Outsourcing

Outsourcing is the practice of hiring a party outside a company to perform services or create goods. In some cases, these were traditionally performed in-house by the company’s own employees and staff. Outsourcing is a practice usually undertaken by companies as a cost-cutting measure or a strategic management tool. As such, it can affect a wide range of jobs, from customer support to manufacturing to the back office.

Outsourcing was increasingly used as a business strategy in the 1990s, when multinationals used third-parties for logistics and manufacturing functions, along with others. But due to its broader economic implications, the practice of outsourcing is subject to considerable controversy in many countries. Those opposed argue that it has caused the loss of domestic jobs, particularly in the manufacturing sector. Supporters say it creates an incentive for businesses and companies to allocate resources where they are most effective, and that outsourcing helps maintain the nature of free-market economies in a highly connected world.

What Is Outsourcing?

Outsourcing is a business practice in which services or job functions are hired out to a third party on a contract or ongoing basis. In IT, an outsourcing initiative with a technology provider can involve a range of operations, from the entirety of the IT function to discrete, easily defined components, such as disaster recovery, network services, software development, or QA testing.

Companies may choose to outsource services onshore (within their own country), nearshore (to a neighboring country or one in the same time zone), or offshore (to a more distant country). Nearshore and offshore outsourcing have traditionally been pursued to save costs.

Outsourcing services

Business process outsourcing (BPO) is an overarching term for the outsourcing of a specific business process task, such as payroll. BPO is often divided into two categories: back-office BPO, which includes internal business functions such as billing or purchasing, and front-office BPO, which includes customer-related services such as marketing or tech support.

IT outsourcing is a subset of business process outsourcing, and it falls traditionally into one of two categories: infrastructure outsourcing and application outsourcing. Infrastructure outsourcing can include service desk capabilities, data center outsourcing, network services, managed security operations, or overall infrastructure management. Application outsourcing may include new application development, legacy system maintenance, testing and QA services, and packaged software implementation and management

What Are the Benefits of Outsourcing Internationally?

Outsourcing internationally can help companies benefit from the differences in labor and production costs among countries. Price dispersion in another country may entice a business to relocate some or all of its operations to the cheaper country in order to increase profitability and stay competitive within an industry. Many large corporations have eliminated their entire in-house customer service call centers, outsourcing that function to third-party outfits located in lower-cost locations.

In 2023, a Deloitte survey found that India, Poland, and Mexico were the top countries for outsourcing shared services. Meanwhile, outsourcing IT service desk functions was the top service exported in the information technology sector globally.

Top Outsourcing Statistics

Global spending on outsourcing could hit $731 billion in 2023
92% of G2000 companies use IT outsourcing
9% of the Philippines’ GDP comes from business process outsourcing
37% of small businesses outsource at least one business process
Over one million new employees join the services outsourcing industry in China each year

Outsourcing Market Statistics

IT outsourcing (ITO) and business process outsourcing (BPO) make up most of the global outsourcing market.

ITO encompasses services such as cloud computing, web hosting, cybersecurity, and data backups. BPO services include payroll and other HR services, marketing, customer service, and logistics.

Global spending on outsourcing could hit $731 billion in 2023 (Deloitte)

By December 2022, firms will spend more than $700 billion annually on outsourcing. Spending on IT outsourcing will reach $519 billion in 2023, a 22% rise over 2019. The amount spent on business process outsourcing is expected to reach $212 billion in 2023, a 19% increase from 2019.

The global business process outsourcing market is to reach $525 billion by 2030

Business process outsourcing will grow by more than 9% annually between now and 2030. Most of this growth will likely come from the financial services, information technology, and telecommunications industries.

The global outsourcing market is worth $92.5 billion in total contract value (TCV) (ISG)

The global outsourcing market value peaked at $104.6 billion in 2014 before hitting a ten-year low of $76.9 billion in 2016. Since then, the market has recovered, growing 20% between 2016 and 2019.

IT services make up 72% of all global outsourcing contract values (ISG)

Information technology (IT) services accounted for $66.5 billion of the $92.5 billion in contracts that global outsourcing companies won. Business process outsourcing made up the remaining $26 billion in total contract values.

60% of finance and accounting outsourcing contracts will not be renewed by 2025 (Gartner)

Outdated pricing models are causing financial and accounting firms to reevaluate their outsourcing agreements. As outsourced activities become increasingly automated, traditional “headcount-based” pricing models grow more expensive and less effective.

FAQs

Top IT outsourcing companies?

Accenture
TCS
CapGemini
Wipro
HCLTech
Cognizant
Infosys
NTT
IBM
LTI/Mindtree (new entrant of merged entity)

IT outsourcing models and pricing?

The appropriate model for an IT service is determined by the service provided. Most outsourcing contracts have been billed on a time and materials or fixed price basis. But as outsourcing services have matured to include strategic transformation and innovation initiatives, contractual approaches have evolved to include managed services and outcome-based arrangements.

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