When we think of outsourcing, many of us think of call-centers out of India, however
there is much more to the concept than that. During the 20th century, most companies
felt that they could own, manage and directly control their own
assets. Most companies had factories in a central location, with
the head office nearby. Things began to change during the
economic-powered decade of the 1980s when companies began
to develop new strategies to compete globally. For many years,
only a select few of industries used any form of outsourcing,
mostly publishing companies that purchased composition,
printing and fulfillment services. It was not until 1989 that the
first real use of outsourcing by a large corporation was used,
when Eastman Kodak outsourced its IT systems business in
1989. Katharine Hudson, then the Chief Information Officer of
Kodak, said her goal was “to plug into the wall and have data
come out.”1 Many other companies began to follow suit by
outsourcing their technology services they used to access
important information. Soon enough, organizations began to focus more on cost-savings
measures by outsourcing functions needed for a company to run, but not related to the
core of the business.
Now-a-days outsourcing is the buzzing word of modern business arena. Some
definitions of outsourcing are as follows:
Outsourcing is subcontracting a process, such as product design or manufacturing, to a
third-party company2.
Outsourcing is a business practice commonly used by companies that implies hiring an
external service provider & transferring some of the company's internal operations/
jobs to this third party entity3.
Outsourcing is the subcontracting of activities (production processes or services) that
are not regarded as part of a company’s core business4.
Outsourcing is delegating specific work to a third party for a specified length of time, at
specified cost, and at a specified level of service5.
Outsourcing is the transfer of the management and/or day-today execution of an entire business function to an external service provider by the way of subcontracting.
Outsourcing is subcontracting work to contractors outside the firm6.
Outsourcing is the delegation of non-core operations from internal production to an
external entity specializing in the management of the operation.
Form the definitions above the characteristics of outsourcing is as follows-
Outsourcing means subcontracting
Subcontracting to a third party company outside the business
Implies hiring an external service provider
For a specified length of time, at specified cost, and at a specified level of
service
So, outsourcing involves the transfer of the management and/or day-to-day execution of
an entire business function to an external service provider7. The client organization and
the supplier enter into a contractual agreement that defines the transferred services.
Under the agreement the supplier acquires the means of production in the form of a
transfer of people, assets and other resources from the client. The client agrees to
procure the services from the supplier for the term of the contract.
A more detailed explanation would be that a client and contractor or supplier enters
into an agreement that defines a transferable agreement. In this agreement, the supplier
acquires the means of production in the form of people, assets or other resources. For
most of the outsource process, there are detailed steps that are followed. Of course,
these steps vary depending on the complexity of the organization and the service being
outsourced.
First, there is the decision to outsource by a company, in which the company decides
what service is going to be outsourced.
Second, the company will develop a shortlist of suppliers from whom they will request
a proposal and a price for the outsourcing project.
Third, the client or company will do a supplier competition, where the client assesses
the proposal sent in and chooses which supplier to go with. Often, this step will
involve face-to-face meetings.
Fourth, negotiations begin in which the client will complete the conversion of the
proposal sent in by the winning bid into an agreement. This will often finalize the
documentation and pricing process.
Fifth, the contract finalization begins once negotiations are complete. This process will
define how the company and client work together over the course of the contract.
Finally, the transition period begins in which the client begins to take on the services or
staff of the company or client.
ow everybody wants to plug into “OPR” that means “other people’s resources”
and strategically focus internal resources towards doing what they do best. The
realization is that as companies strive to improve quality and customer service,
they can only focus on what they do best. They are hence outsourcing what they admit
they are not good at.
According to the Outsourcing Institute Index, clearly outsourcing is no longer just
about saving money. It’s now
about doing things quicker, more
efficiently, getting to market
faster than your competitors,
having maximum flexibility with
your workforce and gaining
access to high quality employees
you otherwise could not afford.
Executives site the 3 primary
reasons for outsourcing as
“improving their company’s
focus” (55%), “reducing and
controlling operating costs” (54%) and “freeing their resources for other purposes”
(38%).
Outsourcing helps organizations to:
• Focus on your core business
• Leverage advanced technology and skilled personnel without its associated costs
• Lower information technology (IT) operating expenses and capital investment
• Shorten business application development cycles and next-generation system
implementations
• Improve IT service levels and increase performance reliability
• Better identify and control IT costs
• Use IT savings to fund new strategic programs
Organizations that outsource are seeking to realize benefits or address the following
issues.
Cost savings: Organizations outsource to make the overall cost of the service to the
business as lower as possible. This will involve reducing the scope, defining quality
levels, re-pricing, re-negotiation, cost re-structuring. Access to lower cost economies
through offshoring called "labor arbitrage" generated by the wage gap between
industrialized and developing nations11.
Cost restructuring: Operating leverage is a measure that compares fixed costs to
variable costs. Outsourcing changes the balance of this ratio by offering a move from
fixed to variable cost and also by making variable costs more predictable.
Improve quality: Outsourcing helps in achieving a step change in quality through
contracting out the service with a new service level agreement.
Knowledge: Access to intellectual property and wider experience and knowledge12.
Contract: Services will be provided to a legally binding contract with financial
penalties and legal redress. This is not the case with internal services13.
Operational expertise: Outsourcing ensures access to operational best practice that
would be too difficult or time consuming to develop in-house.
Staffing issues: Outsourcing also ensures access to a larger talent pool and a
sustainable source of skills.
Capacity management: By outsourcing an improved method of capacity management
of services and technology where the risk in providing the excess capacity is borne by
the supplier.
Catalyst for change: An organization can use an outsourcing agreement as a catalyst
for major step change that cannot be achieved alone. The outsourcer becomes a
change agent in the process.
Reduce time to market: The acceleration of the development or production of a
product through the additional capability brought by the supplier.
Commodification: The trend of standardizing business processes, IT Services and
application services enabling businesses to intelligently buy at the right price. It
allows a wide range of businesses access to services previously only available to large
corporations.
Risk management: An approach to risk management for some types of risks is to
partner with an outsourcer who is better able to provide the mitigation14.
Venture Capital: Some countries match government funds venture capital with
private venture capital for startups that start businesses in their country.
Two dominant types of outsourcing are-
1. BPO (Business Process Outsourcing) and
2. ITO (Information Technology Outsourcing)
In another way-- ITO, BPO, Software R&D and KPO (Knowledge Process Outsourcing)—
these four are treated as the four basic types of offshore outsourcing. But, in another
way general outsourcing and BPO is the same thing and ITO is a part of BPO. Both are
used here. So, classifying ‘outsourcing’ is not an easy task.
ITO is the most booming one among all types of
outsourcing. If we split ITO and BPO by total market
value, this can be easily seen how dominant the ITO
is. Here, ITO poses 74.42% where BPO poses only
25.58%.
Some of the definitions about Information Technology Outsourcing (ITO) given by
various authors are as follows21:
According to Lacity & Willcocks (1998), Willcocks, Fitzgerald & Feeny (1995),
“Information Technology Outsourcing occurs when third party vendors are responsible
for managing the Information Technology components on
behalf of their clients. IT Outsourcing means handing over the
management of some or all of an organization’s information
technology (IT), systems (IS) and related services to a third
party.”
According to Chaudhury, Nam & Rao (1995), “Information
Technology Outsourcing is defined as the contracting of various
information systems functions such as managing of data
centers, operations, hardware support, software maintenance,
network, and even application development to outside service
providers.”
According to Carmel & Agarwal (2002), “Information
technology (IT) outsourcing describes a process whereby an
organization decides to contract-out or sell the firm’s IT assets,
people and/or activities to a third party supplier, who in
exchange provides and manages these assets and services for an
agreed fee over an agreed time period. ”
According to SOTA, “Information Technology Outsourcing
(ITO) as the decision by an organization to contract an external
provider in the delivery and/or support of IT and/or IS services and functions.”
21 Source: Presentation of Jo Ann Saitta, Ph.D. candidate (2005), Department of Information
Systems, New Jersey Institute of Technology (Advisor-Jerry Fjermestad, Ph.D., School of
Management, New Jersey Institute of Technology)
Information Technology Outsourcing (ITO) means handling over the management of some organization’s information technology or information system to any third party online information technology service provider.
Practically anything can be outsourced. Some traditional and new ideas of outsourcing
are as follows22:
Traditional Ideas of
Outsourcing
New Ideas of Outsourcing
• Bookstore
• Endowment Management
• Food Services
• Housekeeping
• Legal Services
• Payroll
• Pension Administration
• Security
• Telecommunications
• Vending Services
• Benefits Administration
• Conference Administration
• Duplicating Services
• Health Services
• Human Resources
• Information Systems
• Residence Halls
• Training & Development
• Web Site Development or
Maintenance
• Data Processing
• Software Testing
• Networking Services
• IT Consulting Services
• Search Engine Services
• E-Commerce
• Application
Maintenance
• Database
Development
If we have a look at the
parcentage of outsourced
services we can easily notice
that Information Technology
Outsourcing is far ahead than
the other types of outsourcing.
From a survey it is found that
now-a-days among major jobs
of an organization ‘Information
Technology’ is outsourced
most and is followed by ‘Administration’.
ITO or Information Technology Outsourcing is the most promising & booming type of outsourcing. Some of the popular and rapidly practiced outsourced services under ITO are as follows:
• Web Development
• Software Development
• Call Center Outsourcing
• Data Processing
• Application Maintenance
• Software Testing
• Search Engine Services
• IT Consulting & Outsourcing Services
• E-Commerce Outsourcing
Source: Prospect of Information Technology Outsourcing in Bangladesh by Md. Azim Ferdous
