Risks and Benefits of Outsourcing IT for Small Companies
Outsourcing benefits apply not only to large corporations but small companies as well. SMEs that lack expertise in certain areas can outsource these jobs to contractors to get the job done without spending a considerable sum of money.
Each company has its own information technology needs which may not be addressed by ready-made software packages. SMEs that have to integrate one software tool to another need skilled programmers to do so, which could be a limiting factor given the scarcity of professionals.
Many small companies that lack in-house IT expertise find it attractive to outsource system design, implementation and maintenance to offshore to BPO firms in India or the Philippines. Cost savings, access to technical expertise, and economy of scale translate into more profits and productivity.
Combining offshore outsourcing and open-source software can cut the cost of software development by 50%-75%. The benefits of outsourcing are also seen in hardware maintenance, which includes scheduled check-up of routine server and networks. Hardware failure and data loss can be mitigated through outsourcing.
Although the benefits far outweigh the risks, it is better to anticipate the potential implications of outsourcing.
Small companies should be able to oversee remote operations and deal with differences in time zones and culture. Also, the liabilities of third parties can be difficult to identify in a complex outsourcing set-up. Unwanted competition may result when the outsourcing firm takes advantage of intellectual property rights or trade secrets of its clients.
Risk management all boils down to careful planning and informed decision making. Outsourcing has long been proven to work for small companies. Choosing the right information technology contractor is the key to make it work.
What SMEs Should Consider Before Outsourcing
What to Outsource
Think twice before outsourcing your business’ critical processes. Non-strategic operations like payroll and back-office support are examples of non-strategic operations that can be outsourced to streamline your organizational operations.
Quality over Price
Choosing the cheapest vendor without considering the quality of service is the surest way to fail. Most of the time, BPO firms that charge more for the same service are likely to provide better customer service and meet quality standards.
Looking at specialization is a good way to distinguish between two equally good providers. Make sure that the fields of expertise of a prospective contractor are in line with your IT needs.
The rapid pace of technological change adds to the burden of maintaining an IT system. Choose a BPO firm that use cutting-edge programming languages and software tools to make your IT systems as modern and easy to maintain as possible.
Transfer of knowledge
Choose a BPO firm that can provide technical training to your in-house staff, especially if you’ll be outsourcing a short-term project like software development and integration.
Drawbacks of Outsourcing Information Technology
The following drawbacks of outsourcing information technology jobs are based on a study of outsourcing deals made between 1992 and 2000, which revealed a 36% failure rate.
Nevertheless, success stories on IT outsourcing showed that such risks could be managed to take advantage of the benefits of outsourcing. Companies that lack awareness of the unpredictability of outsourcing outcomes are more likely to be caught off guard when these issues arise.
System failure, security breaches and lack of data integrity result into unreliable system-generated information. Poor IT systems can drive a company out of business or expose it to lawsuits and sanctions due to non-compliance with regulations.
Risks are inherent in any IT set-up, but a major change like offshoring can increase the chance of system failure. Risks in IT operation are particularly high when it is outsourced. Problems arise when the client and its outsourcing company follow different policies and processes. The risk of system failure is further aggravated by the lack of a reporting system that allows clients to identify operational problems.
In some offshoring arrangements, the in-house IT personnel and intellectual property of the client are shared or completely transferred to the offshoring company, thus weakening the IT capability of the client. In this situation, the client loses its knowledge capital which could affect its ability to manage itself effectively.
The client will also struggle in developing the new management skills needed to oversee the outsourcing contract. It may take time for the client to govern and monitor its remote IT operations effectively. The lack of management team with relevant experience could prevent the company from making necessary changes and coming up with the right decisions.
Meeting client standards is often a contentious issue that can take a considerable period of time to be settled. Because each organization has its own operating environment, standards may differ to some extent.
Clients that intend to fully exploit the benefits of outsourcing may impose a 100% compliance rule which is impractical for the IT outsourcing company in the short run. Bridging the gap between clients’ expectations and the actual output of the service provider is made more challenging by disagreement over the priorities of IT operations.
In most cases, failure to meet the client-defined standards is mainly due to the inability of the outsourcing company to outline IT objectives, understand major needs and develop performance metrics at the start of the contract.
The unanticipated costs of outsourcing can prompt clients to cancel their contract. Lack of preparation can lead to a very costly transition. Other reasons behind unanticipated costs are lack of common understanding of price structure of the service and the use of subjective metrics in measuring performance and incentives.
The best way to address these drawbacks of outsourcing information technology jobs is to develop a comprehensive outsourcing plan. Key objectives, requirements and standards should be defined and clearly communicated to the outsourcing provider. A contingency plan should also be put in place to minimize the cost of failure.