Lesser Known Limitations of IT Outsourcing

by HSG on Feb 24, 2014 in Articles from Software Fans

IT Outsourcing came to foray as a means for corporations to focus on critical business operations while having a specialized IT company take over the responsibility of managing the IT infrastructure and application development. For corporations especially in the developed countries, IT outsourcing provided two fold advantages, one was access to a highly talented pool of engineers and that too at a lower cost since countries like India were quickly growing their stature as an IT outsourcing hub.

IT Outsourcing is now as mainstream as ever and almost every leading organization outsources some or all parts of its IT infrastructure to a specialized company. It makes pure business sense and with tightening budget controls, IT outsourcing has become one of the strategic cost reduction driver for most organizations. Moreover, IT outsourcing is no more restricted to companies in USA & Europe outsourcing their IT projects to countries like India. Domestic companies within India itself actively use IT outsourcing including the Indian government like the India Post project given to TCS.

Is it then a no brainer that IT Outsourcing is critical to your business? Well, if it is cheaper and does not seem to have any inherent disadvantages why not!! Not really, IT Outsourcing despite proven benefits has its limitations and you should be cognizant be of the same before considering outsourcing your IT operations.

·         Limitations in estimating the actual cost of IT outsourcing:Let’s tackle the biggest driver of IT Outsourcing-Cost Savings. For anyone to estimate the cost savings from IT Outsourcing one needs to be able to predict the cost of outsourcing which then helps understand the cost savings from the same. Yes, at a higher level it is a matter of a simple $ per man-hour costs and IT outsourcing will appear to be cheaper in almost all cases. However, “hidden costs” are commonplace with IT outsourcing and it can be immensely difficult to accurately predict these hidden costs. For example, you need to be able to identify the costs of transitioning your in-house IT to an outsourcer, management overhead needed to manage the outsourcing relationship etc. In addition, IT outsourcing contracts are fixed at the start of the contract and as a result any additional requirement/change tends to be charged additionally. It is no surprise that IT requirements can change frequently and if your outsourcing contract doesn’t account for flexibility, you might be limited in the actual cost savings you might make. There is no surprise that there have been so many instances of IT outsourcing projects overshooting their budgets by a huge margin such as the one government shared services project going 500 million pounds over budget

·         IT Outsourcing can limit your organization’s in-house IT learning ability: Yes, IT outsourcing allows organizations to reduce their dependence on training and managing their in-house IT teams. However, complete dependence on an outsourcing vendor results in losing in-house ability to develop/maintain technology expertise. While there are no short term problems, one needs to understand the opportunity cost of having no internal IT knowledge base in the long run should your company strategy require bringing IT in-house. The cost of training and building an IT team then can be a hugely time consuming initiative. There are lot of analogies present in the hardware world that expose this limitation of outsourcing as experienced by leading firms like Apple and Sony

·         IT Outsourcing Limits Your Organization To Respond In An Agile Manner: A common notion that marks any discussion to outsource IT functions to an external vendor is “Agility”. In other words, decision makers often think that by outsourcing the IT function will make their organization make more agile to respond to strategic changes in business since they now have more resources to align to business functions. While that it true, one needs to consider the limitations in agility that the IT functions itself can suffer from. While agile project management and product development are gaining steam, if your IT vendor still follows traditional service delivery models it might limit your organization’s ability to introduce or experiment with new technologies in an agile manner. On the other hand, if you had an in-house IT function you would have much more agility to experiment with IT changes. This is the reason that IT outsourcing vendors themselves urge firms not to outsource software development if agile/scrum development is not offered

So like every other business decision, you need to be fully aware of the limitations of IT outsourcing or you might be blinded by the much touted benefits of it. As a decision maker for your organization, IT outsourcing can be a hugely beneficial and help your organization become more cost-efficient but be ready to consider these limitations and account for these while doing a cost-benefit analysis for deciding whether to outsource IT functions or not

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