Outsourcing Considerations

Even when an outsourcer's staff works on the client company's premises, IT is not vulnerable to claims of co-employment. This is because of the fundamental difference between staff augmentation and outsourcing. In outsourcing, the company contracts for a service, not a person. It is the outsourcer's responsibility to determine how many people will be required to perform the service, and what technical background they must have. The company normally does not interview them, and it does not direct the staff. In short, IT specifies what is to be done, not how to do it.

Although some companies believe that the primary benefit of outsourcing is to avoid the co-employment issues associated with lengthy staff augmentation engagements, there are other reasons why an IT department would outsource one or more of its functions, including:

■ The work is not a core competency. For example, a manufacturing company may decide that its core business is manufacturing widgets rather than distributing them, and may therefore outsource the warehousing and distribution components of its business. Similarly, an IT department may decide that some functions are not part of its core competency, and may choose to transfer responsibility for them to a service provider. An example of a non-core competency is support of legacy applications while implementing a new system or integrated suite that will replace them. In this case, IT may have decided that its core business is being a systems integrator rather than an application support function.

■ The skill is a commodity. Some functions, such as mainframe operations, help desk services, and telecommunications support have become commodities. The work provided does not vary substantially from industry to industry, or even from company to company. Because of the standardization and economies of scale, various suppliers have established themselves as experts in these functions, and can perform them at least as well and often cheaper than the IT department.

■ IT has a major skills gap, with no short-term plan to close it. As noted above, an IT department may use staff augmentation as a way to obtain specific expertise, and transfer that to existing staff. This approach is desirable when the skill is one the department seeks, such as an emerging technology. If, on the other hand, the department has difficulty retaining experts for key systems, such as SAP or PeopleSoft, it may choose to turn responsibility for the entire system over to an outsourcer rather than struggle to keep the department fully staffed.

■ There are a number of advantages that an IT department may derive by outsourcing one or more functions. The most important among these are:

■ Departmental resources previously involved in the function are freed to participate on other projects, including higher priority or value- added work.

■ Costs are fixed and may be less than the department was previously paying.

■ Risk, especially the risk of losing key employees, is transferred to a company whose primary business is recruiting and retaining technical staff. Because outsourcers' contracts require adherence to specific SLAs, they have a high incentive to provide cross-training that will reduce dependence on a single individual.

An added advantage for some companies is that an outsourcing contract can specify that the supplier offer employment to staff whose jobs are being transferred to the outsourcer. If IT has decided to divest itself of non- core competency functions, it may not have other assignments for the staff currently performing the work. Transferring employees to the outsourcer provides continued employment for the staff, and reduced risk to both the company and the outsourcer.

Although favored by some IT managers, outsourcing raises concerns for others. The fear cited by most critics is that the IT department will lose control over its business. This is a valid concern. The simple fact is, when a function is outsourced, IT transfers responsibility for day-to-day operation to the supplier. IT has indeed given up the ability to direct the work at a detailed level. Instead, it relies on the supplier to provide that daily management, and to ensure that service level agreements are met. If an IT manager is not comfortable with relinquishing task-level control, or if the corporate culture does not support such a change, outsourcing should not be considered.

The second concern is reduced flexibility. Because outsourcing is normally a long-term engagement, bound by contractual terms, it is not designed for day-to-day changes in the scope of work. Instead, it is predicated on the fact that a finite scope of work has been transferred to the service provider, and that the vendor will be held accountable for clearly defined service levels. Although good outsourcing contracts provide for periodic adjustment of service level agreements, they do not lend themselves to frequent changes. If the workload is volatile, outsourcing may be an inappropriate solution.

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