The Risks of Outsourcing IT

  • Michael J. Earl
  • April 15, 1996

While outsourcing IT has been a trend in the 1990s, it is not a new phenomenon. For example, systems development has been sourced from outside through application packages or software houses for many years. Large facilities management contracts in the late 1980s signaled a timely convergence of supply and demand factors. On the one hand, major vendors offered facilities management and other outsourcing services. On the other hand, managers who were tired of IS budget growth year after year and sometimes elusive business benefits saw an opportunity to cut IT costs, downsize the IS function, and do to IT what they were doing in other parts of the business — subcontract. The announcement of two seemingly revolutionary outsourcing contracts — at Eastman Kodak and at General Dynamics —may have given business the confidence to take on IT outsourcing on an ever-widening scale, and the issue was established on corporate agendas.1

The objectives of outsourcing are cost cutting; a desire to focus on the business, not on IT (or on “core systems, not on the total application portfolio”); or subcontracting responsibilities for operating and maintaining legacy systems. Whatever the objective, the possibility of outsourcing tends to generate strong emotions among both IS professionals and general managers. Thus research on the myths and realities of outsourcing has been followed by “how to do it” literature that aims to help companies implement outsourcing, not only in managing contracts and relationships sensibly but also in how to select sourcing options.2 These prescriptions help both the companies that are bold protagonists of IT outsourcing and those that think they have to do some outsourcing and would appreciate guidelines on being selective.

There is currently a trend toward selective or “smart” sourcing and a recognition of alternative sourcing strategies, whatever the objective. Figure 1 offers a typical analytical framework to aid in these decisions, in which the guiding parameters are the business value of a technology or application and the operational performance of the associated service. The framework suggests, for example, that outsourcing of information systems central to business strategy may be a dangerous diversion, especially if IT operations are already efficient. Insourcing in this situation is preferred.