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 wagesin 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.
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.
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.
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.
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
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.
ModelDescriptionSampleWorkforce 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.
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.
Read more about Benefits, Risks and Trends of IT Oursourcing here https://blog.sumatosoft.com/it-outsourcing-2019-overview-trends/