What is IT Outsourcing

What is IT Outsourcing, and why is it important?
In the last decade, information technology (IT) outsourcing has emerged as an important tool for enabling organizations around the world to gain access to specific IT skills and services, focus on their core competencies, and in some cases, reduce the cost of IT service provision. Its economic impact is now huge. 2003 Revenues of US-based vendors EDS and CSC were US$21B and US$11B, respectively (EDS 2004; CSC 2003). In India, the National Association of Software and Services Companies (Nasscom) projected recently that the country's IT services industry would grow nearly 28% in 2003 to more than US$12B in revenue (Vijayan 2003). Kern et al. (2002) estimate that worldwide IT outsourcing revenues will exceed $US160 billion by 2005.

IT Outsourcing (ITO) is the contracting out of IT service provision to one or more external organizations (Domberger 1998). The client organization enters into contracts with one or more suppliers (sometimes called vendors) of IT services, and managers in those firms become responsible for the management and provision of physical, software, and/or human resources that provide IT services for the client organization. The key test is responsibility for managing service provision. For example, although entering into a contract for the provision of contract programmers and analysts or consultants, or entering into a contract with a software vendor for rights to use packaged software, are examples of contracting for the provision of IT services, if the direct management of those resources remains the responsibility with the client organization these are not examples of IT outsourcing. Outsourcing involves the handing over of responsibility for service provision to another organization. Inevitably this gives rise to possible conflicts of interest between the two organizations. According to Domberger (1998), outsourcing is a sound decision if the net cost to the client organization drops as a result of outsourcing, provided there is no drop in service quality.

A recent and growing trend in outsourcing is business process outsourcing (BPO). Typical examples of service provision through BPO include accounting, human resource management, and ITO. In other words, ITO is just a special type of BPO. Many of the lessons learnt in the last decade about ways to manage ITO also apply to BPO.