IT Outsourcing can be defined as "the process of transferring an existing business function or a part of business function to an external provider in order to strategically use outside resources to perform activities previously handled within the same organization".
IT Outsourcing (or contracting out) can also be defined as "the delegation of non-core operations or jobs from internal production within a business to an external entity (such as a subcontractor) that specializes in that operation".
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Outsourcing is often done to reduce cost of development or production cost so as to gain an edge over competitor in globally competitive market. "Off shoring" means transferring work to another country, typically overseas. Off shoring is similar to outsourcing when companies hire overseas subcontractors, but differs when companies transfer work to the same company in another country.
The Outsourcing market has grown tremendously in last few years with an increasing number of companies planning to outsource in near future, both low end and high end jobs to offshore destinations. Also the number of industries outsourcing the work are increasing. Due to the fact that more and more companies are outsourcing, the risks are getting smaller as businesses have more experience and clearer objectives.
Back office operations of a company require high maintenance and specialized attention. Yet most of them are critical for the company's everyday activities. By outsourcing their back office operations businesses can concentrate on their core competencies while their back office operations are being managed smoothly by a specialized third party company.
Organizations are outsourcing their back office functions to the companies in other countries so as gain the advantage of skilled manpower in those particular countries. Also this man power is available at much lower rates compared to average wages being given in the western countries. Outsourcing also reduces the cost and efforts involved in recruitment and retaining the employees.
Investing in new technology is very costly and often risky. As the technology market develops rapidly, it is difficult to keep up with latest innovations and solutions. Thus outsourcing to companies that have the resources, expertise and desire to continuously update their technological solutions, offers a true advantage of outsourcing. The table below shows the reduction in various costs, resulting from outsourcing.
Activity/cost
% of cost in-house
% of cost paid to offshore outsourcing provider
Vendor selection
77
23
Transition costs
65
33
Project management costs
62
37
Application development costs
31
68
Integration costs
59
40
Ongoing/application maintenance costs
45
56
Legal/contract costs
80
19
By employing skilled manpower in larger numbers at lower costs companies can really increase their productivity. This in turn would result in better customer satisfaction and increased profitability. According to a research carried out in the US, for every dollar spent on outsourcing to India, the United States reaps between $1.12 and $1.14.
In today's fast paced global economy a company needs to provide high-quality services to its customers in order to retain them, as well as provide the services for cheap prices. Outsourcing in this case can help the company maintain lower rates with better service solutions, thereby giving them a better market position or even a competitive advantage.
By selecting the right BPO destination companies can save up on taxes in turn saving on costs. Eg: The tax incentives offered to the investors by the Government of India are a boon for firms involved in IT outsourcing to India.
In India, the IT industry is rated amongst top 5 industries. Hence the government formulates the policies in such a way that they reap the maximum benefit out of the policies.
Outsourcing as a phenomenon is not new and has been going on for years. But since 1990 the offshore outsourcing market has grown immensely bringing it into the spotlight.
Outsourcing statistics show that the largest percentage of jobs being outsourced is in Information Technology, by around 28%. The next largest field is human resources taking 15% of the outsourcing market, followed closely by sales and marketing outsourcing with 14% and financial services outsourcing at 11%. The remaining 32% is made up of other different processes such as administrative outsourcing. Most of the outsourcing is done by multinational companies and the most popular destinations are India, China and the Philippines. Of course these figures slightly differ depending on the study and the point of view, but this division gives an idea of the outsourcing market. Eyeing the success of the Indian offshore market, thousands of firms have realized that they too can compete in the global economy regardless of their location.