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IT Services Outsourcing- Challenges & Risks

Narendra Kumar

| Updated: Nov 22, 2017 | Category: General

Outsourcing

Outsourcing can be defined as a practice in which an individual or company provides services, performs tasks or manufactures products for another company. Outsourcing is generally chosen by companies to save costs.

Outsourcing is the most common trend in information technology and other industries. Businesses outsource for that services which are generally seen as intrinsic to managing a business and serving internal and external customers. Products, like computer parts, and services like payroll and bookkeeping are usually outsourced. In most of the cases, businesses outsource the entire information management of a company including the planning related to business activities and business analysis as well as the installation, management, and servicing of the network and workstations of the business.

Outsourcing helps the enterprises to reduce costs of its business, accelerate more time to market, and also to take advantage of external expertise.

Reasons for outsourcing

The reason why business people prefer to outsource their business.

  • Improved efficiency
  • Saving in labor and overhead costs
  • Greater productivity and
  • The opportunity to focus on core product and functions of the business.

Furthermore, more companies are looking to outsourcing providers as innovation centers.

Types of IT Outsourcing

There are several types of IT outsourcing and these types include:

  • Moving business/services overseas, typically this is to be done to take advantage of lower costs and more favorable economic climate.
  • Nearshoring: Nearshoring is transferring business or services to another country close to your country, often times it is sharing your country’s own border.
  • Homeshoring or onshoring: It allows employees to work from home rather than an office, factory or related physical workplace.

Examples of Frequently Outsourced IT Services

  • application/software development;
  • web development/hosting;
  • application support or management;
  • technical support/help desk;
  • database development/management;
  • telecommunications;
  • infrastructure

Advantages of Outsourcing:

The reason why companies /entrepreneurs choose to outsource part of their business.

  • Expertise: sometimes an overseas vendor/business has special equipment and/or technical expertise, making them better at the given task than employees within the organization.
  • Reduced costs: The biggest advantage of outsourcing of work overseas is reduced costs for labor, operations, and even equipment.
  • Staffing flexibility: Outsourcing will allow operations that have seasonal or cyclical demands to bring in additional resources when you need them and release them when you’re done.

Disadvantages of Outsourcing:

Some potential disadvantages of outsourcing are:

  • Language/cultural barriers: This problem can affect both employees as well as the customers, especially when clear explanations of the problems and solutions are required.
  • Different time zones: This is one of the most common barriers to communication and coordination with the hiring company.
  • Slower turnarounds: The language barriers coupled with time differences can sometimes lead to a longer project, a possible loss in quality unless you invest time in a rigorous screening process.

The Reasons why Company Outsources Part of its Business:

According to the Outsourcing Institute’s Outsourcing Index 2000, there are many reasons why companies outsource. Here are some of the top reasons:

  • Reduce and control operating costs.When you outsource, you eliminate the costs associated with hiring an employee, such as management oversight, training, health insurance, employment taxes, retirement plans etc.
  • Improve company focus. Outsourcing of your business lets you focus on your core competencies while another company focuses on theirs.
  • Gain access to exceptional capabilities.Your return on investment is so much greater when you outsource information technology to a firm that specializes in the areas you need. Instead of just the knowledge of one person, you benefit from the collective experience of a team of IT professionals. Outsourced IT companies usually require their IT staff to have proper industry training and certifications as well.
  • Free internal resources for other purposes. Outsourcing will allow the business to retain their employees for their best use instead of wasting their time on things which can be done by people who are expert in this.
  • Resources are not available internally.On the flip side, maybe you don’t have anyone in your company who can manage your IT needs, and hiring a new employee is not in the budget. Outsourcing is the best alternative, both for the interim and for the long-term.
  • Maximize restructuring benefits.When you are restructuring your company to improve costs, quality, service, or speed, your non-core business functions may get pushed aside. They still need to be handled and outsourcing is the best way to manage your business.
  • Make capital funds available.By outsourcing non-core business functions, you can spend your capital funds on items that are directly related to your product or your customers.
  • Reduce Risk.To keep on updating with technologies required to run your business is expensive and time-consuming. Because professional outsourced IT providers work with multiple clients and need to keep up with industry best practices, they typically know what is right and what is not. This kind of experience, as well as knowledge, reduce your risk of implementing a costly wrong decision.

What are the Risks Associated with Outsourcing the Business:

Anytime you give someone else responsible for an aspect of your business, whether a full-time new hire or an outside vendor, there is risk involved. So here is a list of risks involved in the outsourcing of business.

  • Some IT functions are not easily outsourced: IT affects an entire organization; from the simple tasks employees do every day to the complex tasks. Before outsourcing any part of the business, be sure the outside vendors are qualified to take care of your greatest needs.
  • Control may be lost: Many critics argue that an outside vendor will never be effective. Other concerns regarding outsourcing include confidentiality of data and disaster recovery. A supervisor that is knowledgeable in managing an IT staff member will always be required when the work is outsourced.
  • Employee morale may be affected: This is a particularly very true risk if the business is outsourced instead of transferring to the internal staff. Other employees may wonder if their job is at risk and this will lose the employees morale and will decrease the quality of work.
  • You may get locked in: If the vendor does not document their work on your network and system, or if you’ve had to sign an agreement for outsourcing you may feel like you can’t go anywhere else or take back your network. Many outsourced companies require you to sign a year to year contract which limits flexibility and the business gets locked in for that period.
  • Security Protocols: All the businesses which are considering to outsource their IT services must investigate whether the managing company i.e. the company to which the part of the business is outsourced employs the security measures or not, and whether the applied security measures are safe or not. This is especially important when dealing with offshore companies run from a foreign country.

The Rewards Associated with the Outsourcing of IT Services:

There are following rewards when you outsource your company’s IT functions:

  • Access to the latest and greatest in technology: You may have noticed how rapidly software and hardware become obsolete in this industry. It is not possible for one staff or a single person to keep up-to-date with everything. Outsourcing gives you the benefit of having more than just one IT professional. And since it’s the core competency or the core business activity of the company, they can give you the best advice.
  • Cost savings: Outsourcing your IT services to experts in a specific field provides financial benefits to the business such as bulk purchasing and leasing options for hardware and software, and software licenses, as well as potential compliance with various government regulations.
  • The high quality of staff: Since it’s their core competency, outsourced IT vendors look to hire staff with specific qualifications and certifications.
  • Flexibility: Vendors have multiple resources available to them, while internal staff may have limited resources and capabilities.
  • Job security and burnout reduction for regular employees: Using an outsourced IT company removes the burden from your staff who has taken on more than he or she was hired for. You will establish a better relationship with your employees when you let them do what they do best and what they were hired to do.
Narendra Kumar

Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.

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