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October 28, 2005
• Vol.27 Issue 43
Page(s) 28 in print issue
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Is Outsourcing Overhyped?
The Reality Behind The Trend In Today’s IT World
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No other business term provokes as much emotion as outsourcing. Some believe the practice is downright traitorous to the American worker, while others believe fierce global competition is compelling businesses to seek out the most competitively priced labor pools possible. Both sides of such a polarizing issue will never see eye to eye, but one thing they can certainly agree on is that outsourcing is here to stay.
But is outsourcing truly paying huge dividends for businesses that have embraced it? Are the captured savings greater than the challenges of managing culturally different workforces located far away from company headquarters? Or has outsourcing received an inordinate amount of hype that didn’t quite measure up to reality? Let’s take a look.
 Outsourcing Defined
A 2005 study by CAPS Research and A.T. Kearney provides useful definitions for two terms that are often used interchangeably when outsourcing is discussed: outsourcing and offshoring. According to the study “Outsourcing Strategically for Sustainable Competitive Advantage,” outsourcing is a make-or-buy decision where a business chooses to purchase an item or service that was previously made in-house. For example, when a business outsources its customer service function, it chooses to purchase that service from a specialized third-party provider.
On the other hand, offshoring occurs when a business chooses to operate outside its home country’s boundaries. A customer service function may be offshored from a domestic site to a foreign country, but it is still performed by employees who work for the business, albeit at a foreign location.
Of course, detractors will proclaimperhaps rightfully so, depending on where you stand on the issuethat the effect from both practices is the same on workers whose jobs are affected. Those displaced by a business decision are still displaced, and it doesn’t matter whether the company chose to continue performing the activity or pay to have a third-party supplier do it for them.
Outsourcing Today
Even though outsourcing is widely believed to yield immediate cost savings, the reality is many hidden costs are often overlooked in the rush to outsource. According to the Info-Tech Research Group 2005 study “Special Report: Outsourcing in Mid-Sized Enterprises,” over half of all outsourcing projects fail to meet expectations.
Factors that lead to the failure of outsourcing initiatives in midsized enterprises, according to the report, include the development of poorly defined, unrealistic, and unachievable objectives; the appearance of hidden costs for services not considered during initial negotiations; poorly defined outsourcing scope; and insufficient resources dedicated to managing the outsourcing relationship.
Here's another interesting finding from Info-Tech: 75% of midsized enterprises that outsourced last year did so domestically and did not go offshore to launch their outsourcing efforts. IT functions getting outsourced, the report reveals, include application development, Web design, and application maintenance.
The Impact Of Outsourcing
The specter of outsourcing, whether real or imagined, is taking a toll on the number of college students seeking degrees in IT. Frank Scavo, president of Computer Economics, a research and advisory firm focused on the strategic and financial management of information systems, says many of the jobs that are being sent offshore are the entry-level positions that are natural for new graduates in computer science, such as programming and technical writing.
Scavo says his firm is already seeing a tightening of the job market for IT professionals, and the fewer number of new graduates is part of the problem, he warns. Even though the law of supply and demand will take care of the problem, adds Scavo, the tightening of the job market for IT professionals may cause even more jobs to move offshore as businesses who need the expertise encounter fewer resources available in the United States.
Also, Scavo believes that offshore outsourcing, in combination with the overall downturn in tech hiring that occurred earlier in the decade, is causing many IT professionals to give up careers in IT. Many of these professionals have not returned to IT, says Scavo, even in the face of a recent IT job market recovery.
Is Outsourcing Losing Its Luster?
But these clearly negative impacts of offshore outsourcing are not having a negative effect on the use of outsourcing by businesses, reveals an informal Web site survey conducted by Computer Economics. According to the results of this survey, 33% of respondents are already offshore outsourcing and plan to do even more in the future. While 50% have no plans to do so at this time, 11% are not doing so but are planning to in the near future, while only 6% of respondents are planning to do less outsourcing. These results, believes Computer Economics, indicate businesses will pursue further offshore outsourcing in the near future.
Outsourcing opponents, however, can take heart in the July 2005 Deloitte study “Calling A Change in the Outsourcing Market,” which reveals that many enterprises are taking a closer look at outsourcing after experiencing less than stellar results. According to this study, 70% of survey respondents reported negative experiences with outsourcing projects; 25% brought outsourced functions back in-house, while 44% did not capture the expected costs savings from their outsourcing projects.
So what happened? While 70% of survey participants cited cost savings as a driver for embracing outsourcing, 38% of these participants paid additional, hidden costs for services not included in their contracts. The 57% of participants who cited the need to implement best practices, quality, and innovation when establishing outsourcing relationships responded at a 31% clip that once contracts were signed, outsourcing vendors became complacent.
Other problems cited include excessive rigidity from binding contracts that prevent flexibility when changes are required and the discovery that vendors did not have the capabilities to provide the expected level of quality and costs savings.
The Hype & The Truth Behind Outsourcing
The statistics collected by various research firms and market analysts reveal that while businesses are encountering a dose of reality regarding their outsourcing arrangements, the outsourcing trend will continue. Outsourcing can provide benefits, but only if businesses realize that hidden management costs may put a damper on rosy cost savings expectations fueled by the hype that has tended to surround outsourcing.
To be successful, Info-Tech’s report advises businesses to outsource for the right reasons, take a formal and structured approach to the task, and be sure to establish sound governance mechanisms to manage the outsourcing relationship. Businesses must eliminate their expectations of outsourcing as a “set it and leave it” proposition; instead, successful outsourcing requires management commitment and oversight. 
by Sixto Ortiz Jr.
View the charts that accompany this article.
(NOTE: These pages are PDF (Portable Document Format) files. You will need Adobe Acrobat to view these pages. Download Adobe Acrobat Reader)
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