Outsourcing is a business practice in which services or job functions are farmed out to a third party. In information technology, an outsourcing initiative with a technology provider can involve a range of operations, from the entirety of the IT function to discrete, easily defined components, such as disaster recovery, network services, software development or QA testing.
Companies may choose to outsource IT services onshore (within their own country), nearshore (to a neighboring country or one in the same time zone), or offshore (to a more distant country). Nearshore and offshore outsourcing have traditionally been pursued to save costs.
Outsourcing benefits and costs
The business case for outsourcing varies by situation, but the benefits of outsourcing often include one or more of the following:
- lower costs (due to economies of scale or lower labor rates)
- increased efficiency
- variable capacity
- increased focus on strategy/core competencies
- access to skills or resources
- increased flexibility to meet changing business and commercial conditions
- accelerated time to market
- lower ongoing investment in internal infrastructure
- access to innovation, intellectual property, and thought leadership
- possible cash influx resulting from transfer of assets to the new provider
Some of the risks of outsourcing include:
- slower turnaround time
- lack of business or domain knowledge
- language and cultural barriers
- time zone differences
- lack of control
Business process outsourcing (BPO) is an overarching term for the outsourcing of a specific business process task, such as payroll. BPO is often divided into two categories: back-office BPO, which includes internal business functions such as billing or purchasing, and front-office BPO, which includes customer-related services such as marketing or tech support. Information technology outsourcing (ITO), therefore, is a subset of business process outsourcing.
While most business process outsourcing involves executing standardized processes for a company, knowledge process outsourcing (KPO) involves processes that demand advanced research and analytical, technical and decision-making skills such as pharmaceutical R&D or patent research.