The popularity of outsourcing is somewhat enigmatic. Why would companies entrust activities that are its lifeblood — information technology, human resources, and marketing and sales — to a third party? Yet according to “The 1999 Outsourcing Trends Report,” they do, outsourcing roughly one-third of those activities and roughly one-fifth of their financial affairs.1 The outsourcing business is booming. The report says nearly all companies spent more on outsourcing in 1999 than in 1998 and anticipate continued increases.
The report shows IT outsourcing leading the increase, with companies giving 38% of their IT functions to vendors. One reason is reduced cost. IT is one of the most expensive parts of the organization to establish and maintain. But a vendor with many clients can operate at a scale a single enterprise cannot. Large vendors can use more powerful equipment, for example, than can individual clients. Moreover, their size helps them negotiate with hardware and software providers.
Another reason companies outsource IT is improved performance. The expertise of an in-house IT department often lags behind today’s technology. A vendor’s sole job is to follow the trends and provide leading-edge software and systems. Vendors have more expertise than their individual clients because they face more-varied issues. They also can have employees specialize in areas clients typically encounter only once, such as converting to a client-server architecture. (See “An IT-Outsourcing Survey.”)
Although the benefits of IT outsourcing are clear, they often get eaten away by costs that managers can’t pinpoint. In a survey of 50 companies, about 14% of out-sourcing operations were deemed failures. Companies say they entered an out-sourcing agreement believing that they understood all major costs.