Information technology (IT) outsourcing is when a company contracts out IT work to another firm or individual. It is a component of business process outsourcing (BPO). The contractor, or third-party provider, uses its own employees and equipment to do the work.
IT outsourcing may be seen as controversial when jobs go to IT workers in other countries instead of those within the U.S.
Companies can outsource the entire IT function or just specific components.
These components include programming, application development, and technical support. Other examples are cloud computing and software-as-a-service (SaaS). Hiring freelancers on a job-by-by basis is also an IT outsourcing practice.
Globally, IT outsourcing is a $92.5 billion business. A 2016 Deloitte survey found that 72% of businesses outsourced some or all of their IT functions.
What Causes Businesses to Outsource IT Jobs?
Companies outsource IT jobs to improve efficiency and profits. This includes improving time to market and catalyzing IT innovation.
The third-party provider is an expert in technology. As a specialist, they can perform these functions faster, better, and cheaper than the hiring company. Outsourcing companies take advantage of the third party's knowledge, experience, and expertise.
For example, a CEO of a small, fast-growing company might outsource IT so the firm doesn't have to focus on building up the expertise in house. Instead, it can focus on its core competencies.
Small firms may need to outsource aspects of IT because they can't afford to hire full-time, in-house professionals.
Other companies may only need additional tech support during rush times. Outsourcing gives them additional flexibility to fill additional orders.
Outsourcing IT may also lower labor costs. U.S. technology professionals may cost more to hire than those in other countries. For example, a software developer/engineer earns $19,447 in India, $42,497 a year in China, and $89,910 in the United States. One reason for this difference in salary is that the cost of living is cheaper in other countries. Another advantage of India's IT industry is that professionals there already speak English.
A U.S. technology company must keep its costs low to compete in the global marketplace. If it can hire trained workers for less money, it can help save the business money.
What’s the Impact on the Economy?
There are many benefits to the economy from outsourcing. Hiring IT experts allows U.S. companies to be more efficient and competitive. That builds the comparative advantage of the nation overall.
By working together with foreign firms, U.S. companies create better international relationships. That supports better relations between their two governments.
When companies hire H-1B workers from foreign countries, it also adds to the diversity of the company.
The blend of dissimilar perspectives allows the group to look at problems from all different angles. That creates innovation, as well as jobs, more tax revenue, and higher stock prices.
IT outsourcing allows companies to hire the best workers, regardless of where they live. This freedom enables firms to hire to meet their skill needs.
There are also disadvantages to IT outsourcing. Many point out that outsourcing takes those jobs away from American workers. That's despite the Department of Labor regulations. They require that the company proves it cannot obtain the needed business skills and abilities from the U.S. workforce.
In 2014, almost 30% of H-1B visas went, not to individuals, but to 10 firms. Five of the 10 firms are headquartered in India, four in the U.S., and one in Ireland. All have large workforces in India and other low-cost countries.
Another downside is the risk of national security breaches and cyber attacks. That could occur when transferring sensitive data to a foreign company.
Improves efficiency and competitiveness
Enhances international relationships
Increases cultural diversity and innovation
Companies are free to hire the best workers in the world
Fewer jobs for American workers
10 foreign companies used 30% of H1-B visas in 2014
Cyber security risk
Protectionism and IT Outsourcing
Protectionism occurs when the government bans or otherwise restricts free trade. In this case, that includes limits on IT outsourcing.
For example, a limit on H-1B visas prevents U.S. companies from hiring the best workers from all over the world. A minimum salary threshold for H-1B visa workers increases business costs. That also makes U.S. companies less competitive.
The strength of the U.S. free-market economy is due to the open environment that allows innovators, technologies, and organizational forms to emerge and compete. This encourages productivity and reduces stagnation. To remain competitive, the U.S. needs to foster this environment and not focus on protectionism that inhibits it.
How Can IT Outsourcing Be Reduced?
One way to reduce IT outsourcing is to address the supply side of the problem. Federal grants, loans, and subsidies will encourage more U.S. college students to graduate in science, technology, engineering, and math (STEM) areas. Educating the American workforce will help to decrease reliance on importing new workers.
Reducing the number of H-1 visas or banning outsourcing will reduce outsourcing, but at a cost to companies and the economy.
Restrictions on the labor supply could reduce the competitiveness of U.S. based companies.
Any attempts to reduce IT outsourcing will only go so far. U.S. workers still require higher wages than emerging market workers to afford the American cost of living. That will raise corporate costs and, ultimately, consumer prices.
Outlook on IT Outsourcing
New IT services drive demand for technology outsourcing. Since they are new, that makes them ideal for outsourcing. Companies are interested in the latest in intelligent automation, artificial intelligence, and blockchain.
Cloud solutions have allowed outsourcing of in-house data centers and business processes. A 2018 Deloitte survey found that 93% of firms are considering or have already adopted cloud solutions. This enables on-demand access to computing networks, servers, and storage.