Introduction to outsource IT


This guide is based on UK law. It was last updated in February 2008


The trend in outsource of IT continues to grow – both in the number and value of the outsourced IT transactions and in the variety of services which are outsourced.


The pressures which lead organisations to outsource IT show no signs of slackening and cost savings remains a major incentive. However, other factors are increasingly influencing the decision to outsource IT– access to innovation, increased speed to market, and service quality are proving equally as important as cost savings.


As the value of transactions has increased, so too has the range of outsourced IT services. Most non-core services which organisations have traditionally provided internally such as IT are now commonly outsourced. The locations from which services are provided have also changed – the attraction in outsource of IT to offshore locations such as India has soared.


Reports show that the fastest growing sectors are business process outsourcing and business process management. For many large IT suppliers choosing to outsource IT and process management are one of the few areas to have flourished in the difficult market of recent years.



What is outsourcing?

Outsourcing involves the transfer of the responsibility for carrying out an activity (previously carried on internally) to an external service provider. The service provider in turn provides services back to the customer against agreed service levels for an agreed charge. In many outsourcings the transfer of the activity involves the transfer of staff and assets (see the employment section below).

Outsource of IT is often characterised as having 3 distinct phases:

    * The customer transfers the existing service to the service provider;
    * The services are provided by the service provider;
    * Termination/expiry, which may involve either:



(a) renegotiation/renewal of the service contract; or
(b) exit management either by:

(i)   the service being brought back in-house (in practice this is rare); or
(ii) the appointment of a new service provider (most likely course).


Outsource of IT is not a new concept: many organisations are into their second or third generation of outsourcing. Traditionally the financial sector and the motor, defence and aerospace industries have dominated the outsourcing market. In the construction sector outsourcing is not unfamiliar but is a more recent phenomenon. Contractors have outsourced IT as customers to third party service providers. They have also, and increasingly, set themselves up to provide outsourced IT services to their clients, having identified outsourcing as a means of securing long term profit growth. In this briefing we look at contractors choosing to outsource IT as the customer and we focus primarily on IT outsourcing. We take a look at the pros and cons of choosing to outsource IT, issues relating to employees, global deals and off-shoring, and how to plan and prepare for a successful outsourced IT.
What are the pros and cons of outsourcing?

The reasons for choosing to outsource IT are varied but some of the most frequently cited drivers include:

    * Reducing IT costs through efficiencies and economies of scale on the part of the service provider
    * Access to world-class IT skills, experience and resources
    * Removing non-core business
    * Minimising sizeable capital expenditure on IT infrastructure
    * Certainty of future IT spend

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