Not all IT outsourcing models are created equal. Three main models, however, dominate the wide range of concepts discussed, offered, and implemented on the market:
- Complete outsourcing (including business process outsourcing, BPO):
A company outsources all of its IT operations or entire business processes to external service providers.
- Partial outsourcing (outtasking/managed services, application outsourcing/hosting, software as a service): A company outsources only individual IT services.
- Internal outsourcing (shared services)
Regardless of the model a company chooses, legal requirements almost always come into play. Consequently, organizations must keep a constant eye on the provisions of data protection, labor, tax, and IT-related laws.
Outsourcing models at a glance:
Complete outsourcing (including BPO)
In traditional IT outsourcing, a company outsources all or large portions of its IT to an external service provider. The transfer of the functions is established in a service contract. In addition to IT functions, this approach outsources entire business processes, including simple services in financial accounting and human resources.
Benefits: reduces costs and increases transparency; strengthens core competencies; relieves internal IT department; takes advantage of the provider’s expertise; secures IT
Risks: dependence on the service provider; complicated rollback in changing providers; loss of internal expertise
Since complete outsourcing often entails multiyear commitments, many companies opt for partial outsourcing of individual IT areas. This alternative makes it easier to roll back outsourcing relationships when necessary and assign each area to the respective best-of-breed provider. However, it does increase requirements in interface management.
Benefits: reduces costs; relieves individual departments; takes advantage of best-of-breed solutions
Risks: complicated provider management; loss of internal expertise
Application outsourcing and hosting
Application outsourcing involves an external provider handling the operation, ongoing development, and maintenance of software applications for a flat monthly fee. In the case of hosting, the user purchases licenses and makes annual maintenance payments to a software provider. An IT service provider is responsible for running and providing support for the IT infrastructure.
Benefits: ongoing support from the provider; secure application operations
Risks: not suited to company-critical applications.
Software as a service (SaaS)
With SaaS, an external provider renders software functions and associated services on demand over the Internet. Billing is based on usage.
Benefits: ongoing support from the provider; very flexible
Risk: external data archiving
Outsourcing is not legally defined per se, which is why outsourcing contracts can comprise elements of purchase, service, and lease contracts.
Companies must observe four legal principles:
- Confidentiality: Systems must be protected against unauthorized access.
- Integrity: Systems must be protected against modification, destruction, and other damage. Data backups, virus protection updates, and firewalls are key.
- Availability: Systems must be fully functional at all times.
- Auditability: Systems must fully log users and access attempts.
Offshoring and nearshoring
To reduce labor costs, an increasing number of companies are outsourcing their IT functions to low-wage countries. This is known as offshoring or nearshoring.
The number-one offshore region is India; China is beginning to establish itself as well. The quality of externally rendered services has risen in recent years, but risks remain: for example, significant distances, different time zones, high management costs, and language and cultural barriers.
Nearshoring involves principles similar to those of offshoring, but with companies outsourcing call center services or simple BPO services to neighboring countries – such as from western to eastern Europe. Advantages over the offshoring model include greater geographical proximities and common aspects of culture, but the cost of labor is higher.