Outsourcing in a Global Economy: Traditional Information Technology Outsourcing, Offshore Outsourcing, and Business Process Outsourcing

The notion of outsourcing — making arrangements with an external entity for the provision of goods or services to supplement or replace internal efforts — has been around for centuries. Kakabadse and Kakabadse (2002) track one of the earliest occurrences of outsourcing to the ancient Roman Empire, where tax collection was outsourced. In the early years of American history, the production of wagon covers was outsourced to Scotland, where they used raw material imported from India in the production process (Kelly 2002). Outsourcing remained popular in the manufacturing sector, with part of the assembling in many industries being sub-contracted to other organizations and locations where the work could be done more efficiently and cheaply (Vaze, 2005). Commenting on this unstoppable trend, Pastin and Harrison (1974) wrote that such outsourcing of manufacturing functions was creating a new form of organization which they termed the “hollow corporation” (i.e., an organization that designs and distributes, but does not produce anything). They note that such an organizational form would require considerable changes in the way organizations were managed. While they limited their research to the role of management in the hollow corporation, they comment on the substantial (and unpleasant) social and economic changes that the outsourcing of manufacturing was causing.

It was not long before the idea of outsourcing was applied to the procurement of information technology (IT) services also. While the current wave of IT outsourcing can be traced back to EDS' deal with Blue Cross in the early sixties, it was the landmark Kodak deal in 1989 that won acceptance for IT outsourcing as a strategic tool. Many large and small outsourcing deals were inked in the years that followed. From its beginnings as a cost-cutting tool, IT outsourcing has evolved into an integral component of a firm's overall information systems strategy (Linder, 2004). Still, reducing costs is an idea that never loses its appeal, and the opportunity to meet the IT demands of the organization with a less-expensive but well-trained labor pool has led organizations to look past their national borders, at locations both far and near, for such resources. Recent statistics vouch for the continued acceptance and popularity of IT outsourcing as well as this trend towards outsourcing to different global locations. A Gartner study conducted in 2004 placed global IT outsourcing at $176.8 billion in 2003, and suggested that it would grow to $253.1 billion in 2008 (Souza et al., 2004). A recent IDC Report noted that the IT service market has now reached $746 billion (Fogarty, 2008). While outsourcing has grown beyond the domain of IT embodying decisions such as where and how to source IT to a much wider set of business functions, IT outsourcing still leads the pack with 67% of all global outsourcing deals in 2004 being related to IT (Pruitt, 2004). This inexorable trend towards outsourcing and offshoring brings unique sets of challenges to all parties involved. Western organizations have to walk a tightrope between the savings and efficiencies that offshoring could provide and the adverse reactions from a society increasingly disenchanted by the job displacement and loss that outsourcing brings.