IT Outsourcing
Tyler Baze
Kent Bushnell
Anne Travous
BA471 – Dr. Reitsma
9 May 2006
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Abstract
Outsourcing has suddenly become imperative for businesses that want to remain
competitive in a global market. Although the concept of outsourcing has been around for
centuries, only recently have companies begun to utilize the resources available to them
by outsourcing certain functions to firms that can do it better, faster, and more efficiently.
Outsourcing has shown mounting benefits to firms that participate. Although there have
been challenges that these firms have been forced to face, outsourcing will predictably be
the way of the future.
Introduction
In December of 2005, Hewlett-Packard introduced a new technology that they
called ‘Halo Collaboration Studios’ (HP, 2006). For a modest $550,000 per studio (a
minimum of 2 studios are required to communicate between them) and $18,000 monthly
in service and maintenance fees, your headquarters can be connected “easily and
seamlessly” to another part of your organization across the world. Sporting state-of-theart plasma screens that display life-sized images, as well as quality lighting and audio,
Halo rooms are currently the very best in long-distance communication.
Why would a company ever spend over a million dollars just to be able to
communicate more realistically? What’s wrong with the good old fashioned phone and email? The answer lies in the ever increasing world of outsourcing, where businesses are
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increasingly looking abroad in their search for quality maximizing and cost minimizing
business elements.
This paper discusses the trend of IT outsourcing in depth. First, we define
important outsourcing terms and look back on the history of IT outsourcing – when and
where it began. We take a look at IT outsourcing in our world today – who’s outsourcing,
what are they outsourcing, and to where? Finally, we touch on the future of IT
outsourcing, looking for indications about where we’re headed as our economy and our
world increasingly becomes a global community.
Outsourcing Trends and Terms
To explore a concept such as outsourcing, it’s important to know exactly what
outsourcing is. Amy Stefancic defined outsourcing as, “the use of resources outside of the
organization to perform routine tasks” (Stefancic, 2004). Rather than choosing to perform
all the aspects of a given business process, a company who outsources chooses to
purchase a service from an outside suppler.
‘Contracting’ is a term that is often confused with outsourcing. Many people think
of the terms interchangeably, but there’s a key difference. In contracting, the buyer
effectively manages the services of the supplier. The actual work is performed by the
supplier, but it’s up to the buyer to oversee the process.
In outsourcing, things work differently. The buyer merely has to decide what
product or service they require, leaving the supplier in charge of the details. The supplier
is able to perform the process as they see fit, occasionally even outsourcing a part of the
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process to someone else. The buyer is only concerned with getting the product or service
they requested for the price they agreed to.
Once a business has chosen to outsource, their next decision is where they’re
going to outsource to. Businesses can choose to outsource domestically or abroad. Should
a business choose to go overseas with their outsourcing, they must decide whether to
choose a nearby country (nearshoring) or one that’s further away (offshoring).
Nearshoring can offer important benefits. A company facing large transportation costs
will benefit by choosing a supplier in a country that is closer. Also, sometimes there are
cultural benefits to nearshoring. For example, if a US company outsources to a Canadian
company, they likely have similar outlooks on business, whereas a company outsourcing
to China or India would likely have to consider cultural implications.
A relatively new buzzword in the IT outsourcing world is multisourcing.
Multisourcing is simply outsourcing different aspects of one process to different
companies. Further allowing businesses to focus on their core competencies,
multisourcing allows companies to focus on an even smaller scope of practice.
History of IT Outsourcing
The concept of outsourcing is one that is as old as business itself. IT outsourcing,
however, has a very distinct beginning. In 1989, Eastman Kodak outsourced several of
their mainframe IT processes to IBM, according to Karen Hill in ComputerWorld Canada
(Hill, 1997). This landmark deal sent waves throughout the business community. Such a
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large company hadn’t outsourced their IT before. Many other companies were waiting to
see how such a system would work, and whether or not it would be profitable.
When it did work, other companies began following suit. Since the Eastman
Kodak/IBM deal, IT outsourcing has grown nearly 20% a year; in 2000, IT outsourcing
represented about 30% of IT budgets, and in 2001, worldwide spending on IT
outsourcing reached almost $64 billion, according to a study by research scientists Levina
and Ross (Levina, 2003).
Present Situation
There are many issues today regarding businesses facing the decision on whether
or not to outsource. Although companies may choose to outsource for a variety of
reasons, there are several factors that seem to be at the forefront of this decision. These
factors include higher quality and lower costs available to them overseas, educational
differences between the US and other countries, and the growth of offshoring. Currently,
global outsourcing is growing at an exponential rate. According to results from a survey
performed by TPI, an outsourcing advisory firm (CNET, 2006), the first three months of
2006 had the “largest number of outsourcing contracts ever signed in the first quarter of a
year”. Globally, 83 contracts were signed with a total value of more than $21.9 billion.
Compared to last year’s first quarter numbers of 76 contracts valued at $15.7 billion,
outsourcing has climbed $6.2 billion in just one year.
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Why Are Businesses Outsourcing?
More and more, businesses are reaping the rewards of utilizing outsourcing in
order to improve their business strategies. According to a study conducted by
Yankelovich Partners (a market research team) for PricewaterhouseCoopers (EDP, 1999),
businesses are embracing the concept of outsourcing for several reasons. First,
outsourcing can be used “as a way to improve performance and profitability”. It can also
allow companies to “focus on their core competencies” by outsourcing support-based
work that consumes a large part of a firm’s time and energy. One example of this would
be offshore call centers for employees and customers. Customer service through call
centers can take an enormous amount of time and money, and does not necessarily
contribute to final profits. Therefore, companies can delegate this service to another firm
and focus solely on their core competencies in order to improve revenues and profits, and
to remain competitive.
According to the survey, outsourcing also allows firms to “increase efficiency
without having to invest in people and technology”. Again, using the same example of
the call center, firms may delegate the call center to another company that already has the
employees and the equipment necessary to do the work. Therefore, the firm is not
required to use valuable resources in order to provide that particular service.
Finally, outsourcing can contribute to a firm’s survival and growth in a
competitive global marketplace. As more and more companies begin to utilize
outsourcing to become more efficient and profitable, those that refuse to participate may
be left behind.
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Quality and the CMM Promise
Companies have always placed
a high value on quality.
Currently, international
companies are gaining access
to jobs outsourced by the US in
part because of their
Figure 1
commitment to quality, and their
ability to quantify that quality through a certification known as the Capabilities Maturity
Model (CMM). The five levels of process maturity for the CMM model are shown in
Figure 1. The CMM model, according to Surendra Saxena in her article, CMM – What is
it and how important is it?, holds several purposes. Its focus is on Software
development, and its aim is to “distinguish mature processes from immature processes”
within a company. CMM also provides “quantitative measures” on expected output by
certified firms. The benefits of being CMM certified are vast, according to Saxena, and
include such ideas as consistency across projects, better quality, higher productivity,
predictable performance, and continuous improvement goals. An important thing to note
is that CMM certification does not guarantee the quality of a firm’s output, only that that
firm has the necessary building blocks to perform consistently and accurately. Firms
certified at even the highest level, 5, may not produce what was expected. The idea is
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that because of the processes in place at that firm, they will be able to catch problems
early on and should have the means to fix them quickly.
Firms that are rated higher by CMM are much more likely to gain business from
companies looking to outsource, as CMM is considered to be the “passport to the global
market”, according to Gene T. Kim, CEO of Bamboo Networks (Zamiska, 2005). In
most cases, if a firm has not been CMM certified the chances of them gaining outsourced
jobs is slim.
Cost Reductions Associated with Outsourcing
Firms frequently make the decision to outsource in order to reduce their costs,
which in turn can increase their net profits. Currently, wages are much higher for skilled
workers in the United States than they are in most other countries. Firms wishing to
capitalize on lower wages often determine that outsourcing is a viable option. Often
times, however, it is not just reduced wages that make outsourcing appealing. It is the
reduction or elimination of other expenses associated with those employees. These other
expenses include pensions and health benefit costs that firms must pay US workers in
order to remain competitive. In the US today, health care costs are one of the highest
expenses a firm must face, and they are still on the rise. Therefore, the opportunity to
outsource some jobs provides an appealing and beneficial way to reduce those costs.
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Educational Differences Between the US and Other Countries
According to Alan Greenspan, in a statement made at the Greater Omaha
Chamber of Commerce 2004 Annual Meeting in Omaha, Nebraska (Greenspan, 2004),
regarding the critical role of education on the nation’s economy, the US may be facing a
shortage of highly skilled workers and a surplus of lesser-skilled workers “relative to the
needs of our capital stock”. The root of this problem, says Greenspan, may extend back
to our education system. Greenspan referred to a study that was conducted in 1995 that
compared students in the US with those internationally. This study revealed that
although 4th grade US students were above average in both math and science, by the 8th
grade those same students had dropped to about average. In the 12th grade, however,
those students had fallen well below the international average.
There is some controversy regarding the issue of education in the US, and how it
stacks up in the international system. According
to David Berliner, a psychologist and co-author of
the 1996 book The Manufactured Crisis: Myths,
Fraud, and the Attack on America’s Public
Schools, the trouble with comparing US averages
with those of other countries is that the nation is
running 50 separate school systems, whereas
some of the countries used in comparison have a
Figure 2
national school program that blankets all students in the country (Bushweller, 1996).
Although some of the states in the US are very competitive when taken individually,
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when an average of the nation is used America appears to be lacking. In Error!
Reference source not found., for example, the United States is second from the bottom
in math proficiencies when compared to the other nations involved in the study. If we
were to take the states individually, however, many of them would perform in the highest
brackets, competitive with Taiwan and Korea.
Another factor that must be considered is the cultural implications of these
standardized tests. American students do not face the same pressure to perform well than
do their international counterparts. In many Asian countries, for example, a student’s
acceptance into a university is dependent on their cumulative scores from the
standardized tests. This provides them with a much higher incentive to perform well than
American students who face no repercussions or advantages, regardless of their scores.
Difficulties of Outsourcing
Although outsourcing has definitely proven itself to be a valuable asset to the savvy
business firm, there are still some challenges that companies are facing, according to
Thomas Hoffman and Patrick Thibodeau, authors of Working Through the Pain: Lessons
in How to Succeed at Offshoring (Hoffman, 2005). One challenge that many firms have
been forced to deal with is the need to send IT specialists overseas to resolve unforeseen
project problems. This has occurred when companies jump into outsourcing headfirst,
without first analyzing their situation to determine the pros and cons of offshoring.
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Another challenge has been that of time zones. When firms are outsourcing to
companies on the other side of the world, they have a much more difficult time
communicating because while one company is hard at work, the other is fast asleep.
Cultural and language differences have also been a challenge to many firms. This
can include cultural differences in how business practices are carried out and language
barriers that affect customer satisfaction. One example would be Hewlett Packard’s
decision to outsource their employee payroll call center to South America. Employees
have been forced to call representatives that speak little English, and have accents so
thick it is difficult to communicate. This has left employees feeling frustrated and
aggravated at their inability to communicate their problems or issues with those who are
supposed to help them.
Finally, quality and security are both issues that have presented challenges to
outsourcers. Quality and security are both viewed differently from different cultural
perspectives, and although it may be obvious to a US firm that security measures or
quality must be paramount, if the firm fails to relay this to the outsourced company, they
may find that security or quality are not up to par with current US standards.
The Future – Size & Direction
As we have shown, outsourcing is a growing trend, but by how much? A recent
study by the International Data Group (IDG, 2006) showed that in 2005, there was a 33%
increase in the amount of outsourcing deals signed. That would mean that not only is
outsourcing still growing, it’s growing exponentially. In some countries, outsourcing has
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become an important economic boon; in India, for example, the outsourcing market
makes up almost 5% of their GDP, a $23.4 billion industry, according to a New York
Times article (Rai, 2006).
It is becoming increasingly easy to outsource parts of a business overseas. As
discussed in the introduction of this paper, technologies such as Halo are allowing
companies to easily and efficiently communicate across the world. It is no longer difficult
to monitor an important business function being performed miles and miles away.
Outsourcing is no longer restricted to large businesses. According to an article in
ComputerWorld (Babu, 2006), it is increasingly small and midsized companies that are
fueling the growth. As more technologies become available and less cost prohibitive, the
doors to offshoring are becoming more readily accessed by smaller firms.
Multisourcing is becoming more and more common, according to another
ComputerWorld article (Thibodeau, 2006). As outsourcing grows, firms are specializing
more and more on more specific tasks. By focusing on such a small part of running a
business, core competencies abound. The old business model is in jeopardy as firms gear
themselves towards a particular task or process, forming a kind of global assembly line.
The concept of outsourcing is one that makes a lot of people cringe, as they
imagine more and more domestic jobs being sent overseas. Should we be concerned?
According to Pete Engardio with BusinessWeek, the answer is ‘no’ (Engardio, 2006). His
article suggests that outsourcing may actually revitalize and turn around struggling
businesses. By focusing on core competencies, business can outsource their lagging areas
to more capable firms, allowing for businesses to focus on what they do best. Such
“transformational outsourcing” should be seen as an opportunity to businesses. IT
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workers, however, need to realize that more competition is becoming more readily
available. As in any job that is approaching saturation, IT workers in the present and
future would do well to acknowledge the trend in outsourcing, and to prepare accordingly
as they plan their futures.
Conclusion
In this paper, we have explored the roots of the IT outsourcing trend, and what exactly IT
outsourcing means. We looked at why companies outsource, who is outsourcing, what
they’re outsourcing and what companies look for in an outsourcing supplier. Finally, we
touched on where outsourcing looks to be going, and how it affects businesses today,
both new and old.
Outsourcing is a growing trend that is affecting many different industries greatly,
and IT is no exception. Companies are outsourcing more and more each year, with no
signs of slowing. They outsource for cheaper production, higher quality, or increasingly
both. While this means more competition for domestic firms, it’s important to realize
how much of an opportunity it presents for firms looking to grow and expand. Like it or
not, outsourcing is here, and it isn’t going away; businesses able to take advantage will
find that for outsourcing, the sky is the limit.
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