Although outsourcing has been around as long as work specialization has existed, in recent history, companies began employing the outsourcing model to carry out narrow functions, such as payroll, billing and data entry. Those processes could be done more efficiently, and therefore more cost-effective, by other companies with specialized tools and facilities and specially trained personnel.

Currently, outsourcing takes many forms. Organizations still hire service providers to handle distinct business processes, such as benefits management. But some organizations outsource the entire IT Departmental operations. The most common forms are information technology outsourcing (ITO) and business process outsourcing (BPO).

Business process outsourcing encompasses call center outsourcing, human resources outsourcing (HRO), finance and accounting outsourcing, and claims processing outsourcing. These outsourcing deals involve multi-year contracts that can run into hundreds of millions of dollars. Frequently, the people performing the work internally for the client firm are transferred and become employees for the service provider.

Some firms that are short on time and/or money, such as start-up software publishers, apply the multisource method, utilizing both internal and service provider staff. They hire a multitude of IT outsourcing service providers to handle almost all aspects of a new project.

The process of outsourcing generally encompasses four stages: 1) strategic It outsourcing thought process, to develop the organization's philosophy about the role of IT outsourcing in its activities; 2) evaluation and selection, to decide on the appropriate IT outsourcing projects and potential locations for the work to be done and service providers to do it. 3) contract development, to work out the legal, pricing and service level agreement (SLA) terms. 4) IT outsourcing management or governance, to refine the ongoing working relationship between the client and IT outsourcing service providers.

IT outsourcing success depends on three factors: executive-level support in the client organization for the outsourcing mission; ample communication to affected employees; and the client's ability to manage its service providers. The IT outsourcing professionals in charge of the work on both the client and provider sides need a combination of skills in such areas as negotiation, communication, project management, the ability to understand the terms and conditions of the contracts and service level agreements (SLAs), and, above all, the willingness to be flexible as business needs change.

The challenges of IT outsourcing become especially acute when the work is being done in a different country (offshored), since that involves language, cultural and time zone differences.

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