Organizations have used external vendors to supply information technology (IT) functions since the first commercial implementations. In the sixties, the use of facilities management, contract programmers, and contract project management were common, but during the 70s, many organizations relied increasingly on internal delivery of IT services. The term “outsourcing” arose in the late 80s. Since that time industry has seen a fundamental change in the way information technology (IT) services are organized and delivered, with increasing reliance on external, outsourced providers. Managing outsourced IT service delivery has now become a core competence for organizations.
There is no generally agreed “theory” of outsourcing but a range of theories drawn from economics, strategy, marketing, and public policy have been used to understand the phenomenon.
Key Terms in this Chapter
Off-Shore Outsourcing or “Offshoring”: Outsourcing that is provided across national borders. In most cases this involves sourcing services from a low-salary nation like India, China, or parts of the former Soviet Union, where “salary arbitrage” (definition follows) leads to reduced costs.
Salary Arbitrage: Differences in average salary rates between developing nations (such as India, China, various South American countries) and developed nations in Europe, North America, etc.
IT Insourcing: This is a term with multiple meanings and so often unclear. It can mean services delivered in-house; services put to tender and then awarded to an in-house team in competition with the market; or services originally outsourced then brought back in house (this latter is sometimes labelled “backsourcing”).
Application Service Provider (ASPs): Standardized IT applications (such as enterprise processing, office systems, and e-mail) or software that is hosted by a provider, and accessed over the Internet by purchasers, who are charged on a transaction basis.
IT Outsourcing: The provision, at an agreed price, of specified IT services by an external vendor that is contracted to manage the day-to-day activities (and IS/IT assets and resources) so as to meet agreed performance and quality standards. Outsourcing can involve either the once-off development of a new information system or the ongoing provision of IT services (such as mainframe operations, PC support, software maintenance, etc.) over a specific period.
Transaction Costs: The costs of contracting with a vendor through the marketplace, in contrast to coordinating and managing service provision “in-house” (i.e., through the hierarchy). Key costs include finding, choosing, contracting with, monitoring, and controlling the work of the vendor, as well as coordinating the vendor’s activities with others being carried out by the purchaser.
Business Process Outsourcing (BPO): The outsourcing of relatively complex IT-supported business functions or processes. In practice, this often also involves “offshoring”.