The pros and cons of outsourcing IT services
Outsourcing a range of business functions has become common practice for enterprises across the world. According to the Arvato UK Outsourcing Index, the value of outsourcing contracts in the private sector swelled to £4.9 billion (€5.48 billion) in 2017, representing a nine percent increase on the year before.
This particularly applies to the outsourcing of IT functions, which accounted for a massive 73% of the UK outsourcing industry in 2017. This volume is also doubling each year, with more than twice as much spent on IT outsourcing in 2017 (£3.8 billion) than 2016 (£1.7 billion).
According to Sean Pepper, a partner in Deloitte’s outsourcing practice, clients are increasingly looking to suppliers when it comes to innovation, especially in the areas of digital, automation and analytics.
“Secondly, organisations are increasingly demanding cheaper larger-scale automation and infrastructure ‘run’ contracts, to reflect the adoption of automation, new technologies and new operating model techniques in core and legacy estates,” he said.
Of companies currently outsourcing their IT, 69% are doing so as a means of reducing costs, while 64% see it as a vehicle for business transformation.
That being said 22% of UK companies that currently outsource some IT functions are actively planning to bring them back in-house in future.
As a result, “outsourcing organisations are now parcelling their capabilities to support digital transformation, cloud adoption and automation projects and these are likely to become more common offerings as businesses increase the integration of technology into the wider business,” Pepper added.
Public sector outsourcing
One sector that is undergoing a stark change in its relationship to IT outsourcing is the UK government and public sector. Councils in the UK are noticeably reducing their reliance on outsourcing to private vendors, in favour of bringing jobs back in-house.
This can be put down to the combined forces of a historically poor standard of service, a lack of flexibility baked into contracts, and the volatility of companies in this sector, exemplified by the collapse of the government’s biggest contractor, Carillion, in January 2018.
Close to a third of Conservative councils, and 42% of Labour councils in the UK, brought services back in-house in 2017, according to the not-for-profit body, the Association for Public Sector Excellence. This trend is most clearly evident in IT-heavy areas such as HR and payroll, where government spending on outsourcing fell from £708 million (€791 million) in 2012/13 to £535 million (€599 million) in 2015/16.
Now, let us take a look at the advantages and disadvantages of outsourcing various IT functions.
Gain greater expertise: Companies looking to outsource often do so because they are looking for a level of expertise or capacity that is not readily available within their own organisation.
Outsourcing allows enterprises to access a wider pool of potential workers, because the search is not limited by location. This means that instead of being restricted to a local pool of applicants, you can extend your horizons—even globally if you choose. This means that the level of expertise on offer will likely be higher than if you restricted the search to within a local radius.
Lower costs: This is the reason 69% of companies are outsourcing IT in the UK, and no wonder. Going down the IT outsourcing route can definitely save companies a few pennies. It means that instead of bringing on more staff in-house at a fixed cost you are employing contracted workers.
This removes the necessity for expensive training of employees and providing other employee benefits such as insurance or sick pay. You can also hire on a per-project basis, meaning you only pay contractors for the work completed, rather than tying your business into a lengthy contract. Having said this, some contractors can quickly seek to renegotiate the terms of the work, and employers may find the total cost of outsourcing steadily inching up.
“Outsourcing still offers an opportunity to reduce costs through offshoring, although care always needs to be taken to factors such as the cost of remote working methods, taxes and transfer pricing, for instance,” says Pepper. “Additionally, it can improve access to scarce skills at times of peak demand, for instance in cybersecurity.”
Improved equipment and security: Contractors are focused on providing very specific areas of IT, and this means that they will likely have the best quality and up-to-date equipment and software for this work. This can also mean that the security standards are very high, given they have specialised equipment for this purpose.
Free up internal resources: Outsourcing means that internal resources are made available for different purposes, rather than trying to accommodate many extra IT functions. In cases where all IT functions are operated in-house, staff may end up dabbling in areas – such as IT or accounts – that they weren’t specifically brought on to do. This can end up sapping their capacity to help in areas where they can bring more innovative potential.
Focus your business: Outsourcing certain business functions means that your core enterprise remains ‘lean’ and potentially more focused, adaptable and agile. This means that staff can really focus on their own specialisms, and the company can become an expert in delivering its core product. This reason may be particularly applicable to start-ups who need to focus on their core offering, and removes the pressure of having to cultivate disparate areas of expertise in-house.
Less control: A loss of granular control over IT functions is one of the most commonly cited examples of why outsourcing can become problematic. Although you can of course provide detailed direction, the team is operating off-site, so it can be difficult to implement close monitoring as you could with an on-site team.
Quality expectation gap: This is an issue that has plagued the UK government in regards to outsourcing, and is something that any company can fall prey to. To try to avoid this it’s important to perform thorough due diligence on the contractor and their previous standard of work, as well as trying to talk to some of their previous clients about whether they delivered on time and within budget. Also, be thorough when laying out your expectations for contractors—the set budget, timeline and required quality standards.
Communication can be difficult: When an activity is taken off-site it’s harder to communicate as frequently and effectively as when a department is located on-site. This can depend on your point of contact in the outsourced team and how reliable and competent at communicating they are.
If you have a similar style of communicating and are happy to engage as regularly as the other would like, then the relationship will likely be an amicable one. If not, then problems and frustrations could arise. This can be mitigated to some extent by indicating what kind of communication you would like – how frequently and how in-depth – before initiating the contract. This issue can of course be exacerbated in cases where the contractor is located in a different country or time zone.
Environmental and labour standards may slip: Unscrupulous outsourcing to companies located in different countries may involve contractors engaging in labour practices not acceptable domestically, as well as unacceptable environmental practices. To avoid this one, make sure you are aware of the workplace practices adopted by contractors abroad.
Negative influence on company culture: This depends on context, but if you replace an in-house team with outsourced workers, this can have a detrimental effect on employee morale. It can also increase anxiety in the workforce, as people worry that their jobs may be at risk too.
A positive work culture can engender high levels of employee satisfaction and productivity, and is therefore something you do not want to jeopardise at any cost. To avoid this, have clear discussions with employees about the outsourcing, the reasons for it and how it will work in practice for any departments closely linked to the functions being outsourced.
“Many organisations continue to under-invest in the skills needed to manage outsourcing deals, either in terms of managing broader retained organisations or in vendor management abilities,” says Pepper. “This can hamper transition and transformation activities which often causes value to be eroded over the life of a contract as deals fail to keep pace with evolving business needs or technological changes.”
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