We are approaching the end of Q4 and it is time to defend the IT budget for next year. It is then that, as IT managers, we ask ourselves: wouldn't it be convenient to outsource IT?
Of course, this is not a simple question to answer, mainly because we need to analyze multiple factors in order to find an answer that fits each organization. So, if you're looking for a yes or no answer, we're sorry to disappoint you.
What you will find in this article is a breakdown of the question to really consider what IT outsourcing means for organizations, what the advantages and disadvantages are, and what elements you should consider before making a decision.
In short, we'll walk you through the process, but the last word will be yours. Now, let's get started.
What is IT outsourcing?
Briefly, IT outsourcing is the replacement of technological capabilities with capabilities acquired through a supplier. If you opt for this alternative, what you will be doing is changing part or all of your IT department for one or more services provided by suppliers outside the organization.
This may be similar to what is known in the industry as "IT as a service."
3 advantages of IT outsourcing
Of course, there are certain advantages of outsourcing IT services, as you can imagine, and we will summarize them in the following three points.
1. Transforming expenses from CapEx to OpEx
Outsourcing services makes it possible to transform costs that are typically capitalization expenses (CapEx) into operating expenses (OpEx). This will provide you with new opportunities when managing your budget, facilitating the adoption of new technologies, and speeding up the transformation.
A clear example of this advantage is the replacement of on-premise infrastructure – which requires the purchase of expensive equipment with usually long acquisition cycles – with a cloud infrastructure, which usually follows a pay-per-use model and is available almost instantaneously.
2. Focusing the organization's resources on core activities
Thanks to IT outsourcing, your organization will be able to focus its resources on core activities. For example, your company could use the savings in money, time, and personnel to work on an ISO-9001 certification or on R&D related to the product it delivers to the market, something that will undoubtedly differentiate your offer from that of your competitors.
In any case, we must not lose sight of the fact that, although the department and the services IT provides to the organization rarely differentiate an organization from its competitors, this does not mean that they are not important to the business.
Although the result the customer receives does not show whether the internal IT capabilities are in-house or outsourced, technology is what enables the effective delivery of the product or service. Therefore, it plays a fundamental role and can positively or negatively impact what is being sold.
To a large extent, we can then consider some of the IT services as a commodity, and as such, outsource them to reduce costs and redirect resources to the core areas of the business that generate competitive advantages in the market.
3. Filling skills and capabilities gaps quickly
Last but not least, outsourcing IT services will allow you to quickly fill the gaps that your company has in terms of skills and capabilities. Although selection processes are becoming more and more agile, talent in IT profiles is expensive and difficult to acquire. On a day-to-day basis, this translates into difficulty in covering transitory work overloads and difficulty in acquiring highly skilled talent in new technologies.
However, with IT outsourcing you will be able to access this talent dynamically and flexibly, allowing you to incorporate the knowledge and capacity you need to meet business needs temporarily, and release them when you no longer require them.
3 disadvantages of outsourcing IT services
But since all that glitters is not gold, IT outsourcing also has its cons, which we will also summarize in three points.
1. Creating greater dependence on external entities
Getting rid of the IT department (either in part or entirely) implies creating a dependency on one or more external providers. This will mean that, in turbulent times, you will not be able to manage the fine-tuning of the ship and you will be largely conditioned by the service contracts agreed with your suppliers and their ability to pass through them.
Likewise, you will expose the organization to completely unrelated risks, while internal supplier problems will have a direct impact on your service, without you being able to do anything about them.
2. Loss of some of the in-house knowledge
When you outsource, you lose in-house skills and capabilities. It makes sense if we consider that outsourcing involves a substitution, a replacement of an in-house capability. Therefore, the talent is no longer part of your organization.
While this may be trivial when we are talking about highly commoditized services, it becomes a complex situation when you outsource business-critical capabilities.
3. Increased complexity in implementing business solutions
This is perhaps the least considered and most important risk. The final disadvantage of outsourcing your IT service is that it will increase the difficulty of tailoring technology to the specific needs of your organization.
Technology services can indeed be seen as a commodity. However, technology applied to our business context rarely is. Therefore, you have to be aware that, by outsourcing the IT area, you lose part of the knowledge you have of the technology applied to your business.
In this sense, it is not common for suppliers to know the typical problems of their clients' operations, let alone the operational needs of each business. As a consequence, it is common that the operation is affected both in quality and innovation capacity due to a lack of understanding and holistic vision of the business.
So, when should you outsource IT?
As with everything in the life of an IT manager, these decisions are based on a balance between costs, risks, and added value.
When you outsource your organization's technology area, you are shedding internal capabilities, and removing risks and costs associated with them. Instead, you acquire external capabilities in the form of services, which introduce new costs and risks to your operation. It is the balance between these elements that will tell you whether outsourcing creates value for your organization, and is therefore an option to consider.
It often happens that less experienced IT leaders consider outsourcing is convenient just by looking at risks and costs, but keep in mind that this is not always the case. Sometimes, the capabilities you lose versus those you acquire are not of equal quality. Therefore, they can negatively affect users, deliver less value to the organization and create a poor customer experience (CX).
For example, you may be able to outsource activities such as on-site support or printing services without too much impact, but you will always want to be able to evaluate their performance and the experience you provide to your employees.
A good service desk solution will be your best ally in this, not only to be able to have a complete view of the CX, but also to evaluate the results obtained from the services you have decided to outsource and to control compliance with service level agreements.
The good news is that with this won't be a headache: your agents won't need extensive training, you can have it up and running in just one day, and its reporting and automation capabilities will help you monitor everything we mentioned above. In this sense, it'll be your best ally, not only to have an overview of the CX, but also to be able to evaluate the results obtained from the outsourced services you have in your organization.
IT outsourcing is a complex decision that involves multiple variables to consider, and there is no absolute answer for all cases. Even so, we can summarize some key points to keep in mind when evaluating these options:
- Outsourcing IT is not an all-in, you can outsource one sector or process, and keep other capabilities in-house.
- It is important to control the level of abstraction you create between IT and the business, as you do not want to completely lose its understanding.
- It is advisable not to focus on a single vendor. Have more than one vendor providing part of the same service to create a competitive marketplace that improves costs and the quality of results.
- Coordinating multiple suppliers is a skill you must acquire. When many parties are involved, you need a holistic view of the service. For this, rely at all times on as your CMDB software, as well as in a coordinator role that integrates all the parties.
- While the main objective of IT outsourcing is to reduce costs, be careful not to lose flexibility. The shorter the contracts, the more flexibility you will maintain to adapt quickly to market changes.
- And don't forget that contracts must be properly governed to ensure the quality of service, and the relationship with each of your suppliers must ensure the co-creation of value to achieve good results.
With all this in mind, you are equipped to make the best decision for your company at any given time. But keep in mind that what you decide today may change in the future. You need to be flexible enough to re-evaluate your decisions as the context of your organization changes.
And remember: a good IT manager can strike a balance between the capabilities they can outsource and those they must keep in-house.
Frequently Asked Questions
What services can be outsourced?
Much of IT can be outsourced, and there are even companies that outsource the entire department. This is very common in small organizations, where developing these capabilities is cost prohibitive. By outsourcing IT, they get a service of specialists and resources that would otherwise be inaccessible.
On the other hand, in medium and large companies, it is much more common to find IT departments with outsourced capabilities carefully chosen to optimize resources.
Will I lose control of the IT department if I outsource it?
When you decide to outsource IT, you necessarily give up some control, although the implications will depend on the risk/benefit ratio. Ideally, you should maintain enough control to ensure that IT objectives are aligned with the organization's objectives, without having to get into the micromanagement of designing how this should be done yourself.
How much money can I save by outsourcing IT?
The economic relationship will depend mainly on what you agree with your suppliers. Will you outsource only some services? Will you outsource the entire department? Or maybe you will only opt for this in a remote geographic region where moving your own staff is very complex?
The specific characteristics of what you outsource will make the savings marginal or extremely significant, but remember at all times: the important thing is to continue providing quality service. Reducing costs by affecting the quality of service is a solution for today and a problem for tomorrow.