Outsourcing Institute (OI)’s IT Index, an annual survey of buyers and sellers, the top three reasons for outsourcing are:

cost reduction
improving company focus
securing external resources not available internally

Cost reduction is easily worth first place. Outsourcing decreases costs by 30 to 60 percent, according to different estimates. Efficiency gains are largest when outsourcing offshore, where labor costs are considerably lower. Offshore outsourcing often incurs only two-thirds the in-house cost.

IDC research notes that the top strategic reasons for outsourcing include: access to world-class capabilities, building partnerships and improving focus.
Offshore outsourcing can also solve problems related to a lack of internal resources. Despite the layoffs in the IT sector, the shortfall of computer programmers in the U.S. will reach 1.4 million by 2003, according to the Department of Commerce.

The complexities involved in establishing and maintaining a successful outsourcing partnership prevent some buyers from capturing the benefits. Late deliveries, increasing costs and quality mismatch are common problems.

The benefits of domestic outsourcing include geographical proximity, cultural similarity and common laws, regulations and standards.

Outsourcing options have also multiplied in terms of location. Offshore outsourcing is the fastest growing segment of the market. Low-cost labor and a wealth of qualified technical staff make some regions especially attractive outsourcing locations. The preferred outsourcing regions are Asia (mostly India and China), Central and Eastern Europe and Russia, some developed countries (Israel and Ireland), Mexico and several Middle Eastern states.

However, offshore outsourcing can pose certain problems. These are usually related to language, cultural misunderstandings and differing standards, laws and regulations.

According to The Outsourcing Institute’s IT Index, IT outsourcing has not only grown, it has developed and changed as well. Companies are outsourcing a wide variety of IT activities. Though traditional outsourcing aimed at cutting costs continues to predominate, many new types of activities are increasingly being outsourced. These include: consulting services, Web hosting, Web design, imaging and OCR.

The fastest growing outsourcing segments according to IDC are the E-commerce and ASP markets. The ASP’s, which deliver software functionality over the Internet, have survived the dotcom bubble burst and are expected to increase their market share. Many of them are shifting from serving dotcom startups to developing, customizing and maintaining solutions tailored to the needs of large corporations.

Outsourcing is also making inroads into the Web hosting market. According to a recent report on Web hosting by Forrester Research, companies can reap between 25 to 80 percent savings by outsourcing, compared to running their Web sites and applications in-house.

To wrap it up, outsourcing will continue to expand and evolve with the ongoing change in business and technology. As the industry matures, many companies will turn to outsourcing not only as a way to cut operational costs, but also as a strategic option for company growth.

As Seen On: Tophosts.com