Outsourcing for businesses worldwide has become an increasingly common practice. In 2017, the value of outsourcing contracts grew by 9% to top £4.9 billion. In terms of what is being outsourced, IT made up a vast 73% of the total outsourcing market in 2017, with the amount spent doubling between 2016 and 2017. Other popular areas for outsourcing are HR and accounting.
However, particularly in the public sector, there have been high-profile incidents of disastrous outsourcing initiatives, most recently exemplified in the recent collapse of the UK government's biggest contractor, Carillion. This has prompted a number of local councils to begin to move jobs back in-house instead.
Indeed, in the 2018 CIO 100 some 75% of CIOs responded that they were either increasing headcount or planning to bring key skills back in-house in order to drive IT and digital transformation initiatives.
Whether a company should outsource or instead focus on developing skills in-house is a matter of context, situation, organisation, sector and a myriad of other factors. We discuss when and why you would choose to outsource.
Pros and cons of outsourcing IT
One of the biggest reasons for outsourcing is to access a greater pool of skills without being limited by location. When outsourcing work, you can look for applicants beyond a commutable distance to the office, potentially opening the doors for more qualified or skilled workers. This might be particularly applicable for companies located in smaller cities or more rural areas, where the applicant pool is not as large. Similarly, companies based in cities where their industry lacks a large presence, for example, a tech company in a city where there is no vibrant technology sector, may also particularly benefit from outsourcing.
As people in many sectors can now easily work remotely, many companies these days choose to hire people from all over the globe.
Another major reason and one that 69% of UK companies give as the reason they choose to outsource is to save money. This is because investing in outsourced work does not mean taking on new employees. This means the company does not have to pay employee benefits such as sick pay or insurance on top of wages, and means they do not have to invest in training the employee either.
Companies seeking to really cut costs may also choose to access workers in emerging markets, where labour commands a lower wage. Therefore, companies who do not have a large pool of capital to invest in training and taking on new workers may want to consider this option.
This is especially applicable to young companies or startups that may want to focus on their core product without cultivating specialist teams in-house for many different areas. For these types of company, it may be easier to outsource than to recruit the necessary talent.
However, there are cases where the vendors accepting outsourced contracts can quickly try to renegotiate the terms, and force you to pay more, or increase the amount of time you are tied into the contract. To avoid this, try to ensure you choose to work with a reputable company with an excellent track record and glowing reviews from former partners. If you simply seek to scrimp at all costs, the quality of the work will undoubtedly be poor.
However, despite the benefits, taking on an outsourced team of employees does involve making some sacrifices. For one, it is much harder to exert control over their work that it is an on-site team. Therefore, it will involve accepting that although you can provide broad direction, it's impossible to exert granular control over operations anymore.
This can also depend on how much communication you seek to have with the leader of the outsourced team. Agree to a schedule beforehand, so both of you are clear about how much interaction you need to have and in how much detail.
This will somewhat circumvent the possibility of frustrations on either party. Of course, this is a problem that can be exacerbated by taking contracted workers who are located in different countries and time zones. In these cases, it may be necessary to be very clear and structured in your approach to communication.
Another thing to be wary about with outsourcing is the effect on current, in-house employees. If you're deciding to eliminate jobs and replace with contracted workers then you should be aware the impact this can have on morale by making employees feel less stable in their own positions. To help mitigate this, you should be very clear at communicating with employees why you are choosing to do so and what the effects will be on each department.