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IT outsourcing. Image Credit: Shutterstock.com/SWKStock

IT Outsourcing: How It Works, Types, Benefits, Limitations, and Examples

Xomety X
By Team Xometry
December 13, 2023
 9 min read
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IT outsourcing is a strategic business technique whereby companies contract with outside service providers to handle particular IT tasks or full projects. This technique is an essential part of contemporary corporate operations since it includes a wide range of services and activities. 

This article will discuss IT outsourcing, how it works, types, benefits, and limitations, and give a few examples.

What Is IT Outsourcing?

IT outsourcing is the process of hiring outside service providers to supply infrastructure solutions, applications, and business processes that are supported by IT to accomplish corporate objectives. This approach includes services for cloud-enabled outsourcing, software as a service, and utility services. It supports long-lasting, mutually productive partnerships with external partners by helping with sourcing strategies, supplier selection, contract architecture, and governance.

What Is the Aim of IT Outsourcing?

The main goals of IT outsourcing are to provide businesses access to specialized skills and knowledge, lower operating costs, and free up resources for their core business operations. Through outsourcing certain IT tasks to outside service providers, businesses can improve productivity, simplify processes, and maintain their competitiveness in a rapidly changing technology environment. This tactical methodology enables enterprises to efficiently utilize outside resources for long-term expansion and novelty.

Is IT Outsourcing the Same as Business Process Outsourcing (BPO)?

No, business process outsourcing (BPO) and IT outsourcing are not the same, even though they both entail assigning work to outside vendors. Software development and IT infrastructure management are two examples of IT-related tasks that are particularly the focus of IT outsourcing. BPO, on the other hand, covers a wider variety of non-IT business operations, such as: finance, human resources, and customer service. Each fulfills specific organizational operational demands.

How Does IT Outsourcing Work?

IT outsourcing is the practice of businesses hiring outside service providers to handle certain IT tasks. The scope, service level agreements, and conditions of engagement are first established by the client and provider. The provider takes on accountability for the mutually agreed-upon IT duties, which could involve network administration, software development, or support services. The effective completion of tasks that are outsourced is ensured by regular monitoring and communication.

How Does IT Outsourcing Differ From Other Types of Outsourcing?

IT outsourcing describes the contracting out of technology-related work and services to outside vendors. It focuses solely on technology-related tasks, such as: software development, network management, or technical assistance, setting it apart from other forms of outsourcing like business process outsourcing (BPO) or manufacturing outsourcing. IT outsourcing stands out for its emphasis on technology-driven jobs and has the potential to increase productivity, lower costs, and provide access to specialist talents.

To learn more, see our Types of Outsourcing guide.

What Are the Different Types of IT Outsourcing?

There are several types of IT outsourcing, each with special benefits and uses. Listed below are some of its types:

1. Offshore IT Outsourcing

Offshore IT outsourcing involves contracting IT-related services to a distant country, often with lower labor costs and a thriving IT sector. Because of time-zone variations, a US corporation that outsources customer care to a Ukrainian company, for instance, can provide 24/7 service without incurring costly night shift expenses.

2. Nearshore IT Outsourcing

Nearshore IT outsourcing means delegating software development to a geographically closer location. This approach facilitates real-time collaboration while maintaining cost advantages. For instance, a US company outsourcing to Canada or a German firm utilizing Ukrainian development services fosters efficient communication during regular hours.

3. Onshore IT Outsourcing

Onshore IT outsourcing entails hiring a service provider within the same country. This model offers accessibility, shared language, time-zone synchronization, and cultural alignment. However, talent shortages can make finding the right onshore fit challenging.

What Are the Areas of IT Outsourcing?

IT outsourcing includes a wide range of services that are essential to contemporary companies. These services can include the following:

1. Cybersecurity

In a time at which cyberattacks are constant, outsourcing cybersecurity is essential to business security. This procedure guarantees access to knowledgeable professionals who are skilled in safeguarding confidential information and systems from the constantly changing array of cyber threats. Protecting a business's integrity and reputation depends on the diligence and knowledge of external cybersecurity experts.

2. Software Development

Outsourcing software development is a strategic decision that elevates a company's competitive edge. The cost-effectiveness of this approach is apparent, as it eliminates the need for expensive in-house development. By outsourcing, you secure the services of dedicated experts who deliver results characterized by quality and efficiency, enabling businesses to thrive in a competitive market.

3. Cloud Services

Three benefits come with outsourcing cloud services: cost-effectiveness, scalability, and flexibility. Service providers are skilled at hosting applications, storing data, and managing cloud infrastructure. This simplifies processes and frees up companies to concentrate on their main business activities.

4. Technical Support

IT outsourcing services encompass an array of technical support functions, including: hardware and software troubleshooting, remote assistance, and customer support. This comprehensive support network ensures businesses have access to reliable technical assistance, enhancing operational efficiency and minimizing disruptions that can hinder productivity.

5. Infrastructure Management

Managing IT infrastructure is a complex task with its many moving parts, including: servers, networks, and storage systems. There are many advantages to delegating this task to outside experts. Experts with extensive knowledge of server administration make sure these systems run smoothly and securely. In addition to streamlining operations, this calculated decision gives businesses peace of mind that the people handling their digital foundation are qualified to preserve its integrity and performance.

What Are the Benefits of IT Outsourcing?

Some benefits of IT outsourcing include:

  1. Cost Reduction: Reduces the capital required for long-term staff and IT infrastructure, leading to cost savings.
  2. Scaling Staff: Provides flexibility in adding or reducing IT experts as needed, without the time and cost associated with hiring and training new employees.
  3. Improved Focus: Allows on-site staff to focus on their specialties and higher-priority tasks, enhancing overall productivity.
  4. Improved Security: Access to additional security services, including data monitoring and protection, helps maintain cybersecurity practices and minimize potential intrusions.
  5. Gain Essential Functions: Allows businesses to integrate essential services like data storage and security monitoring into their infrastructure, often overcoming capital limitations.

What Are the Limitations of IT Outsourcing?

Some limitations of IT outsourcing include: 

  1. Loss of Control: This can lead to a loss of direct control over IT operations, potentially affecting decision-making and customization.
  2. Security Concerns: Sharing sensitive data with third parties can raise security risks, requiring stringent contracts and monitoring.
  3. Quality Variability: Quality of services may vary among providers, impacting the consistency of IT operations.
  4. Communication Challenges: Differences in time zones and language can create communication difficulties.
  5. Hidden Costs: Unforeseen costs, such as contract disputes or additional services, may emerge.

What Is the Origin of IT Outsourcing?

The inception of IT outsourcing, while lacking an exact date, is commonly attributed to the 1980s. In 1989, Eastman Kodak's pivotal deal with IBM marked a significant milestone in the history of IT outsourcing. This partnership set a precedent for organizations leveraging external IT expertise, shaping the modern IT outsourcing industry.

To Which Countries Do Companies Outsource IT Services?

Businesses contract with nations including: Brazil, Mexico, Argentina, Poland, the Philippines, India, and Malaysia to provide IT services. They base their decisions on a variety of criteria, including the capacity to manage outsourced teams, government backing, cost savings, and access to competent workforce pools. The key to success in outsourcing is carefully choosing the location of the work.

How Big Is the Industry of IT Outsourcing?

At $ 29,929.09 million in 2021, the worldwide IT outsourcing market is expected to increase at a 5.65% compound annual growth rate (CAGR) to reach $ 41,614.95 million by 2027. This strong rise highlights the industry's significant scale and continuous growth, which is fueled by companies' reliance on IT services.

Is IT Outsourcing a Good Strategy?

Yes, IT outsourcing can be a beneficial strategy when executed thoughtfully. It allows companies to access specialized skills, reduce costs, and focus on core activities. However, success depends on careful vendor selection, clear communication, and risk management to ensure it aligns with organizational goals and maintains data security.

Is IT Outsourcing a Dying Concept?

No, the idea of IT outsourcing is not going away. It is still a workable approach for a lot of firms and keeps changing as technology advances. Companies still use outsourcing to access specialized knowledge and increase efficiency while adjusting to shifting business requirements and market dynamics.

What Is the Future of IT Outsourcing?

Cloud computing, automation, and cybersecurity will be the main focuses of IT outsourcing in the future. Improved security protocols, artificial intelligence, and telecommuting will be crucial developments that guarantee data security and economical resolutions while capitalizing on a worldwide workforce.

What Is the Difference Between IT Outsourcing and Offshoring?

Hiring other parties to manage particular IT duties or services is known as IT outsourcing. This can happen both locally and internationally. Conversely, offshoring is the act of moving business operations or services to another nation, usually to take advantage of lower costs. Offshoring suggests a change in the location of business, whereas outsourcing can be done both domestically and abroad.

To learn more, see our guide on How Offshoring Works.

Summary

This article presented IT outsourcing, explained it, and discussed its types and benefits. To learn more about IT outsourcing, contact a Xometry representative.

Xometry provides a wide range of manufacturing capabilities, including casting and other value-added services for all of your prototyping and production needs. Visit our website to learn more or to request a free, no-obligation quote.

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Xomety X
Team Xometry
This article was written by various Xometry contributors. Xometry is a leading resource on manufacturing with CNC machining, sheet metal fabrication, 3D printing, injection molding, urethane casting, and more.