The term outsourcing hasn't been around that long. The first use of the term outsourcing is up for debate, but some scholars attribute the coinage of this word to a 1937 paper by Ronald Coase, a British economist who worked in the United States for the second half of his professional life. Other researchers say that 'outsourcing' as a business model can be traced back to the first industrial revolution.
Whatever the truth about the origins of the word outsourcing might be, the meaning has remained constant: Outsourcing refers to the practice of engaging third-party providers to manage and deliver a portion (or the entirety of) a company's services and departments. These might include helpdesk, technical support, delivery drivers, catering, or IT services, among many others.
In the early years, outsourcing was a rather uncommon practice, and when it did happen, it was restricted to very specific jobs. As the concept evolved, its scope broadened to include an ever-growing range of work types and services. Today, outsourcing is a common and widespread practice.
The IT sector is one of the major drivers of outsourcing. Software development services, technical support or infrastructure, or many other aspects of the industry can be outsourced to specialized providers.
Several reasons may drive outsourcing: company restructuring, reduction of business risks, or need to focus on goals and objectives, for example. But often, economic factors and a local shortage of skilled professionals are the major drivers for an outsourcing initiative. The latter is particularly true when outsourcing applies to the IT sector.
Outsourcing has as many supporters as it has detractors. People often perceive an outsourcing move purely as a way to get cheaper labor elsewhere. In some cases, such opinion might be justified, but it is unfair -and perhaps, unwise- to reduce outsourcing to a simple good/bad question, as business decisions are often determined by intricate factors that lead to sometimes controversial and unpopular decisions.
Instead, it is best to take an objective look at the granularity of outsourcing, consider both the positive and negative aspects, and also analyze the different types of outsourcing practices.
From a company's perspective, outsourcing does represent a range of benefits. Among these:
But there are also negatives. Among these:
When we hear the word 'outsourcing' in the context of IT, we tend to think of helpdesk departments moving to locations in India, with all the connotations that this implies. Such events, while true, are only part of the story. IT outsourcing is a sort of 'catch-all' term with nuances, subtleties, and gradations.
Broadly speaking, outsourcing can be split into three inter-related (but not quite the same) categories:
This outsourcing model looks at moving a limited number of business processes to a location within the same country as the client company. A local shortage of a particular set of skills might be a driver for this.
For example, an IT firm based in a rural area engages contractors from the country's capital city.
Another sub-division of the outsourcing concept is nearshoring, which implies software development or other IT services being done by third parties that are abroad, but geographically near, relatively speaking. In some cases, both countries might share a border, which makes engagement and communication simpler and more accessible.
Under this model, IT functions are shipped to a country abroad, usually far from the client company. This country might offer an abundant skill pool and a more efficient cost base. Ukraine, for example, has established itself as a prime offshoring locations for clients worldwide.
When looking specifically at IT sourcing, we can make further differentiation in how clients and vendors engage in this business modality.
Some IT projects might be quite niche and require a very specific set of skills, which might not always be available locally. In a staff augmentation model, clients engage vendors to hire staff for either short- or long-term projects to enhance or strengthen ('augment') the team. This strategy enables the company to do 'as needed' hiring to fill a certain gap in the team's skills. Read more about Staff Augmentation.
Companies might have a requirement to develop a certain product, or work on a certain project, but the skillset to do so might be lacking. In this situation, the client might engage a service provider with specific expertise on the particularities of the project. Also, this model might work well if the work being outsourced falls outside the core company offerings.
Long-term cooperation with a service provider might be the best solution for some companies. Reasons for a lasting collaboration might be a significant amount of work or the nature of the company's services and products. In this outsourcing model, the vendor provides full-time staff to work specifically on the client's project.
Offshore development center (ODC)
This is a relatively recent outsourcing model, where a company sets a facility abroad to access a larger skill pool and maybe take advantage of lower labor force costs and a beneficial tax framework. But the key component of ODC is that the company retains full control of the project.
Again, many companies have chosen to create ODCs in Ukraine, due to the country's abundance of IT skills and comparatively lower costs.