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Information Technology Outsourcing

Introduction

Information Technology Outsourcing is a company outsourcing of computer or Internet

related work, such as programming, to other companies. It is used in reference to Business

Process Outsourcing or BPO, which is the outsourcing of the work that does not require much of

technical skills.

At its core, outsourcing involves transferring ownership of an organization¶s business

activities to a service provider. For a fee, the outside service provider carries out the activities

and maintains responsibility for their outcomes. The outsourcing arrangement may be either

tactical or strategic. Tactical outsourcing has a short-term focus on minimizing operational

inefficiencies or maximizing daily operations . Strategic outsourcing seeks overall business

improvement rather than simple cost savings so that a company can achieve its long-term

strategic goals by focusing on those activities central to organizational success.

Types of Outsourcing

Outsourcing essentially implies the transfer of non-core services to third parties who specialize in

providing such services. It can cover a wide range of components depending upon the core competency

as well as the requirements of the outsourcer.c

Outsourcing may be broadly classified into the following types:

Ôc Information Technology (IT).

Ôc uman Resource (R).

Ôc 0ustomer Service.

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Ôc Gngineering.

Ôc ^nowledge Services.

Ôc R&D.

Business Processing Outsourcing (BPO) and ^nowledge Processing Outsourcing (^PO)

are the two major components of the outsourcing industry .

Ôc Business process outsourcing may be defined as the delegation of one or more IT intensive

business processes to an external agency, which in turn owns, administers and manages the

selected process based on definite and measurable performance.

Ôc ^nowledge process outsourcing may be defined as a high added value process chain where the

achievement of objectives is dependent on the skills, domain knowledge and experience of the

people carrying out the activity. It is being claimed that ^PO is one step extension of

BPO.

^PO involves business processing outsourcing, research process outsourcing and analysis

process outsourcing. ^PO business entities provide typical domain-based processes, advanced

analytical skills and business expertise, rather than just process expertise. ^PO Industry

handles more amount of high skilled work other than the BPO Industry. In other words, while ^PO

derives its strength from the depth of knowledge, experience and judgment factor; BPO is more about

size, volume and efficiency. The future potential of ^PO is quite high because it is not restricted to

Information Technology (IT) or Information Technology Gnabled Services (ITGS) sectors and includes

other sectors like Legal Processes, Intellectual Property and Patent related services, Gngineering

Services, Web Development application, Business Research and Analytics,

0linical Research, Market Researched.

In today's competitive environment, focus is to concentrate on core specialization and

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core-competency areas and outsource the rest of the activities. Many companies and

organizations have come to realize that by outsourcing non core activities, not only cost

are minimized and efficiencies improved but the total business improves because the focus

shifts to the key growth areas of the business activity.

IT Outsourcing

IT outsourcing has existed for a while, yet it has suffered from some limitations in the breadth

of offerings, service quality, flexibility, and enabling technologies. Timesharing was one of the first

types of IT outsourcing services introduced in the 1950s. 0omputers were expensive then, and

even large companies opted to buy processing cycles of computers. Timesharing was

popular for almost 25 years. But as technologies evolved, other outsourcing ideas emerged. In

the late 1980s, large consulting firms like Andersen 0onsulting, 0S0, GDS, SL Systemhouse

and vendors like IBM invented remote management services. 0ustomer's systems, networks, and

applications were monitored and managed remotely from a Network Operations 0enter (NO0),

and the customer was assured high service guarantees through the implementation of Service

Level Agreements (SLAs). 0ustomers liked these services and bought them mostly to ensure

availability for their systems and networks. Then the phenomena of Business Process

Outsourcing arrived. 0onsultants generated this idea as well. It offered customers professional

assistance for streamlining and managing their operational business processes. Finally, IT

outsourcing, which was almost a total takeover of a customer's IT environment, emerged as an

offering around 1990.

The current form of outsourcing is completely different from the traditional form of

outsourcing. In the past, the users and developers of information technology were using different

computer platforms and incompatible proprietary architecture. So the client and the customer needed

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to have the same computer platforms in order to do business. The computer world was dominated

by mainframes, and the networking infrastructure was of very low quality and very costly. All

these factors led to the form of outsourcing where the service provider had to be inside the firm

in order to provide the services. Most of the firms entered into agreements where the service

provider would sit inside the firm, work under the same environment as the firm and provide the

service.

But in today¶s business world, the usage of converging computer platforms and open

Architecture have made it possible for the firms to outsource its IT function to service providers who

may be sitting in some other country far away from the firm. The networking quality and speed has

improved so dramatically that it takes only few seconds to transfer tons of gigabytes of data from

an offshore service provider¶s server. This has helped the business to get the information faster

and thus has helped the corporate world in cutting down the cost.

Types of IT Outsourcing

Information technology outsourcing can be clearly classified into three different types:

information technology outsourcing, data entry and call center outsourcing, and business process

outsourcing (BPO).

Information Technology Outsourcing: This type of outsourcing deals with corporate IT projects

contracting to an outside contractor. Almost all types of business nowadays need an IT department to

fulfill their Information Management requirements. For example, quite a few firms spend tremendous

amount of money on acquiring GRP packages in order to meet their information requirements. These

packages are costly and it is hard to hire trained people to work on these systems. To cut the extra cost,

a lot of firms outsource their IT department to a specialized contracting firm. This contracting firm

takes care of all information processes inside the firm. This type of outsourcing is seen throughout all

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types of business, except for the IT companies. The contractors do all kinds of work, including

coding customized software for their clients, taking raw data from the firm and generating all

kinds of MIS reports for the management use. This allows the firm to cut costs on expensive

software, server space, IT maintenance and labor costs.

Data Gntry and 0all 0enters Outsourcing: Data entry and call centers operators who work in

a corporate data center are equipped to handle high volume digital- and paper-based data entry

in any form. Sometimes, e-business data entry operators may assist the database design and

management, SGML/TML coding for the Internet, and a host of other related e-commerce

services. An easy way to cut down costs and increase production is to outsource IT work to

cost-effective service providers, no matter wherever they are. This way also cuts down expenses

on research, development and marketing. India is growing as a steady source of outsourcing

provider. Data entry operators at call centers in the country can input any type of data, develop and

update databases and accurately handle a high volume of data at high speeds.

Business Process Outsourcing (BPO): BPO is a step beyond IT outsourcing. It increasingly

becomes a strategic choice for companies that look to achieve cost reductions while to improve their

service quality, increase shareholder value and focusing on their core business capabilities. The BPO

market is predicted to have a global annual growth rate of 22% for the next 4 years. The BPO trend is

shifting dramatically from IT outsourcing to R, accounting and finance components with business

organizations. BPO can be treated as an investment strategy for sourcing business value

chains, including the customer relationship management, supply management, organizational

productivity management, and innovation management.

Advantages and Disadvantages

The main motive behind business process outsourcing is to allow a company to invest more time,

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money and human resources in core active items without losing quality and name. Thus, cost advantage

followed by increased ability to focus on core competencies is the major driving factor. Advantages for a

firm are as following.

Ôc 0ost savings: The lowering of the overall cost of the service to the business. This will involve

reducing the scope, defining quality levels, re-pricing, re-negotiation, cost re-structuring. Access

to lower cost economies through off shoring called labor arbitrage generated by the wage gap

between industrialized and developing nations.

Ôc Focus on 0ore Business: Resources (for example investment, people, infrastructure) are focused

on developing the core business. For example often organizations outsource their IT support to

specialized IT services companies.

Ôc 0ost restructuring: Operating leverage is a measure that compares fixed costs to variable costs.

Outsourcing changes the balance of this ratio by offering a move from fixed to variable cost and

also by making variable costs more predictable.

Ôc Improve quality: Achieve a steep change in quality through contracting out the service with a new

service level agreement.

Ôc ^nowledge :Access to intellectual property and wider experience and knowledge.

Ôc 0ontract: Services will be provided to a legally binding contract with financial penalties and legal

redress. This is not the case with internal services.

Ôc Operational expertise: Access to operational best practice that would be too difficult or time

consuming to develop in-house.

Ôc Access to talent: Access to a larger talent pool and a sustainable source of skills.

Ôc 0apacity management: An improved method of capacity management of services and technology

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where the risk in providing the excess capacity is borne by the supplier.

Ôc 0atalyst for change: An organization can use an outsourcing agreement as a catalyst for major

step change that cannot be achieved alone. The outsourcer becomes a 0hange agent in the

process.

Ôc Gnhance capacity for innovation: 0ompanies increasingly use external knowledge service

providers to supplement limited in-house capacity for product innovation.

Ôc 0ommodification: The trend of standardizing business processes, IT Services, and application

services which enable to buy at the right price, allows businesses access to services which were

only available to large corporations.

Ôc Risk management: An approach to risk management for some types of risks is to partner with an

outsourcer who is better able to provide the mitigation.

Ôc *enture 0apital: Some countries match government funds venture capital with private venture

capital for start-ups that start businesses in their country.

Thus, business process outsourcing assists in increasing a company's profits as well as shareholder value.

Software companies are trying new avenues through business process outsourcing to increase their

revenues. Outsourcing helps convert a fixed cost structure into a variable one and allows for more

flexibility in handling of business related uncertainties.

Risk is the major drawback with Business Process Outsourcing. Outsourcing of an Information

System, for example, can cause security risks both from a communication and from a privacy perspective.

The security of North American or Guropean company data is more difficult to maintain when accessed

or controlled in the Sub-0ontinent. From a knowledge perspective, a changing attitude in employees,

underestimation of running costs and the major risk of losing independence, outsourcing leads to a

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different relationship between an organization and its contractor. Risks and threats of outsourcing must

therefore be managed, to achieve any benefits. In order to manage outsourcing in a structured way,

maximizing positive outcome, minimizing risks and avoiding any threats, a Business continuity

management (B0M) model is setup. B0M consists of a set of steps, to successfully identify, manage and

control the business processes that are, or can be outsourced.

Another framework, more focused on the identification process of potential out-sourceable Information

Systems, identified as AP. Several contracting problems companies face, ranging from unclear contract

formatting, to a lack of understanding of technical IT- processes.

TRENDS IN INFORMATION TECHNOLOGY OUTSOURCING

Outsourcing has changed its format from single activity outsourcing to business process

outsourcing. In order to save costs and to provide better and more efficient services to the clients,

service providers have crossed the international borders and continue to look out for new emerging

markets. The following are trends in IT outsourcing.

Ôc More and more IT jobs will move overseas in the coming years.

Ôc More corporate giants are opening dedicated software development centers in places like India

and Russia.

Ôc The gradual acceptance of Western intellectual property (IP) standards.

Ôc Offshore sourcing moves up the value chain.

Ôc Stratification of offshore countries based on cost and skill sets.

The global outsourcing becomes a major outsourcing trend in recent years. In the U.S. and

Guropean countries, outsourcing IT jobs to countries like India and 0hina is already visible in the

business world. 0omparing India to 0hina, India apparently has an advantage over 0hina since it

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has Gnglish-speaking labor force. 0hinese government has acknowledged this comparative

disadvantage; therefore, it shifts its focus on manufacturing sectors, such as computer hardware

and automobile industries.

{usiness Process Outsourcing Industry size

The following Table show the Global BPO market by industry, where Information Technology is

the largest industry which accounts for 43% of BPO market.

Î
 
 

Industry Percentage (%)

Information Technology 43

Financial Services 17

0ommunication (Telecom) 16

0onsumer Goods/ Services 15

Manufacturing 9

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India has revenues of 10.9 billion USD from offshore BPO and 30 billion USD from IT and total

BPO (expected in FY 2008). India thus has some 5-6% share of the total BPO Industry, but a

commanding 63% share of the offshore component. This 63% is a drop from the 70% offshore share that

India enjoyed last year, despite the industry growing 38% in India last year, other locations like Gastern

Gurope, Philippines, Morocco, ^enya, Ggypt and South Africa have emerged to take a share of the

market. 0hina is also trying to grow from a very small base in this industry. owever, while the BPO

industry is expected to continue to grow in India, its market share of the offshore piece is expected to

decline.

According to Mc^insey, the global "addressable" BPO market is worth $122 ± $154 billion, of

which: 35-40 retail banking, 25-35 insurance, 10-12 travel/hospitality, 10-12 auto, 8-10 telecoms, 8

pharma, 10-15 others and 20-25 is finance, accounting and R. Moreover, they estimate that 8% of that

capacity was utilized as of 2006

{usiness Process Outsourcing to India

Important BPO centers in India are Bangalore, 0hennai, yderabad,^olkata, Mumbai, Pune

and New Delhi and the top five Indian BPO exporters for 2006-2007 according to NASS0OM

are Genpact, WNS Global Services, Transworks Information Services, IBM Daksh, and T0S BPO.c

Size and Growth of BPO in India

Year Size (US$ {n) Growth Rate (%)

2003 2.8 59

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2004 3.9 45.3

2005 5.7 44.4

The business process outsourcing industry in India refers to the services outsourcing industry

in India, catering mainly to Western operations of multinational corporations (MN0s). As of

2008, around 0.7 million people work in outsourcing sector (less than 0.1% of Indians). Annual

revenues are around $11 billion, around 1% of GDP. Around 2.5 million people graduate in India

every year. Wages are rising by 10-15 percent as a result of skill shortage.India has been a

pioneer in providing outsourcing solutions and has been providing a range of outsourcing

services to countries across the globe. 0ombined revenue of the IT and IT Gnabled Services

(ITGS) that includes Business Process Outsourcing (BPO) was USD 52 billion in the year 2007-

08.

Inspite of severe financial and banking crisis affecting the world's economic growth,

many of the IT, BPO and ^PO companies in India are maintaining good success record. With a

huge market size, India's outsourcing is still continuing to dominate the global outsourcing

market. Though there are many competitors in the market like 0hina, Malaysia, Philippines, etc.,

it is still the major player in the world in outsourcing due to its many advantageous factors. As a

proportion of national GDP, the IT-BPO sector revenues have grown from 5.2 per cent in 2006-

07 to an estimated 5.5 per cent in 2007-08. On the export front, revenue from ITGS-BPO have

shown a year-on-year growth of over 29.8 per cent (from 2006-07 to 2007-08). Also, direct

employment in Indian BPO grew from 2,16,000 in year 2003-04 to 5,53,000 in year 2006-07.

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India has already registered its mark on the globe in IT-BPO sector. While, huge opportunities in

^PO sector will help the Indian market climb the global value and knowledge chain.

At the 0entral level, the nodal agency responsible for the overall development of

outsourcing and information technology (IT) industry has been the Department of Information

Technology, Ministry of 0ommunications and Information Technology.

Both at the 0entral and the State/ Union Territory (UT) level, several policy initiatives

and measures are being undertaken to promote the sound growth of BPOs, IT and ^POs. The

Department of Information Technology, under the Ministry of 0ommunications and Information

Technology, is the central authority responsible for outsourcing industry. While, in States/ UTs,

there are concerned 'Department of Information Technology'. Besides, over 600 Multinational

companies are known to be sourcing product development and engineering services from their

centres in India. Thus, it is right to say that India is continuing to leverage its fundamental

advantages of talent, cost, quality and early mover advantage/ experience to garner a large share

of the growth in global sourcing of IT-BPO. Many other process outsourcing activities are also

taking place in India like that of research, insurance, legal, etc.

Conclusion

Outsourcing information technology has both pros and cons. If not properly handled,

outsourcing can, instead of reducing the costs, actually increase the costs and negatively affect

the bottom line. Outsourcing should not be imagined to be a solution to all perceived IT

problems. 0onsistent and continuing evaluation of IT operations and services are important. IT

outsourcing is also a risky decision to most organizations. These risks arise due to the large

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project scale, the long lead times to complete the project and the potential loss of services across

governments.