For many people, the word outsourcing evokes images of corporate downsizing, pink slips, and mediocre customer service from foreigners with difficult-to-understand accents. But is outsourcing necessarily an economic evil? Is it only the tool of diabolical CEOs (and other executives) bent only on maximizing profits, or does it have a legitimate place in business?
The answers to these questions, needless to say, have a tremendous effect on one’s view of outsourcing in the context of IT. As companies continue to tighten their budgetary belts in the aftermath of the recent economic downturn and the current sluggish recovery (whose very existence is, at best, debatable), IT outsourcing may be losing some of its negative overtones. The cloud, for instance, is nothing more than IT outsourcing on a grand scale—and it’s on an upward swing.
What’s So Bad About Outsourcing?
An honest and fruitful discussion of any topic requires an understanding of what certain critical terms mean. In this case, what is meant by outsourcing? Outsourcing may mean different things to different people (or organizations), but in its broadest for, outsourcing is delegation of some task or set of tasks to another person or organization. In these terms, it certainly doesn’t seem so bad.
Almost everybody outsources certain tasks. Do you hire an accountant or other individual or company to file your taxes? Then you’re guilty of outsourcing. Do you hire someone to mow your grass? Fix your car? Babysit your children? You’re guilty. But few people see these activities as evil; sometimes—whether for the sake of safety, convenience, or money—hiring someone else to do certain jobs is the best option. Most people, for instance, would do better having the brakes on their cars repaired or replaced by a professional instead of by themselves. Similarly, the time some people would otherwise spend filing taxes is not worth the relatively modest fee for having a professional tax preparer do the work. We all outsource regularly, and no one complains.
Now, consider outsourcing in the context of business. At this level, something changes relative to the level of the individual, and that something has garnered a negative reputation for outsourcing. But is there any difference when a business decides to hire someone else to do work that would otherwise be too expensive, too time consuming, or too difficult to do in house? Why should a business started for the purpose of manufacturing widgets spend its precious time on tasks like filing taxes, cleaning uniforms, and repairing computers?
For some reason, some people have the (often implicit) idea that for any task necessary to running a business, that business should have a full-time employee. Of course, this system is patently impossible for small businesses, many of which cannot afford additional employees or “jacks of all trades.” In the context of large businesses, however, failure to use employees is a violation of truth, justice, and the American way—especially if that business instead uses foreign workers or organizations to do certain work.
This leads to a differentiation that must be made to clarify the issue of outsourcing: not all outsourcing involves foreign workers. (Use of foreign help is often called “offshoring” to differentiate it from domestic outsourcing.) Furthermore, not all outsourcing involves laying off existing employees: some companies may have never hired an IT staff in the first place, and yet they still rely on other organizations to meet their IT needs. And finally, despite jingoistic sentiments that paint offshoring as a slap in the face of America, offshoring is not necessarily wrongheaded.
So, outsourcing is not inherently evil. Like so many business (or personal) strategies, it is a tool that can be used properly or improperly. For historical reasons, outsourcing may have gained its bad reputation owing to association with layoffs of existing employees, reliance on foreign labor, and other circumstances that have gained it political and public disfavor. But what about outsourcing in the realm of IT, specifically?
What Is IT Outsourcing?
Outsourcing of IT is pretty much just what it sounds like: hiring another organization to provide the company with IT resources, thereby eliminating the need to maintain infrastructure and IT personnel in house. That’s simple enough; what’s more complicated, though, is the variety of ways and extents to which IT outsourcing is used. Some companies might outsource a portion of their IT infrastructure or services—they might rely on Gmail, for example, instead of an in-house email system. Others might outsource essentially all of their IT resources to the cloud, essentially just maintaining an Internet connection for workstation access to those resources.
Although some stigma remains regarding IT outsourcing (especially to foreign organizations), that stigma has relented, in part because of a change of terminology. That stigma, following the lines of the discussion above, has revolved around a “loss of American jobs,” company disloyalty to its employees, and similar broad (and sometimes inaccurate) sentiments. So, what happens when the name of a useful or profitable policy gets a bad reputation? Change its name.
In the case of IT, outsourcing has been re-termed the “cloud” and re-presented along with its high-tech trappings. According to CIO.com (“Cloud Computing is Just Outsourcing, Says Forum”), for instance, principal research analyst Adrian Davis of the Information Security Forum stated that the “cloud is just outsourcing. You can rely on knowledge of how you do outsourcing to an extent,” as long as you pay attention to the peculiarities of cloud computing as one particular type of outsourcing. Indeed, the cloud is just another form of outsourcing, as we have defined it: a company hires another company to do certain tasks, rather than doing those tasks in house. From this perspective, the cloud is really nothing new, although it may involve some slightly novel twists on an old theme.
IT outsourcing may involve relatively minor tasks such as web development and hosting, or it may involve more complicated tasks like application development, infrastructure hosting (such as colocation), or technical support. Thus, IT outsourcing can involve hiring outside organizations for small items all the way up to handling a company’s entire IT system.
Who Is Outsourcing?
Whether a company outsources its IT or keeps it in house is usually the product of a variety of factors—although some companies make wiser choices than others. Outsourcing is not limited to large or small companies; some small companies may benefit from in-house IT despite the startup and ongoing operational costs, and some large companies may benefit from outsourcing, allowing them to focus on their core businesses rather than on IT infrastructure. But certain industries face challenges that make outsourcing more or less beneficial. For instance, the financial sector faces regulatory hurdles that make reliance on cloud computing difficult, if not impossible. The health care industry must meet regulatory requirements regarding security and confidentiality of patient records, but it is also seeking to expand availability of those records to allow easier and faster access by authorized health professionals.
But the biggest draw may well be (perceived) savings—usually measured in terms of cost (dollars), but also in terms of time (which often translates to dollars). Imagine your car just broke down. You have two options: fix it yourself, or hire a mechanic to fix it. Taking the car to a mechanic (the outsourcing option) and fixing the car yourself (the in-house option) will likely involve the same (or similar) cost for parts. The difference in cost is the labor of the mechanic. So, fixing it yourself is cheaper, right? Not if your time has any monetary value. In the context of business, an employee who must do a job outside his or her expertise faces a learning curve as well as a lack of experience. And every hour spent on this other task is time not spent on that employee’s area of expertise—meaning lost value. Thus, outsourcing is not necessarily more expensive than the do-it-yourself (in-house) option; in fact, it can potentially be less expensive. Furthermore, hiring a dedicated in-house IT staff may also be more expensive than simply letting another company (who can amortize costs over multiple clients) do the work.
In many ways, then, the question of who is outsourcing cannot be restricted to a specific industry, company size, or company budget. Each company has its own set of goals and restrictions (whether budgetary, regulatory, or practical) that will largely determine whether outsourcing is a viable option.
IT Outsourcing and the Economy
One of the main features of the recent economic downturn is the high unemployment rate—including among IT professionals. This economic reality doesn’t necessarily improve outsourcing’s reputation, but it isn’t necessarily its enemy, either. For instance, a company that outsources (specifically, offshores) IT jobs is likely to receive flak for not hiring American workers, many of whom are having difficulty finding work. But many companies are also facing tight budgets, and taking a cheaper IT route may be the only option in some cases.
Despite the recent economic woes, however, IT outsourcing has not increased greatly. According to CIO.com (“Goodbye Outsourcing, Hello Insourcing: A Trend Rises”), for the past year, “most outsourcing analysts agree that the level of IT services deals sealed has held relatively steady, year-over-year. The total value of outsourcing contracts signed in 2010 was $62.4 billion, according to outsourcing consultancy TPI, a figure that’s pretty consistent with their last five years of total contract value data.” In other words, throughout the recession, IT outsourcing has remained largely flat, at least according to this metric.
Computerworld (“As Cloud Grows, IT Hiring Flatlines”) notes that “Corporate IT departments are increasing their spending on hardware and cloud services, but not on new hiring in this weak economy.” The article also cites Computer Economics VP of Research John Longwell as indicating that “the number of organizations that are turning to software-as-a-service (SaaS) is rising rapidly. About 36% of the firms they surveyed have SaaS in place, which is up from 24% in 2009. Longwell said that the use of SaaS is a form of outsourcing and enables companies to reduce some of their capital and staff support.”
But what about the savings associated with IT outsourcing? They may not be quite what one would expect. CIO.com (“The Hidden Costs of Offshore Outsourcing”) notes that the savings associated with outsourcing (particularly, offshoring) may well be much less than the typical salary of a foreign IT professional might indicate: “it takes years of effort and a huge up-front investment,” and “for many companies, it simply may not be worth it.” Some industry observers and IT professionals make similar arguments regarding outsourcing to the cloud: it may sound good in theory, but the costs compared with more-traditional approaches to IT simply are simply too high. Some of this problem, again, may result from an apples-to-oranges comparison. Not every business, nor every industry, has the potential to save money by outsourcing. In some cases, in-house IT may provide a much cheaper alternative—it all depends on the needs of the company.
Thus, if IT outsourcing doesn’t necessarily deliver tremendous savings across the board for all industries and companies, one would naturally expect not to see a broad-based increase in outsourcing in a weak economy. Some companies, or even industries, may see some variation as they “test the waters” of outsourcing, perhaps going too far and then pulling back.
Outsourcing may have had a very bad name at one time, having been associated with the notion of robber baron companies interested only in profits and not in their workers’ livelihoods, but these sentiments are no longer firmly entrenched in the minds of many. In the IT industry, outsourcing has partly increased its appeal through better packaging and improved marketing: by calling it “the cloud” or “software as a service” (and similar x-as-a-service terms), outsourcing drops some of the baggage that burdens it (especially in other industries). To be sure, however, IT outsourcing is not limited to cloud services, although these may be the current public face of IT outsourcing.
But the human factor cannot be entirely dismissed. The IT industry is still suffering from a high unemployment rate among IT professionals, and outsourcing by companies (and, in particular, offshoring) does little to boost outsourcing’s image in light of these employment conditions. Nevertheless, the unemployment problem in IT (which, according to Computerworld, has a greater rate than in other professions) may be due in part to a glut of IT professionals and not solely a down economy.
The word outsourcing is probably not so much a bad word in IT as it is an uncertain one. IT outsourcing to the cloud seems to be growing, but not everyone agrees that the cloud provides a better value than more-traditional approaches to IT. Furthermore, some companies simply cannot use the cloud, owing to regulatory or other considerations. In an event, it is highly unlikely that the cloud will ever become the entirety of IT: a large portion of users and companies will no doubt want to retain control over their IT resources. The future of IT is likely a mix of cloud, traditional IT, and hybrid approaches.
IT outsourcing as a general trend seems to be a mixed bag, with some amount of retreat but some increased investment (particularly in the cloud). The economic value of IT outsourcing is not entirely clear—whether it pays off to outsource instead of using in-house IT depends on many factors that are peculiar to the different industries and to individual companies within those industries. Thus, even in light of the current weak economy, IT outsourcing is unlikely to spike, even if the hoped-for recovery continues to languish. Thus, for IT, outsourcing may not be a bad word or a good word—just another legitimate option for running a company.
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