Pros and Cons of Outsourcing it Services

Outsourcing IT Services

Some History

The information technology outsourcing industry was established in 1962 by H. Ross Perot, who left IBM to launch Electronic Data Systems (EDS) in Dallas, Texas. EDS gets proper respect for developing most of the practices that are essential to the performance of the industry today: the management and integration of complex systems, client/server transaction processing, and private networks transmitting data, video and voice in digital format. The company's first long-term commercial facilities management contract was signed with Frito-Lay in 1963. But, it was President Lyndon Johnson's (a fellow Texan) Social Security Act of 1965, creating Medicare and Medicaid, which really put EDS in business. EDS was the first to develop a complete insurance claims processing system for Texas's Medicare/Medicaid program. Next on the horizon, in 1969, was California Blue Cross which was horribly backlogged in its Medicare data processing system. EDS' proprietary claims processing programs were widely admired and resulted in a rapid increase in the company's revenues, which topped $16 million by the end of the decade. In May 2008, Hewlett-Packard Co. acquired Electronic Data Systems for $14 billion. As of the date of acquisition, EDS operated in 64 countries and provided jobs for nearly 140,000 people. As a stand-alone entity, EDS was one of the largest service companies in America, serving about 2,000 clients. Today, HP Enterprise Services has continued to grow the business and currently has one of the industry's most extensive product offerings of outsourcing applications, and business process services. (HP, 2009)

The term EDS used to describe its service was "facilities management," but it was the early precursor for the "IT outsourcing" terminology. While many IT functions are hired out to domestic service providers, Ryan Frank from Suite 101 points out that many large corporations have transferred their customer service programs overseas to countries such as Asia, Mexico and India to take advantage of lower labor costs; hence the term "offshoring" -- a specific kind of outsourcing which gets most of the public awareness. The argument goes that, while the costs are lower, the quality of service remains the same, which allows the company to focus on its core functions and to build up its financial strength. Many services other than IT have been successfully outsourced; including help desks, payroll systems, data entry, human resources, and more. However, most of the jobs outsourced to foreign countries are IT services. As with every business decision, the pros and cons of outsourcing IT services are hotly debated.

(Frank, 2009)

The Pros of Outsourcing IT Services

The single most significant advantage of outsourcing IT services is the lower personnel costs, especially in the offshoring situation. The full-time employees in the United States want to be provided consistent increases in basic pay, annual bonuses, retirement plans, medical, dental, vision, and other benefits. Workers in India or China, for example, may be paid one-fourth to one-fifth the wages of a U.S. worker. (Frank, 2009) IBM published the results of an internal review conducted in 2004. A programmer in the U.S. earned $56 per hour and that same work could be accomplished in China for $12 per hour. During 2004, IBM shifted 3,000 jobs overseas, added 15,000 jobs worldwide and added 5,000 jobs in the U.S. (IBM, 2010)

Outsourcing information processing services also allows the company to free up extensive and expensive real estate space housing employees, computer systems, and other equipment. Newly available space gives the company the opportunity to consider other productive uses for the area where the IT service team had been residing. (Frank, 2009)

The web site Outsource2India provides an admittedly biased list of advantages to offshore outsourcing of non-core business processes:

More time to concentrate on core business processes

Access to professional, expert and high-quality services

Save time, effort, manpower, operating costs and training costs

Savings on capital expenditures for hardware, software and infrastructure

Reduced management problems (Outsource2India, 2011)

The Cons of Outsourcing IT Services

The advantages to outsourcing are enticing, but a rational decision requires consideration of the disadvantages. The glaring con of outsourcing is the loss of local jobs. Local job losses are always a burning issue for politicians, but in the current economic conditions well-trained and skilled American IT workers in cities across the United States are unable to find full employment. The company employing an offshoring HR strategy must be prepared for boisterous criticism and threatened consumer boycotts. (Frank, 2009)

A further challenge to the company deciding to outsource IT services is the loss of its direct management control over the service team. Most large businesses take pride in their philosophies or corporate cultures and it takes a lot of time and careful preparation to transfer these subtle concepts to workers in a different region of the world whose traditions may be in direct conflict with those of the company. (Frank, 2009)

Many offshore outsource devotees have admitted that response times are disappointingly slow. Because these service people are working in another time zone, regular communications are usually reduced to email messages. No matter what time of day is chosen for audio or video conference calls, some parties will be required to attend at an inconvenient time. Another factor is that some foreign workers, although they might be fluent in the English language, may have strong accents that are difficult to understand. Communications challenges often result in delays in completing tasks, inconveniencing employees and failing to meet customer expectations. (Frank, 2009)

Outsource2India provides the following disadvantages that must be considered by any manager considering using an outsourcing service:

Provider will be privy to company's confidential information

Difficult to manage the offshore provider

Create redundancies in the organization

Potential problem if provider goes out of business

Negative reaction on part of unaffected employees in the organization

Provider serve the needs of several companies, lack of full devotion

Lose control over the process that is outsourced

Hidden costs, such as the legal costs incurred while signing and renewing the contract (Outsource2India, 2011)

Offshoring: A win-win game?

McKinsey Global Institute conducted a survey of offshoring in 2003, coming to a counterintuitive conclusion that offshoring is more beneficial to the U.S. than it is to the destination countries. The research managers found that the lower compensation in the target countries resulted in significant savings without a reduction in quality. In the United States, a software developer earns about $60 an hour whereas one in India earns only $6 for that same hour of work. This cost disparity results in an obvious benefit for American businesses moving processes offshore. (McKinsey, 2003)