Outsourcing term has recently been discussed a lot by businesses and entrepreneurs. In general, outsourcing is engaging any third party, either local or international, organization or individual outside of the company to manage some business activities for business.
“Master your strengths, outsource your weaknesses.”
Ryan Khan, Founder of The Hired Group
1. What Is Outsourcing?
Today it has become a very common practice to work with external vendors to process various business activities, starting with operational things like payroll, inventory management, content development, or hiring through an employment agency to business processes management.
It is a practice which is becoming more and more widespread that allows companies of all sizes to do their business and grow without major risk or investment when it’s done correctly.
Some Interesting Stats
- The global market size of outsourced services reached $85.6 billion in 2018. (Statista)
- In 2017 65% of the companies that have outsourced have continued to do it in 2018. (Outsourcing Insight)
- In terms of value, about 84.2% of outsourcing deals originated from the USA, followed by the UK at 5.2%. Spain and Australia were two other key outsourcing markets. (KPMG, 2017)
- The Deloitte survey results confirm a significant increase in organizations using outsourcing to enhance M&A efforts—from 45 percent in 2016 to 67 percent in 2018.
- The top three benefits identified by Deloitte research in 2018 are to reduce the need for transition service agreements (34%), to accelerate the integration of the new organization (33%), and to lower operating costs of the acquired entity (31%).
2. What Is IT Outsourcing?
IT outsourcing is the practice of working with external vendors to handle some information technology functions.
2.1. Top 10 Outsourced IT Functions
|Application development||a service provider is responsible for developing new or enhancing existing applications (web, mobile, etc)|
|Application maintenance & support||a service provider takes over ongoing maintenance of existing applications|
|Data center operations||a service provider helps to operate the data center (alone or with the help of inhouse team)|
|Database administration||a service provider monitors and tunes databases (can be done at the physical or logical levels)|
|Desktop support||a service provider is responsible for installation, maintenance, or support of PCs|
|Disaster recovery||a service provider is responsible for off-site data storage, recovery data centers, or redundant systems or networks used in the event of a disaster|
|Help desk outsourcing||a service provider deals with any type of phone or electronic response to end-user incidents|
|IT security||a service provider performs security-related functions (security assessments, penetration testing, managed security services, etc)|
|Network operations||a service provider is responsible for data network operations and monitoring|
|Web hosting and operations||a service provider hosts, operates, or maintains a corporate website / application/ ecommerce platform|
Some Interesting Stats
Currently, IT outsourcing (ITO) and Business Process Outsourcing (BPO) dominates the outsourcing global industry today.
- Revenue of the global ITO industry in 2018 reached at $62 billion. (Statista)
- The revenue of the global BPO industry in 2018 was at $23.6 billion. (Statista)
- 31% of IT services was outsourced in 2017. (Outsourcing Insight)
- 37% of companies planned to increase the amount of work to outsource for app development in 2017. (IT Outsourcing Statistics 2017/2018)
- Total budget for IT outsourcing rose from 10.6% in 2016 to 11.9% in 2017 and keeps growing in 2019. (Logicfy)
3. Why Companies Outsource?
Following the research made by Deloitte, there are a few reasons why companies outsource.
- 59% of companies outsource to reduce or control costs.
- 57% do it to focus on business objectives.
- 47% to solve capacity issues.
- 31% to improve service quality
- 28% to take help from talented professionals
- 17% to manage their business environment
Also, one of the key points for IT outsourcing is a search for innovations. Recently, Deloitte found a significant increase in organizations exploiting marketplace innovation to drive business value.
Three levers that saw the greatest increase between 2018 and 2016 are:
- Moving additional services to providers as they innovate (49% in 2018 vs. 20% in 2016),
- Making innovation a key component of the contract (43% in 2018 vs. 21% in 2016), and
- Increasing provider compensation as they innovate (37% in 2018 vs. 16% in 2016)
Clearly, organizations are proactively driving innovation.
3.1. IT Specialists Market Overview
One of the reasons why companies outsource their IT tasks is getting access to additional IT specialists with experience and expertise needed. Finding them can be a challenging task for most businesses. To give a clear picture why this point is becoming one of the drivers for IT outsourcing growth, we would like to make a short overview of current IT jobs market overview.
The demand for new specialists experienced in complicated technology is considerably increased in the USA, Canada, and Western Europe.
The US Bureau of Labor Statistics data shows: software development is among the most demanded professions and is on the top of the median earnings. These regions are facing the most prominent a lack of workforce. As the demand in higher than the supply, the available specialists increased their service prices significantly.
The Bureau of Labor Statistics predicts the employment growth of 31% by 2026 in the USA. About 255,400 IT jobs are expected to be opened up within this period. Besides, we see the increase of wages in the IT sphere.
Source: LinkedIn Research
This is the growth of approximately 3% while the general U.S. wage growth is 1,8%.
Such factors as a specialty, education, employers, and regions should also be considered. Metropolitan cities are definitely best-paid regions. Cities like San Francisco, NYC, Seattle, San Jose, California are among the most expensive places to hire a software developer in an entire world.
This is where the outsourcing to the software development companies starts growing. Today, in 2019, working with IT service providers has become not only a way to save some budgets (which previously was one of the key points), but also a way to get access to highly qualified specialists with the required expertise for the business.
3.2. Increasing IT budgets
Today we can also observe constant IT spending growth. It takes into account all expenses on technologies upgrade, better customer experiences, security, business management.
Since the spendings grow by 2-3% every year, the market requires thousands of new skilled developers of various technologies, old and new ones
4. Forms of Outsourcing
Outsourcing is an umbrella term and it has a few types depending on the location of the 3rd party service provider chosen to work with.
|Offshore outsourcing||It is outsourcing of services to some company or individual located at a distance. Usually, the offshore outsourcing results it lower labor costs, better economic conditions, time zones, or a larger talent pool. Time difference with the service provider is at least 5-6 hours.||A US business outsources app development to a Belarusian company.|
|Nearshore outsourcing||It is outsourcing of services to some company or individual located not far from the location of the business. Nearshoring may result in smoother communication compared to offshoring thanks to the less time difference and cultural crossover. Time difference with the service provider is about 2-3 hours.||A company based in Germany hires an iOS developer from Belarus.|
|Onshoring (homeshoring)||It is about hiring a service provider within national borders. Usually the chosen location has lower operational and labor costs.
Occasionally, the term “homeshoring” is also used to describe hiring remote employees working from home.
|A US company hired an accounting company within the state.|
|Multisourcing||It is outsourcing business processes to multiple vendors in order to diversify the risk in vendor operations.||A UK-based company has several internal IT projects and works with various IT companies on them.|
4.1. Main Regions for IT Outsourcing
Outsourcing destinations are usually grouped by the location of the companies. However, they are also characterized by other criteria like:
- language requirements
- cultural similarity
- time difference
- service costs
|Eastern Europe||High quality education and expertise||Good English||Closely matched to the Western one|
|Asia and the Middle East||High amount of developers, however, the qualification may differ greatly||Still-improving||Eastern mindset is totally different from the European one.|
|Latin America||Sometimes immature business processes and lack of technical skills||Relatively low English level||There are cultural differences which should be taken into consideration|
Overlapping working hours
|Region||Eastern Standard Time (EST)||Central European Time (CET)|
|Eastern Europe (Eastern European Time, EET)||4 hours||9 hours|
|Asia (India Standard Time IST)||2 hours||3 hours|
|Latin America (Mexico, CST)||8 hours||3 hours|
Global Software Outsourcing Rates
4.2. Why Belarus Stands Out Among Other IT Outsource Destinations
Key facts about Belarus as one of the most attractive locations for IT outsource.
1) Location: Belarus is situated in the center of Eastern Europe, 2–3-hour-flight away from European capitals and connection hubs.
2) Time-zone: The country resides in UTC/GMT+3, and has good working hours overlap with European and U.S. time.
3) Population and Language: Among more than 9.5 mln of Belarusians many are fluent English speakers
4) Visa: As of 2017, Belarus is open for no-visa entry and up to 30-day stay for the citizens of around 80 countries (including 39 European countries and U.S.)
5) IT Maturity: Belarus stands 4th among leading outsourcing destinations of CEE.
6) IT Professionals: More than 40,000 people are involved in the IT sector, and every year Belarusian universities provide additional 4,000 young specialists. Around 90% of developers in Belarus have at least one university degree.
7) IT Partners: Belarus hosts 123.5-acre Hi-Tech park that has brought more than $1bln in 2018 only.
8) IT Quality and Cost Ratio: Outsource from Belarus is highly valued due to 30–60% average saving in development costs and solidly outstanding level of quality.
9) IT Brands Made in Belarus: Epam, Wargaming, Viber, Maps.Me, Juno, MSQRD, Flo etc.
5. IT Outsourcing Models
Besides outsourcing types based on the location, there are also 3 main outsourcing models that describe the relationships between the business and the IT service vendor.
|Workforce augmentation (staff augmentation)||It is a strategy for getting required personnel for short or long-term projects avoiding costs of hiring new full-time workers. The staff augmentation vendor takes care of infrastructure and other costs related to having full-time workers. The business is the one supervising, leading, and managing resources.||A US-based startup makes an app and they need some additional resources to release the application before the deadline. They manage all the development inhouse. They ask a Belarus-based company to provide them with an iOS developer.
This employee remain on the staff augmentation company’s payroll, but still function as full-time employees of the US company.
|Project-based outsourcing||It’s a strategy that allows businesses to partner with IT service providers that have exclusive expertise that is lacking in-house.
Project-based outsourcing works best if the type of work outsourced constitutes the stand alone meaningful part. In this case, business is responsible for high-level business management of the project.
|A Dutch logistics company partners with an app development company in Poland to develop an app for their business processes automation. The logistics company provides the business requirements, but doesn’t manage the development process directly.|
|Dedicated development center (DDC)||It is a model when a company locates its dedicated resources in a different country to get access to additional talent resources and benefit from lower labor costs and/or taxes, while maintaining full control over the work process.
The model has some risks:
- doing the recruitment in an unfamiliar location;
- learning the ins and outs of local labor laws and taxes.
The alternative is in partnering with an IT service provider that provides recruitment services, office facilities, and keeps your developers on their payroll for a fixed fee. However, it usually makes sense if it will be a big office with at least 10 people.A UK company partners with an IT service provider in Latvia that recruits and hires 10 software developers for the partner. The developers work directly with their UK management while being on the Latvian vendor’s payroll.
6. Benefits of IT Outsourcing
There are many proven strong sides of IT outsourcing which the companies can benefit from. Here are just some of them.
- Cost Advantages.
It is one of the most obvious benefits which outsourcing may bring. Business is done for making money and the less operational costs are, the more companies will be able to invest into its future development.
Costs are saved thanks to the optimization of the following things
- Hourly rates
- Equipment & infrastructure
- Recruitment and hiring costs
- Increased Efficiency & Innovation
Outsourcing bring new additional resources into the project which results in faster work and, thanks to the introduction of effective practices and skills, increased efficiency of the team. In fact, it becomes the main reason for outsourcing which is now called disruptive outsourcing.
- Access to Skilled Resources & Staffing Flexibility
As it was mentioned and proved about, the demand on the skilled IT specialists will grow. Fast. IT outsourcing in an option to get access to trained and experienced developers the moment the business needs them (especially for the companies that have seasonal or cyclical demands).
- Internal Staff Education
One of the reasons for working with a 3rd party service provider is that the inhouse team doesn’t have the required knowledge and/or skills. Outsourcing (especially on-site) may result in improving inhouse team qualification thanks to the knowledge sharing and mentoring by the IT company specialists.
- Focus on Core Activities
Working with an IT service provider allows business owners to focus their activities on the strategic things – planning, research, brand building, sales and marketing, business processes optimization, etc. Outsourcing also enables business owners to plan and execute more effective projects or, vice versa, experiment and find new unusual solutions.
- Operational Costs Control
IT service providers are responsible for keeping control over the time & budget of the project (especially if it is a project-based cooperation).
- Time Zone Advantage
Even though time difference may seem to be a challenge for working with a remote team, it has its own advantages. One of the most prominent – the business start working round-the-clock and if the process is well-established the work may even be more effective than working in the same time zone.
- Continuity and Risk Management
Outsourcing companies ensure a level of continuity to the clients thanks to reducing the risk of employee turnover. Also, one important factor in any business is risk assessment and analysis. IT experts will plan and mitigate potential risks.
- Project Management Simplification
Success of the project depends a lot on the quality project management and on how well business owners can organize cooperation of the team. Outsourcing on project-based model already includes project management. If it is an outstuff model, there are lots of project management tool which can help in this process automation.
- Work Relationships Simplification
Work with service providers is based and regulated by official agreements signed which makes the whole cooperation simpler and less risky.
7. IT Outsourcing Risks
- Less Control
When everything is done in-house, companies have a better control of what is done and the way it is done. Outsourcing companies should be able to present and deliver results and detailed reports on the work done.
- Might Be Hidden Costs
It may appear in case if the companies don’t review contracts thoroughly before starting the work with service providers.
- Security Risks
Data protection is essential today. Before the cooperation start, companies should review the way IT outsourcing companies manage data and make it secured.
- Dependency on Provider
Work with 3rd party vendors always brings some dependency on the vendor. That’s why it is crucial to check the stability and reliability of the outsourcing company.
- Time Frames Shift
One major disadvantage of outsourcing is the risk of difficulty of synchronization of the teams in order to ensure stable and on-time delivery.
- Language and Cultural Barrier
If it is not an onshore outsourcing, the chance to work with a non-native speakers is high. English is used by default in communication. Some details of instructions may be lost in translation, especially if English is not a native language both for the company and the service provider. The same applies to the cultural differences. Both sides should take into accouте language and cultural differences while setting up the cooperation.
8. IT Outsourcing Trends
Following the Deloitte 2018 research, There are 3 key trends emerged
Outsourcing is enabling competitive advantage.
Cost optimization remains one of the goals for outsourcing. However, it is not a leading one any more. The companies understood that disruptive outsourcing, when done well, will deliver “deliver competitive advantage by transforming the way organizations operate, and making them more agile, efficient, and effective. The advantages are obvious to respondents: approximately 84 percent of them have either initiated discussions, conducted pilots, or have implemented at least some disruptive solutions.”
Organizations are embracing disruptive solutions such as cloud and robotic process automation (RPA).
Almost all organizations — 93% — are already considering or adopting cloud solutions and 72% are considering or adopting RPA solutions.
70% believe their service providers have a reasonable or advanced ability to implement disruptive solutions.
There are real challenges with adopting disruptive solutions.
There are some challenges which companies should manage in connection with cloud adoption – data migration, security requirements, and application optimization/change are among them. Also, companies face with organizational resistance, highly fragmented processes, and regulatory restraints when it comes to RPA adoption.
9. In Conclusion
The term IT outsourcing gained some not very positive sides. Business owners have heard some stories of unsuccessful experience and now are very sceptical about working with people who they might not meet personally ever. However, just like in any business field, there are companies which do things right and those which provide low-quality services or produce low-quality products. Today the competition in the IT sphere grows and IT companies should provide quality services to grow.
So, just like Lee Kuan Yew said “If you deprive yourself of outsourcing and your competitors do not, you’re putting yourself out of business.”
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