Cheat Sheet: Outsourcing

Isn't outsourcing old news?
Not at all: businesses are continually finding new services that can be provided by an outside company.

IT is one of the most commonly outsourced areas, with outsourcers offering everything from software development and infrastructure provision, to systems maintenance and code testing.

The market has evolved and today business process outsourcing - where an entire function such as HR, finance or customer service is outsourced to a third party - has become a multibillion-dollar market while a relatively new offshoot called knowledge process outsourcing, involving farming out high level data analytics, has also sprung up.

The New York headquarters of one of the world's largest outsourcing companies IBM (photo credit: IBM)

Why should I care?
Because there's money to be saved and, often, a more efficient service to be had.

A big attraction of outsourcing has always been the bottom line, with outsourcing companies usually providing the same services more cheaply than is possible in-house. Outsourcers can do this because they are delivering similar services to many different companies and can take advantages of economies of scale.

Delivering services from offshore can further drive down costs thanks to cheaper labour and tax rebates abroad, with offshore delivery typically offering savings of 20 per cent on average compared to in-house provision, according to analysts Compass.

It's not just about up-front savings, however. Outsourcing companies can use their experience to change not just the IT but also to improve the way that a business operates in order to make it more efficient - by streamlining business processes, for example.

This is representative of a more sophisticated type of deal where a company sets an outsourcer broad goals, such as reducing the time it takes to bill clients to a certain number of days, and leaves it up to the outsourcer to decide how to do it. In this way companies are, to a certain extent, letting outsourcers decide how to run some elements of the business.

Traditionally, these types of deals have been the preserve of the Western companies such as Accenture and IBM, but increasingly Indian outsourcers, such as TCS and Wipro, are landing these sort of contracts. Conversely the Western companies, who have set up extensive offshore operations in recent years, have started to offer more of the low-cost, simple IT service delivery deals that were initially favoured by the Indian IT providers.

Anything else outsourcing can do for me?
Outsourcing also gives companies the ability to quickly increase or reduce the numbers of staff working on a project.

In addition, outsourcers can deliver many specialised IT services that would be expensive for businesses to develop in-house. Having specialist expertise is becoming increasingly important for the offshore providers, as can be seen from Indian outsourcing giant Infosys' recent acquisition of SAP consultancy Axon for £407m.

What type of industries use outsourcing?
Outsourcing deals are widespread throughout both the private and public sector. The public sector is predicted to increase the amount it spends on IT services by 4.3 per cent year-on-year in 2009 and outsourcing is likely to play an important role in helping the government meet its commitment to cut £7.2bn from its IT and back office spend each year.

In the private sector, financial services slowed its spending on new outsourcing contracts in 2008 as the credit crunch bit but it's expected to ramp it back up in 2009.

Retailers are also expected to up their outsourcing in 2011 after two years of cutting back on new deals.

UK spending on IT services is expected to pick up from 2009/10
(Image credit: Pierre Audoin Consultants & TechMarketView)

How has outsourcing weathered the credit crunch?
Better than other areas of IT: analyst house Forrester is predicting that global spend on outsourcing will fall slower this year than the 10 per cent decline forecast across IT spend as a whole.

Indian outsourcing company Mahindra Satyam also believes that businesses have started outsourcing IT services again following a spending freeze during the latter half of 2008.

This thaw in spending will be helped by outsourcers offering price drops...