Putting Outsourcing in Perspective
The term outsourcing carries a potentially confusing variety of connotations. One outsourcing mechanism in particular—offshoring software development projects to India or other countries where highly skilled labor is available at low cost—has received extensive attention and sparked relentless controversy. But thats hardly all that outsourcing entails.
In the most general sense, the decision to outsource is just a variation on the make-versus-buy question that managers confront constantly. For any given business function, does it make more sense to allocate capital and deploy staff internally? Or would the company be better off acquiring it from an external source?
Even outside the technology space, the balance has changed radically over time. A century ago, vertical integration was considered essential in many industries; Ford Motor Co. owned rubber plantations in Brazil to provide the raw materials for manufacturing tires for its vehicles. Today, the notion of maintaining such peripheral capabilities seems almost comical: better to delegate the responsibility to specialized suppliers with the requisite expertise, as is common when companies hand off payroll processing to service providers like ADP.
Outsourcing within the IT world isnt a new phenomenon, either; mainframe time-sharing systems date back to the 1960s. More recently, Web hosting and co-location have become so commonplace that theyre passé. But lately, the idea of migrating significant applications from an in-house data center into the hands of a third-party provider has gained appeal.
Its still a small market, totaling around $2.3 billion worldwide in 2003, according to Amy Konary, director of pricing, licensing, and delivery at research firm IDC. Thats tiny compared with packaged software sales, which are estimated at about $200 billion. But its also growing at a rapid 25 percent annual rate, leading Konary to project that spending will reach $7.2 billion in 2008. And perhaps most important: Even if the size of the market is small, the potential benefits to companies that embrace outsourcing are large.