1999 Product of the Year: Outsourcing

Should you hand over the keys to your kingdom?

If the Microsoft court case and the hypergrowth of high-tech stocks were the splashiest stories of 1999, the most interesting phenomenon was outsourcing.

Across industries and technologies, companies handed over to highly skilled providers specific IT functions as if they were dirty laundry, instead of investing in the hardware, software, and personnel necessary to take care of the job in-house.

In the early part of the decade, the decision to farm out an IT job was considered the desperate act of a business in trouble. But now that IT talent is a precious commodity, many companies see outsourcing as an integral part of their business strategy that enables them to react easily to market shifts while saving money.

The Gartner Group, an industry research company, in Stamford, Conn., estimates that by 2001, 60 percent of enterprise managers will employ selective outsourcing, wherein organizations will outsource anything from desktop maintenance to e-mail to application development.

Service providers generally focus on one category of IT management: information-systems tasks, such as network operations, desktop applications, and help desk support; external processing services, such as electronic billing or payroll processing; or business processes, such as human resources or marketing.

The advantages to outsourcing are many. The most compelling benefit is cost, which usually comes in well below the expense to maintain the same function or process in-house -- 20 to 40 percent less by some estimates. A service provider can usually offer highly efficient service, freeing internal IT staff to focus on mission-critical business. Using a service provider may also help companies react more quickly to changing business conditions; just ask a chief technology officer (CTO) who lost online business to a competitor because he or she had trouble hiring Web developers.

But outsourcing has its drawbacks. Some CTOs have rejected the practice because they had a bad experience with a service provider or feel nervous about handing the company keys over to a stranger. Also, before outsourcing a specific function, a company must determine the cost of the function, which can be a complicated process.

The initial adopters primarily have been small and midsize companies that are bracing themselves for rapid growth. For these businesses, the ability to pay monthly for access to applications such as Oracle Financials is amazing.

Because of the low fee, bundled administration handled by the provider, and free training, a small business can take advantage of powerful, large applications without having to pay for them. This lets smaller businesses, especially Internet companies, keep their core competencies focused on producing, rather than becoming distracted with menial tasks. Then they can take on large competitors ferociously.

Large enterprises have been slower to embrace the outsourcing model. Only time will tell if the perceived benefits are compelling enough for managers of large enterprises to jump on the bandwagon. Outsourcing will catch on if service providers prove they can clearly understand the needs of their clients, retain highly skilled talent, keep the costs down, and provide quality customer service -- a tall order in the best of circumstances.

In light of this surge of interest in outsourcing, the Test Center will begin reviewing service providers by subjecting them to a similar set of rigorous testing procedures that we follow for our product reviews. Look for our debut review in the Jan. 24 issue.

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