Why Outsource?

Which companies can outsource their IT functions and how

Outsourcing does not make the IT department vulnerable to claims of co-employment even when an outsourcer’s staff works on the client company’s premises. This is because of the fundamental difference between staff augmentation and outsourcing. In outsourcing,the company contracts for a service; not a person. The outsourcer's job is to determine how many people will be required to perform the service and what technical background they must have. The company generally does not interview them nor does it direct the staff. The IT department only specifies what is to be done; not how to do it.

Although, the most popular reason for companies opting for outsourcing is to avoid the co-employment issues associated with lengthy staff augmentation engagements, there are other reasons why an IT department would outsource one or more of its functions:

The work is not a core competency. For instance, a manufacturing company may decide that its core business is assembling complicated machinery and may decide to outsource all component manufacturing. Similarly, an IT department may decide that some functions are not part of its core competency and may decide to transfer responsibility to a service provider. An example of non-core competency is support of legacy applications while implementing a new system or integrated suite that will replace them. In this case, IT may have decided that its core business is being a systems integrator rather than an application support function.

Skill is essentially a commodity. Functions, such as mainframe operations, help desk services and telecommunications support have become commodities. The work doesn't vary much from industry to industry or even from company to company. Owing to the standardisation and economies of scale, various suppliers have acquired expertise in these functions and can perform them at least as well and often cheaper than the IT department.

IT departments are perennially plagued with major skill gaps, with no short-term plan to close it. They may use staff augmentation as a way to obtain specific expertise and transfer that to existing staff. This approach is ideal when the skill in question involves emerging technologies. Alternatively, the department may choose to turn over responsibility for the whole system to an outsourcer, if it has difficulty retaining experts for systems such as ERP. In many instances, it would rather outsource than struggle to keep the department fully staffed.

Outsourcing has its own set of advantages:

• Departmental resources previously involved in the function can now be used on other projects, including higher priority or value-added work.
  
• Costs are fixed and may be less than the department was previously paying.
  
• The risk of losing key employees is transferred to a company whose primary business is recruiting and retaining technical staff. Since outsourcers’ contracts require adherence to specific SLAs, they have a high incentive to provide cross training that will reduce dependence on a single individual.
  

There is an added advantage for some companies however. The outsourcing contract can specify that the supplier offers employment to staff whose jobs are being transferred to the outsourcer. If the department is not involved in non-core competency functions anymore, it may not have other assignments for the staff currently performing the work. Transferring employees to the outsourcer means continued employment for the staff and reduced risk for both the company and the outsourcer.

Outsourcing raises concerns despite its many benefits. The primary concern is that of losing control over its business. The concern is valid since the department transfers responsibility for day-to-day operation to the supplier. This translates to giving up the ability to direct work at a detailed level. The department is now dependent on the supplier to provide that daily management and to ensure that service level agreements are met. If an IT manager is not comfortable with relinquishing task level control or if the corporate culture does not support such a change, outsourcing should not be considered.

Reduced flexibility is another concern. Outsourcing is usually a long-term engagement, bound by contractual terms and hence isn't designed for day-to-day changes in the scope of work. Instead, it is predicated on the fact that a finite scope of work has been transferred to the service provider and that the vendor will be held accountable for clearly defined service levels. Although good outsourcing contracts provide for periodic adjustment of service level agreements, they do not lend themselves to frequent changes. Outsourcing may not be an appropriate solution if the workload is unpredictable.