IT Outsourcing has become a massive wave today and holds an untapped potential as an economic driver for the industry.
The Gartner Glossary in the context chalks out various facets of IT Outsourcing, which we will extrapolate and explore in the blog. With the growth of the Outsourcing IT Services market projected to reach multimillion USD by 2028, it highlights the need for CTOs to study the trend.
Yes, you may have an in-house team; however, the statistics and benefits of IT Outsourcing (ITO) are too hard to ignore. How does the trend impact global employment in the future? Keep reading the blog to learn all about successful IT Outsourcing.
What is IT Outsourcing?
The pandemic changed a lot of things. And one of the profound impacts that hit us all is the spectacular growth of the global IT Outsourcing market. So, how big is the market? What is it? Let's start with the latter.
Picture a proficient software development company handling your operations. Wait! That's not all. Let’s add more facets—they can take care of your projects, tasks, mobile, and web application development, and more. Right! You've got it. That's IT outsourcing where you hire (partner with) a third-party company and delegate requirements, which may include:
- Bespoke (custom) software development
- Software testing
- Maintenance of support
- Cloud computing
- Blockchain or IoT (Internet of Things) consulting
- Data Science
- Fintech software (offering Fintech services)
- UI and UX design
- Mobile and web application development
When you outsource, it will help save time, money, and resources. Plus, you get a competitive edge to your business because you can focus on the essential core functions. If you’re still not convinced, here are some exciting insights:
- According to Statista, the global market size of outsourced services stands at 92.5bn USD. (Source)
- Around 92% of G2000 companies use IT outsourcing. (Source)
- The global IT Outsourcing market was valued at $520.74 billion in 2019.
- It is anticipated to grow at a CAGR of 7.7% by 2027.
- IT outsourcing spending is expected to exceed $1.3 trillion by the end of 2023 as companies step up their search for digital transformation experts to help their business gain a competitive edge, discover new efficiencies, and boost productivity.
- According to GrandViewResearch, the global IT services market (in-house and provided by third parties) was worth around $715.93 billion in 2020. Plus, the size of the global IT Outsourcing (ITO) market was valued at $556.67 billion in 2020, accounting for 77.75% of the overall market. (Source)
- The IT services market has an estimated CAGR of 8.4%, and the ITO market of 7.7%. On that basis, the ITO market would be valued at around $ 806.63 billion.
Different Types of IT Outsourcing
Onshore outsourcing (aka domestic outsourcing) is obtaining services from a third-party software development company from within the same country (or region) where your company is located. For example, many companies in the United States may outsource work to places like Canada, Raleigh, or even Mexico. Often this type is also called local outsourcing.
CTOs who are considering hiring specialists from their own country—you may want to check the costs. Typically, they are more expensive than offshore or even nearshore outsourcing.
Offshore outsourcing is where one hires an external organization to perform predefined business functions. The hired firm will be from a country other than where the products or services are developed (Offshore). You will work with a development company from another country or continent in a different time zone.
The top destinations for offshore outsourcing (for US companies to look for offshore development centers) are Eastern Europe, Asia, Latin America, India, and Singapore.
Nearshoring can be seen as a special form of Offshoring. Here outsourcing pertains to business processes, especially information technology processes, to companies in a nearby country, which could be to places sharing a border with the target country.
For example, if a company is based in Germany, the nearshore locations could include Poland, the Czech Republic, and Serbia.
So, why nearshore instead of offshore? One of the top things that nearshoring offers is maximizing business efficiency and reducing the barriers of traditional offshoring.
Cloud computing-based outsourcing
When you think of cloud computing-based outsourcing, the type has all functions online (that is, from making a deal to rolling out the project). Simply, it encompasses models like—Software as a Service, Platform as a Service, and Infrastructure as a Service.
Here is a peek at Outsourcing models.
IT Outsourcing Models
Here's the thing: depending on the business needs and business case, you will need a specific type of service embodied in an apt model for an IT service. So, the model can vary from one project to another.
Some popular cooperation models include staff augmentation, project-based outsourcing, dedicated team, and ODC (opening an offshore development center).
- Staff augmentation: Under this strategy, CTOs can look out for hiring some top-notch tech specialists on external bases (both short or long-term projects). The model is an excellent way to expand your current team. Plus, it helps to boost productivity and achieve your goals.
- Project-based outsourcing: Consider this model when you wish to hire a team of specialists to implement the part of work that is already planned and defined. The model is quite apt for projects that aren't complicated and have well-researched functionality, which will remain the same (with no changes) during the development process.
- Dedicated team: In this model, you may hire remote developers to develop a project and report directly to you. The model works well for clients who need long-term cooperation as their projects require significant work. With a dedicated team, you will enjoy complete control over the project, and more flexibility with the project costs as you can change the team size as requirements change.
- Offshore Development Center (ODC): The model is ideal for startups and large IT companies. When understanding an ODC, think of it as a development office with a team of software engineers located in an offshoring country.
IT Outsourcing Pricing Models
Pricing models have evolved in the IT outsourcing industry. With its pivotal role in a successful outsourcing relationship, let's look at the top models you'd come across.
- Fixed price: The price for the project is decided at the start. You may think of the model for projects with clear scope, objectives, and a stable set of requirements.
- Time and materials: The model is typically used in app development and maintenance projects that require a prolonged time duration. The outsourcing company may agree on a monthly rate (on an hourly basis) for the resources engaged in the project.
- Cost plus model (Open book pricing model): Here, the service provider is paid for the actual expenses incurred for services. Moreover, you will have to pay an additional fixed fee or incentive (as pre-decided by both parties involved).
- Incentive-based: The model is typically used with traditional models like Fixed Price or Time and Material. The outsourcer will offer bonuses or incentives when the service provider achieves key metrics. The metrics may be something that adds more value to his business; for example, it could be early completion, delivery exceeding service levels specified in the contract, etc.
- Shared risk/Shared reward: According to Gartner, the model encourages the provider to develop innovative ideas and solutions that help boost the client's business. It also mitigates the risk associated with new technologies by spreading it to both parties. Here, the provider and the client jointly fund the development of new products and solutions. The profit gets shared between both parties for a specified period.
- Pay as you use/Pay per unit: Here, the service provider offers a unit-based set rate, and the outsourcer can pay for the service availed based on consumption.
- Gain sharing: The model is based on rewarding the service provider for delivering services above the contractually stipulated levels.
Key Benefits of IT Outsourcing
IT outsourcing is preferred by many businesses and can be advantageous for yours too. How? Here are the most popular reasons.
- Cost-reduction: When you hire an IT outsourcing team, you can save on items such as office rent, employee salaries, vacations, insurance benefits, or recruiting expenses. Moreover, you can enjoy lower prices charged by developers in offshore nations. The savings can then be invested to create an MVP (Minimum Viable Product).
- The global pool of talent: Imagine the power of benefitting from a talent pool with a broader range of skills.
- Time-saving: A great way to reduce expenses and speed up the development process is to hire an IT outsourcing team. Not only is it an excellent option, but you can also eliminate spending time training new staff, as the outsourced developer will already have the necessary skills in place.
- Increased flexibility: It will now be easy to find developers who can quickly adapt to the technological stack. Thus, you can enjoy the flexibility of finding resources who can seamlessly integrate and work on diverse projects irrespective of the technological stack or the project’s scope.
- Fast project time to market: Outsourcing projects can get you access to immediate technical help. Thus, the project's time to market accelerates.
- Latest tools and technologies: You can enjoy futuristic digital solutions, as the outsourced developer comes in with know-how of the latest technologies and leverages different tools.
How to Choose the Right IT Outsourcing Company?
1. Technical and domain knowledge experience and expertise
Experience and expertise are core necessities in outsourcing. When the outsourcer has relevant experience, they can help walk you through the futuristic solutions and advise you.
Plus, it helps to have a team aboard who can impeccably work on your target system's environment or pick a complex project. You can enjoy peace of mind and know you're not buying unnecessary risks.
2. Helps meet your scalability goals
Here's an exciting statistic: around 43% of US companies outsource IT jobs. With the right outsourcer, it can help you to create new offshore remote teams. Plus, you can watch your IT infrastructure grow.
You can focus on scaling your in-house team. However, it can get both expensive and time-consuming. Outsourcing IT services also offers the excellent option of an on-demand team at a reduced cost.
3. Company culture
Picture this: you work with a partner (vendor/outsourcer) who shares the same values; plus, you understand each other intuitively. That’s a great work environment!
The cross-cultural facets of business can bring in synergies while working, but it can also get tricky. For example—western societies tend to consider deadlines as crucial. Thus, it matters to partner with someone who shares the same sentiment about deadlines.
With two worlds of both the parties blending and having a work eco-system that's more relaxed and with good vibes, it makes collaborating easier. Plus, what's more: you have a successful IT outsourcing formula.
4. Company processes and communication standards
IT outsourcing companies typically follow a benchmark of quality service. You will find that the experienced outsourcer will support your business's mission and values.
As CTOs, you should ensure that they understand the scope of your business. The core essential is critical to identifying your problem and developing viable solutions.
It would help to think of how you wish to communicate before, during, and after the project. For example—when do you want to have a face-to-face meeting? Select the communication channel as a part of your strategy.
When you have well-established processes and communication standards, it helps to see the project shape well. With agile processes, you can tweak your projects and maintain top-notch quality. The right outsourcing firm will always maintain clear communication. They also seamlessly communicate to dissolve the language and cultural barriers.
5. The onboarding process for clients
It would be ideal to have a client onboarding process in place. Why? The advantages are apparent—it chalks out every step that is understandable for both parties.
If you are wondering how to start preparing for the onboarding process, begin by making an elaborate document containing all the information needed to get started. For example - state who the project's stakeholders are.
It's always nice to build a strong foundation based on a framework with the outsourcer. Plus, it also helps to set mutual expectations.
6. Emergency plan and risk management
One of the keys to determining whether the project is successful or not is the ability to manage risks effectively. Thus, having emergency plans can help you assess and control threats.
It is more than critical post-pandemic to check how outsourcers can work in uncertain and volatile environments. A robust risk management plan will help deal with hazards and unexpected events before they occur, creating a sustainable future.
The outsourcing company should carry out a report on ensuring that the project keeps running seamlessly and succeeds even through unexpected issues that may come up during the development of the project.
7. Data management
With the onset of the pandemic and the new normal of remote working, security and data privacy have become bigger concerns than before. Thus, one must consider this when choosing the right technology vendor.
Outsourcing a project involves sharing sensitive information with the outsourcer. Thus, you would want to ensure that the data is safe.
As CTOs, you must ensure that the outsourcer uses the latest security technology. Plus, ensure that all activities comply with the GDPR. Moreover, take all necessary steps to prevent any data leaks. Consider hiring a vendor who regularly checks out the network and security.
8. High-quality product
One of the most critical facets of successful IT outsourcing is ensuring that the vendor offers high-quality service. It is the heart of successful IT outsourcing—and it is one of the most crucial aspects of choosing a vendor.
Look for vendors who can provide mock-ups before any final code writing. Furthermore, it can be tweaked and improved based on user feedback and opinions.
Yet another point to check is to see if the vendor performs code reviews and functional testing. You may choose an outsourcer that tests for regression. Ultimately, the code needs to be well-tested and follow the best practices to achieve long-term success and allow your software to work without any bugs.
Businesses today must explore the long-term benefits of IT outsourcing. A successful partnership needs time, patience, and accurate planning.
However, when your business adopts a comprehensive outsourcing approach, it can help with exceptionally high service quality. Plus, it can help set a clear path to creating a more sustainable and successful outsourcing strategy that blends with your business goals.
It's time you get ready to unleash your potential and find your business soar.
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We are an award-winning web and mobile app development company in Raleigh with incredible experience partnering with businesses and helping with dedicated IT outsourcing services.
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