Three factors in today’s global, competitive economy increase the demand for outsourcing:
- Technological change.
- Technology management.
- Business change.
Incredible increases in the performance-to-price ratio of information technology in the last 50 years has led to widespread and innovative use of information technology. However, the same rapid technological change quickly makes existing hardware and software obsolete. This places most organizations on a treadmill with equipment and staff skills that are becoming obsolete, while experiencing a shortage of cutting-edge skills and technologies. Consequently, outsourcing offers a way to reduce the human and equipment resources that don’t fit the strategic direction and for meeting the latest needs with more up-to-date resources.
Many information products and services have become commodities as computer technology and its use matures. Vendors who compete on both price and quality of service can often reach the scale necessary for minimum cost.
Rapid technological change creates over-capacity in certain functions in information intensive industries, which leads to opportunities for outsourcing.
The non-strategic status of many information systems functions allows them to be candidates for outsourcing. Technology change also allows the separation of the management, operation and delivery of information services, which expands the choices available for outsourcing.
Changes in the management of information technology also foster outsourcing. Today, chief information officers have stronger business experience and orientation, in contrast to the traditional IT manager/executive who tended to come a technology background. A broader business perspective, rather than a pure technology view, makes outsourcing a viable and attractive alternative.
Information systems budgets have grown along with the growth in the use of computer equipment and automated systems. Since it is often difficult to measure the benefit and justify the use of information technology, senior managers are attracted to outsourcing as a way of making costs easier to predict and assuring that the organization is paying the “market price” for IT services.
Information systems control has been decentralized and dispersed in many organizations, resulting in the old corporate or centralized IT function having excess capacity and resources. Thus, the central IT organization becomes a target for possible outsourcing.
To meet this growing need, the number and quality of outsourcing vendors offering price-competitive and high-quality services have increased. Barriers to entry are lower, and technological change creates discontinuities in needs that vendors can exploit. As new vendors enter the marketplace, competition increases and further reduces the price and increases the quality of service.
Vendors are experiencing rapid growth in the demand for their services and can afford to snap up, reward and promote some of the best technical talent in the industry, further enhancing the potential and the attractiveness of outsourcing.
Globalization of business in combination with technological change creates new needs for capabilities to address problems related to distance, size, and rapid change. The new needs may be better met through reliance on vendors with these capabilities.
All of the above factors work in interrelated and reinforcing ways to account for the phenomenal increase in information systems outsourcing over the last decade. This upswing coincides with a period in which evolving information technology is stretching the abilities and resources of IT departments.
IT managers must struggle to cope with the on-going operation of legacy systems while at the same time implementing new architectures and new ways of doing business, such as eCommerce. The new architectures support the move to flexibility in a global marketplace and involve networks that integrate units internal to the company and connect the company with systems of customers and suppliers.
Outsourcing to external service providers with the requisite capability, coverage, capacity and competence is the only viable option for most companies in this highly competitive, fast-changing global economy. But the good news is that external service providers have the experience, scale and skills to do it better, faster and cheaper than many traditional internal organizations.
Lessons from this Outsourcing Primer:
- Outsourcing helps companies deal with fast-paced technological obsolescence.
- Maturing technology has made many aspects of technology a commodity. Commodities are natural candidates for outsourcing.
- Much of today’s technology is non-strategic. Non-strategic resources are prime candidates for outsourcing as well.
- The number and quality of outsourcing providers is growing, creating competition that reduces price and increases quality for buyers.