In a recent study involving medium and large US business, IDC estimated that while IT spending over the next 5 years is expected to increase at a compounded rate of 4.6%, the spend on outsourcing of services such as logistics, HR, customer support and application development and management will increase at a rate of 22%. This gives a clear indication of the value that outsourcing is bringing to the corporate world.

But why would companies look at outsourcing, especially given the hurdles of culture, lack of control, language and even the problems associated with dealing with different legal and financial structures? The same study also came out with interesting findings of why these companies outsourced, and what benefits (if any) they accrued from such outsourcing.

Over 40% of the respondents said that the original reason for outsourcing was in order to lower costs, followed by lack of staff, better quality and faster time to market. However, when asked what were the key benefits accrued through outsourcing, the improved quality of applications was stated to be the number one advantage of outsourcing, followed by lower IT costs, and faster time to market. Interestingly, issues that are normally considered as “risks” while outsourcing, such as security and business continuity, emerged as key advantages, with 14% stating that business continuity preparedness had improved, and 13% of the respondents felt that security of data had actually improved after outsourcing.

These, and other corporate profit figures, clearly indicate that outsourcing is making good business sense. Thus it is not surprising that more than 90% of all Fortune 500 clients outsource some part of their IS portfolio. The real question would rather be that in the face of such clear indicators, why would some companies opt not to outsource?

One possible reason could be because of bad experiences with their earlier outsourcing attempts. While outsourcing can help a company meet its financial goals, there are other issues that need to be addressed while choosing a partner. One such question would be with regard to the potential partner’s track record while dealing with international clients. Another would be the speed and comprehensiveness of their response. Some companies have been found, to their dismay, that while costs do come down, this is often accompanied by lower response times as well.

The key point here is that any outsourcing partnership is a long term venture that involves the commitment of both time and resources from both parties to succeed. Smaller businesses often focus on the price at the expense of other important criteria. This accounts for the reason why the failure rates among small business outsourcing tend to be higher than the rates for medium and large businesses.

As the role of IT/IS in any organization grows, there is an increasing need for the organization to look at outsourcing as a strategic tool to ensure competitiveness and higher quality of service. Moreover, the changing nature of software projects (from the earlier fixed time / fixed price software projects to application management contracts that focus on the delivery of defined services) also makes it more difficult for organizations to justify the overhead of maintaining a highly specialized IT team for in-house software development. In these situations, an outsourced relationship allows the client to fix clear Service Level expectations and also define clear ROI goals. This allows both partners to focus on what each one does best, while ensuring that together they provide superlative value to the end customer.