Extreme Outsourcing: Risky Business?

Outsourcing and its cousin offshoring are transforming the business of IT. Outsourcing is nothing new: Every project for which IT hires outside consultants involves outsourcing. However, offshoring takes this model to the extreme, shifting the responsibility of projects and sometimes entire departments to foreign-based firms.

Traditional outsourcing, such as hiring consultants for special projects, has well-established benefits. The additional outside resources let your business undertake projects that your in-house IT staff doesn't have the time or possibly the expertise to handle. This type of outsourcing extends your IT organization's capabilities, letting IT focus on its core competencies. And the outsourcing is under your control, because part or all of the consulting work happens on site, letting consultants interact with IT personnel and end users.

But in the end, outsourcing is about cutting costs. And offshoring projects and entire IT departments to firms in countries that have much lower salaries and overhead expenses seems to offer the ultimate in cost savings. The dark side of offshoring, however, is apparent to anyone in the US IT industry.

Offshoring has hit the IT development sector the hardest, taking less of a toll on systems and database administration positions, although those jobs might be in danger in the future as companies look at more drastic cost-cutting measures. Lost jobs for skilled US workers, however, is the tip of the iceberg. Offshoring also reduces consumer spending as a result of unemployment and discourages future employees from entering the IT field.

In addition, companies that offshore IT might face missed project deadlines and reduced IT competitiveness. Communication between DBAs and project developers can be difficult enough when you're all in the same building. Throw in possible language barriers, cultural nuances, and different time zones, and you exacerbate the problem. Misunderstood project requirements lead to poor or wrong implementations, which in turn lead to extended project test cycles and missed deadlines. The result can be a loss of IT credibility with management and end users alike.

Another problem with offshoring: Many organizations that offshore IT still consider IT a cost center instead of an asset, overlooking the advantages a company can gain through effective use of technology. Technologies such as data warehousing and data mining, for example, can help businesses operate more efficiently, cut costs, and turn their line-of-business data into information they can use to find new revenue opportunities. But offshored IT resources typically aren't integrated as a crucial part of a business's strategic planning.

Then there's the thorny issue of security. It's hard enough to enforce security locally, with developers wanting sa rights and end users pasting passwords to their monitors with yellow sticky notes, let alone when your development group is halfway around the globe. Outsourcing a project entrusts important data and vital security information to the outsourcing agency, which lacks the vested interest in security that the company staff has. And one or more competing firms might be outsourcing their projects or IT organizations to the same agency.

Many well-known companies appear to have successfully offshored their IT organizations and dramatically cut expenses−at least in the short term. But such extreme outsourcing has its own set of costs.