Many companies outsource significant parts of their IT to save time and financial resources. In recent years, large and internationally active companies, in particular, have increasingly outsourced IT and handed over many of their work areas to external service providers. However, the SMB sector also benefits more frequently from these measures. This blog post is intended to compare the advantages and disadvantages of IT outsourcing and provide an overview of what is essential.
Table of Contents
What is IT Outsourcing?
IT Outsourcing is a delicate dance, and finding the right partner is crucial to a long-lasting and successful relationship.
Information technology outsourcing (ITO) is the transfer of total responsibility for IT functions, or business areas with a very high proportion of IT, to an external service provider over a defined period. In some cases, existing personnel, hardware, software, buildings, or other assets are temporarily transferred to the IT outsourcing provider (so-called asset and personnel transfer). The service level agreements describe the scope and quality of the services in prior contractual agreements.
A company’s most diverse service levels can be involved in IT outsourcing. Services can be outsourced at the infrastructure level (e.g., servers, clouds, data centers), at the application level (e.g., software, websites, store systems, intranet), or the business process level (e.g., accounting, online marketing, digital product development).
IT Outsourcing for Online Applications and E-Commerce
If you’re running an e-commerce or online business, IT outsourcing may be an excellent way to keep you up and running.
E-commerce stores, mobile apps, intranet solutions, and company websites must be maintained, serviced, and continuously updated. Also, there is the expense of infrastructure systems and IT security. If the main activity of a company is not in the IT sector, it is difficult for many companies to meet the high-tech requirements and the constant further development at all times. Appropriate personnel must be released, trained, or recruited. The proper software and hardware must also be procured, installed, and maintained. This already brings us to the advantages of IT outsourcing.
Advantages of IT Outsourcing at a Glance
Below you’ll find just a few ways that IT outsourcing can boost your business and technology.
The various advantages of IT outsourcing are summarized here for a brief overview:
- Time savings
- Cost reduction
- Trained specialist personnel
- Competitive edge
- No acquisition and maintenance costs
- Latest technology and software
- Data protection and Internet security
- Long-term planning security
- Full cost transparency
- Consulting and advice
Advantage #1: Savings in Time, Resources, and Finances
Instead of hiring specialized staff and investing in technical tools, leaving the information and communication technology to an experienced and specialized IT provider can be worthwhile. This often saves time and resources and is usually also more cost-effective. Small and medium-sized companies can also increasingly benefit from this, as there are now very highly specialized providers offering cost-effective, partly standardized solutions.
In addition to the three most important advantages, saving costs, time, and resources, numerous other factors positively impact the company.
Advantage #2: Competitive Edge Through Continuous Development
Everyone knows how quickly new products and applications are developed in the digital age. The requirements on the customer side for a company’s services and products change just as quickly. Servers are needed to store data, special firewalls are required for Internet security, and then there is the issue of data protection. Since data protection guidelines change regularly and IT technology constantly evolves, specific knowledge must always be up to date to react quickly to changing requirements.
IT outsourcing providers have an eye for changes in the market and have the appropriate specialist staff to monitor digital developments. This is particularly important for new technologies, viruses, hacker attacks, and data protection. If you outsource your IT areas, you can assume that the software and hardware are always up to date. Also, most IT companies have several servers. This minimizes the probability of failure of online applications or e-commerce stores.
Advantage #3: Full Transparency of Costs and Services
Other advantages of IT outsourcing are clear cost transparency and project monitoring. Most IT outsourcing providers work with predefined workflows and process standards. This means that the hours invested and current project tasks can be called up immediately at any time – no requirement disappears into a black box. Services rendered are logged and recorded, making costs traceable even at a later date.
Even before the start of cooperation, an IT provider can already provide precise forecasts of the costs likely to be incurred thanks to its many years of experience and expertise. Many companies lack such clear figures if the IT systems are not delineated and standardized.
Not everything can be peaches and cream when it comes to IT outsourcing. These aren’t necessarily bad for everyone, but you should be aware of them.
Disadvantage #1 of IT Outsourcing: Transparency
They were just mentioned as an advantage, now as a disadvantage: transparency. Those who outsource elements of their information and communications technology are, in some cases placing essential business components in the hands of another company. Of course, this requires a certain amount of trust because the experts are no longer based in-house but are dependent on the availability and support of the partner company. If these are business-critical services, such matters should be clarified contractually in advance to safeguard yourself here. Optional 24h support should never be a problem.
Disadvantage #2: Lack of In-House IT Know-How
Technical ignorance can sometimes also be a factor, as not every entrepreneur can immediately understand the reasonableness of every single IT service. Hardware or software licenses that must be paid for, various analyses and data evaluations, many hours in project management, or creating dozens of prototypes can sometimes cause a frown rather than joy. In any case, the IT service provider is called upon to provide clarification through clear cost and performance transparency and to always be available at short notice for inquiries.
Disadvantage #3: Who is Liable for IT Damage?
The contracting company is liable for errors made by the IT service provider, which can have legal and costly consequences. For example, suppose sensitive data is lost due to carelessness or a system failure. In that case, the client must be liable for this error and, if necessary, compensate for the damage incurred. Therefore, taking out a contractual safeguard and recording all eventualities in writing is advisable. If the IT service provider commits an error, it has acted in breach of contract and must pay for the damage.
How to Find a Good IT Outsourcing Provider
Put away the binoculars. You’ll never find a suitable IT partner like this. Instead, you may want to ask colleagues for referrals or do a quick Google search.
Regarding the contract, it is advisable to stipulate the legally relevant cornerstones of the business-bearing processes in advance. These include terms and conditions and periods of notice. Also, it should be clarified in advance what will happen to customer data and rights after termination of the contract (in terms of data protection). Possible legal consequences can thus be reduced to a minimum early on.
IT Offshoring
Believe it or not, the internet has made it possible to work with people worldwide. You’re no longer tied to working with people locally and can outsource as little or as much work to other countries as needed.
IT offshoring is a separate form of IT outsourcing and refers to outsourcing IT services to companies from overseas. Currently, India, the Philippines, and China are particularly popular. However, Thailand, Sri Lanka, and Mexico are also gradually developing.
Unlike IT outsourcing, IT offshoring has been criticized more often in recent years. With outsourcing tasks abroad, many jobs are eliminated, making it more difficult for skilled workers to find suitable employment in the USA. It is not uncommon for them to go to large corporations in Great Britain or Scandinavia, which further increases the shortage of national specialists. For the companies themselves, IT offshoring often looks pretty lucrative at first because of the tax advantages or the lower location costs in rent, building, or employee costs.
IT Service Provider Abroad: Potential Risk?
When choosing an IT outsourcing or offshoring partner, you’ll want to make sure that their country’s government is on the up and up.
IT offshoring becomes risky when the political climate in the outsourcing country is unstable. Changes in government policy, for example, can cause unforeseeable problems and costs that cannot be calculated in advance. Democratically run countries tend to be more stable in the long term. Communication is also often complicated. Different time zones and language barriers make exchanges difficult, and face-to-face meetings are only possible in rare cases. Besides, different attitudes and work cultures clash, which can (but does not have to!) lead to disagreements and trouble.
IT Offshoring: Beware of Industrial Espionage
IP theft has been a severe problem for a while now, so do your due diligence before choosing a partner to outsource.
If you decide to move your IT abroad, you should also ensure that your country’s data protection regulations are adhered to. The same laws do not apply in every country. A violation can therefore have costly consequences.
Attention should be paid to the current standards for data security. Software applications, premises, infrastructure, and employees could also be vulnerable to industrial espionage. Even if no sensitive company data is processed abroad, it is conceivable that malware could be introduced into the company’s local system via unsecured connections, USB sticks, or hard drives. Special caution must therefore be exercised here.
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