The pros and cons of outsourcing company IT services

IT outsourcing is a competitive business strategy implemented to reduce costs and save resources. Capitalizing on access to first-rate capabilities and infrastructure while controlling operating costs, U.S. IT firms outsource mainly to India and China to achieve financial growth.

IT is the most commonly outsourced sector. Since 2000, over 500,000 jobs have been outsourced out of which 196,026 (39.2%) were from IT companies. The U.S. Department of Labor and Forrester Research estimate that IT outsourced jobs will reach 472,632 by 2015, increased 71 percent from 2010.

IT outsourcing advantages

By tackling strategic internal resources for core activities, IT outsourcing has several advantages.

• Economies of scale

Through IT outsourcing, firms achieve economies of scale. By capitalizing on the optimal use of infrastructure and the expertise around their processes, offshore IT firms manage cost variability. Due to economies of scale, U.S. IT firms take advantage of cheaper labor sources offshore, performing the same tasks at a lower cost.

• Lower personnel costs

Through IT outsourcing, U.S. firms have lower personnel costs because full-time employees onshore require salary raises, medical benefits, retirement plans and insurance, unlike their outsourcing partners. Moreover, IT outsourcing saves firms from dealing with labor unions, saving money in labor lawsuits.

• Specialization

By hiring local, highly specialized workers, firms achieve higher product quality and higher production volumes at a lower cost. Due to specialization, offshore IT firms capitalize on highly skilled services and offer value to their customers through highly customized products.

• Time zone advantages

Offshore IT firms can capitalize on time zone advantages. For instance, the time difference between the U.S. and India enables the outsourcer in India to continue the work during nighttime in the U.S. In that way, business flow is continuous and the work is completed faster, providing the U.S. IT firm with a competitive edge.

• Flexibility

Through IT outsourcing, U.S. firms can respond quickly to changing demands. By developing flexible policies that allow them to take sound business decisions and adapt to changing business environments, firms capitalize on their resources, skills and capacities.

• Homogeneity

Outsourcing IT is a homogeneous process due to the IT nature. Assigned programmed tasks are performed equally well offshore due to high specialization and experience of workers on the field. This explains why India remains the dominant outsourcing destination.

IT outsourcing disadvantages

Although IT outsourcing is a cost-effective strategy, it has drawbacks that need to be considered.

• Loss of local jobs

The tax advantages that offshore IT firms enjoy for the products they manufacture outside the U.S. has led to a massive migration of U.S. plants to foreign countries. Due to U.S. companies outsourcing their operations, there have been more than 250,000 jobs lost since 2000. Public Citizen estimates that the U.S. has lost about 4.9 million jobs and 43,000 factories because of the NAFTA agreement and the trade relations with China.

• Loss of direct control

Through IT outsourcing, firms lose direct control on their operations. Controlling operations offshore is difficult because of geographical distance, time-zone difference, cultural differences and lack of direct communication. Also, since the outsourcer is in charge of product management, the U.S. offshore practically abides by the mission statement of the outsourcer.

• Security and confidentiality issues

Outsourcing may pose a threat to the security and confidentiality of the firm. The U.S. offshore has the obligation to transmit to the outsourcer information about the payroll, medical records or any other confidential company data that the outsourcer may require. If this involves the transmission of proprietary company data such as patents, formulas, etc., the confidentiality of the U.S. offshore is compromised.

IT outsourcing is transforming the industry. Firms outsource their IT infrastructure aiming to achieve sustainable competitive advantage and increase their profits. In the context of globalization, swift technological changes, and fierce competition outsourcing can be the tool of organizational change. On the other hand, IT firms that consider outsourcing as a way to adapt to the altering market realities need also to consider the risks involved in shifting their operations overseas.