What cost benefits does IT outsourcing provide?

2014-09-10, by Diana

Benefits of IT outsourcing: cost reduction Long before there was computer software, there was outsourcing. Historians say that businesses in the 1800s were hiring engineers and laborers from overseas to complete projects more quickly and economically than the local talent. Japan constructed many of its first factories with foreign help; and Russia, many of its first industrial mining operations.

Of course, IT companies today can outsource much more easily, thanks to worldwide telecommunications networks. As a result, a large number of IT companies started to use outsourcing as a strategic tool, for a number of reasons, which among others includes cost efficiency.

What is outsourcing? The definition of outsourcing has changed over the years to include a number of different services, such as business process outsourcing, IT consulting and managed services. In its most simple definition, outsourcing is when a third party is contracted to work on a project. Here’s a list of why companies choose to outsource – one of them is cost savings.

Under the right conditions, an IT company that hires a remote team to take on a project can cut the project costs up to 60%. The cost savings occur in several ways:

Faster product rollout.
Developing a new product often involves unique systems and specifications that only certain qualified technicians know. The company’s own internal workforce might only have a few workers with this prerequisite knowledge (workers that are often hard to find with rampant talent shortage), and while these few could get the job done, they will need extra time—time in which the product isn’t out on the market, making sales. The time frame gets much smaller, however, if the company brings on an outside team that also knows the technology. With more experts together, the company can complete the product, bring it to market, and start reaping profits sooner.

Lower-wage work.
You don’t need to be an IT expert to recognize that the cost of living in the United States is vastly higher than in India, Eastern Europe, China, and other developing countries. As such, a U.S. worker is generally going to command a higher wage than workers in other countries and regions. It’s therefore no coincidence that these other locations have become popular sites for companies looking to outsource IT labor. In many of them, a company can find highly educated IT engineers who will take on the same work and charge only the local wage. And while that may seem unfair to the local workers, it actually comes back to benefit the companies and consumers with lower prices and more efficient operations.

Non-IT savings.
When a company achieves cost savings by outsourcing IT processes, it often indirectly attains more cost savings elsewhere, including some non-IT areas such as administration and general sales. A study published in MIS Quarterly earlier this year reported that if a company increased spending on IT outsourcing by $96.14 million, it could achieve a $121.14 million drop in costs, on average, in other non-IT functions within the company, such as general sales and administration. The authors attribute these non-IT cost savings to the IT outsourcing freeing up resources and boosting internal efficiency overall.

Of course, none of the above is guaranteed. It is imperative to contract external teams that know the technical systems just as well as the internal workforce to avoid above-average training costs. It is also imperative to choose the right outsourcing model, an appropriate project to outsource and a reliable partner.

Prior planning and analysis is essential, as is proper follow-up communications with the remote team throughout the course of the project. Outsourcing is a tool, and a potentially very valuable one. But like any tool, it works best when one uses it properly.

To learn more download this white paper: Who benefits from outsourcing?

Read next:
Six wrong assumptions about IT outsourcing tech leaders make
The search for a better outsourcing model: benefits of Remote Insourcing
Does outsourcing affect customer satisfaction?

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