The size of the global IT outsourcing market reached almost $100 billion in 2020, according to Statista, proving just how immense the IT outsourcing industry has become. What is IT outsourcing, its main types, and why should companies adopt it? With 29+ years of experience in IT outsourcing, we’re well placed to answer these questions.
What Is IT Outsourcing?
T outsourcing is a general term that describes processes ranging from developing a specific solution to executing separate IT functions. Most frequently, companies rely on third-party providers to perform the following operations and business processes:
- Project implementation
- Maintenance and support
- Migrations and upgrading
- Quality assurance and audit
- IT infrastructure enablement
Entrusting IT operations to external vendors allows companies to gain immense benefits. These are:
- Focus on core business objectives. Companies can focus on first-priority business objectives while IT becomes the vendor’s responsibility.
- Deep subject-matter expertise. Developing the required skills may take months and years, while an outsourced team provides them in no time.
- Cost-effectiveness. Building, training, and supporting in-house staff, as well as addressing related difficulties, outstrip the cost, especially if a company needs a one-off project.
- Short lead time. Businesses can kick off projects immediately and quickly adjust to changing requirements without building and training an internal IT team.
- High competitiveness. Companies can implement advanced technologies in their business operations, which results in highly competitive services and products.
- Quick management of issues and minimal downtime. A professional team can quickly and reliably fix problems faster than an in-house support engineer.
- High software stability and reliability. The rich experience of outsourced specialists allows them to anticipate and proactively fix problems.
- 24/7/365 monitoring and support. With external IT experts, a company can monitor its workload non-stop.
These services may also be limited in some ways. These are:
- Communication issues. The remoteness of the client from the outsourced team and the time difference hinder communications.
- Cultural differences and language barriers. Cultural and language barriers may significantly complicate cooperation between the client’s and service provider’s teams.
- Compromised security. Third-party access to assets and sensitive data may threaten security.
- Lack of control. The remoteness of IT experts complicates monitoring and control.
- Time lost adjusting to the client’s specifics. Even service providers focusing on a particular industry or business domain must adapt their operations to a client’s specifics.
- Hidden costs. Benchmarking and analysis, selecting a business partner, transferring business processes and knowledge to an external provider, and staffing support may result in unexpected costs.
IT Outsourcing Models
With a project in mind, a CTO maps it out and determines whether the in-house IT resources can handle the required scope of work. One of three outsourcing service models can be chosen depending on the situation.
Also known as full-process outsourcing, this model is the most popular in IT outsourcing. The IT vendor is granted complete control and responsibility for the project, including all process stages, team management, results, deliverables, and risks.
The client forms a development unit comprising the vendor’s experts. Full-process outsourcing helps companies build long-lasting relationships with their partners.
- Minimum involvement from the client, which allows the client to focus on first-priority tasks and processes
- The Service Level Agreement provides solid results and clear, predictable outcomes
- Access to expertise and knowledge that the IT vendor possesses, which makes it possible to realize ideas of any complexity
- Vendor responsible for any risks and difficulties
- The client has little control of the development process.
- Project kickoff takes more time compared to other models.
We recommend this option if you don’t have sufficient IT expertise or if other software projects take up your IT resources. This mode of cooperation ensures continuity and suits companies requiring long-term services.
To build transparent and accessible cooperation under this model, the client appoints a project manager (PM) to communicate with the vendor’s PM and control reporting and workflow as frequently as required.
Project requirements are agreed upon with the client beforehand and then provided in the specification for further reference. The vendor is responsible for the project and its management, particularly for the agreed deliverables and timeline.
Also known as the managed team, in this outsourcing model, the vendor works with the client’s in-house IT department on a specified scope of the assigned project. The dedicated team works independently: it doesn’t get fully integrated into or work as part of the client’s staff.
The vendor’s PM manages the team, and the communication is done by the client’s and the vendor’s PMs. Responsibilities and risks are shared between the two parties.
The advantages of using a dedicated team are very similar to those of full-process outsourcing:
- Quick ramp-up and upscaling, as dedicated teams are usually assembled by the vendor beforehand, and their structure is well thought out but quickly adjusted to project requirements
- Little effort and time is invested in project management, as this is the vendor’s responsibility
- Better control of processes and deliverables, as in-house specialists are also involved
- Access to the vendor’s best practices and expertise
- Kick-off may take some time as processes and workflows are being set up
- Communication and collaboration issues may arise
- Not suitable for short-term cooperation
We recommend using a dedicated team if you already have an in-house IT department and tried-and-true procedures, but:
- they are insufficient for the specific project
- your project requires particular expertise that your staff lacks
- you don’t want to hire new staff
- you would like to be involved in the decision-making.
This model suits perfectly when in-house developers are engaged with the core product, and there is a side project to work on. It’s a good option when you need software maintenance and support.
When working with a managed team, the client prepares project requirements beforehand so the vendor can assemble the team accordingly.
This model is known as the extended workbench, outstaffing, and team extension. The name is very descriptive: the client incorporates the vendor’s specialists into its IT team and manages them. Usually, this cooperation is temporary. External specialists work with the client’s experts to fill specific positions, and the client is fully responsible for the project.
- Flexibility and cost-efficiency, as the client can ramp up resources without the need to hire full-time specialists
- Quick and easy team upscaling according to client requirements
- Access to skills lacked by in-house specialists
- Complete control over the project, with the client in charge and third-party experts working as staff members
- The client takes on full responsibility for all processes and deliverables
- Possible cooperation and communication problems
- High risk of turnover of the extended staff
We recommend staff augmentation if you have:
- established and clear-cut development processes
- an in-house IT department and tech lead
- resource or skill shortages that third-party specialists can supply.
Staff augmentation works equally well for short- and long-term projects.
These three outsourcing models can be applied regardless of whether the client prefers an onshore, nearshore, or offshore service delivery model. Let’s have a quick look at each of them.
The onshore or local delivery model is based on engaging the local talent pool. There’s no doubt that geographic proximity encourages smooth communication; at the same time, onshoring is associated with higher labor costs and a limited pool of experts.
When using an offshore vendor, companies can take advantage of the vendor’s expertise and experience while ignoring its location. Offshoring allows companies to choose from the global talent pool and access the best experts at a reasonable price. Most offshore companies provide English-speaking experts, adjust their working hours to their clients, or open offices in different time zones to enable 24/7 communication.
An intermediate option, nearshore development, is done by vendors located in neighboring or nearby countries. The advantages of nearshoring over onshoring are lower costs and a larger talent pool.
SaM Solutions is an excellent example of a nearshore software development partner. We provide services to companies from the DACH region (Germany, Austria, and Switzerland). For this reason, we have an office in Germany to settle urgent matters and a development center in Belarus, which is only a two-hour flight away. Our development experts are fluent not only in English but also in German.
Outsourcing Pricing/Contractual Models
The choice of a pricing model is an integral part of the financial effectiveness of the project. Usually, the relationship between outsourcing service providers and clients relies on one of the following pricing models.
With the price determined at the start of the project and paid only when significant milestones are achieved, fixed-bid contracting places the financial risk on the vendor. The vendor must provide the required service at the promised price, regardless of the resources spent. Fixed price works well when clearly defined requirements, scope, and goals.
A clearly defined set of requirements and acceptance criteria is a prerequisite — it allows the client to evaluate deliverables properly. Estimations are based on the results of the initial analysis phase, which typically goes under a dedicated contract; any changes in the scope and deadlines must be registered in additional agreements.
Time and Materials (T&M)
The name is self-explanatory — payments are made based on the time and materials required for the project. The time and materials model is great for:
- flexible projects whose scope of work is challenging to estimate or predict and is agreed with the client before the billing period
- projects that have many unknown variables.
The client is billed based on the actual efforts required of the team members. Usually, the hourly rate for T&M is approximately 15% lower than that for the fixed price.
The Dedicated Team
In the dedicated-team (fee-per-team) model, cooperation principles are the same as those in the managed-team model. What about the pricing?
The vendor bills the client every month based on the agreed monthly rate of the team. As a rule, the hourly rate is lower than for T&M.
How to Outsource Effectively: a Piece of Firsthand Advice
Working with a reliable, experienced, and the proficient vendor is a must-have factor that drives success and efficiency. So, here are a few tips for finding the ideal partner.
- Look for good references. Ask your business partners, associates, or acquaintances for recommendations — the grapevine is the best way to check reliability and reputation.
- Check listings and ratings. Sites like Clutch, Good firms, DesignRush, and similar will give you an idea of the company’s background, experience, expertise, and client references.
- Make a benchmarking analysis. Time and money will be well spent on in-depth research: the more upright you are with your research, the more likely you are to find the ideal partner.
Combining these three methods will give you the best result — a service provider with the most relevant expertise, a positive track record, and a work ethic that resonates with yours.
Once you have outlined your specific needs, communicate with each company on your list of potential partners to develop a complete picture of each company. This includes the following essential steps:
- Reach out to learn firsthand about companies’ experience and expertise and request references to make sure your potential partner has what it takes.
- Negotiate engagement principles to decide on models that work for both of you.
- Ask for an estimate that is based on your project’s specifics.
The final step is to compare the information you have collected and choose the company that satisfies your requirements on budget, engagement models, expertise, and internal culture to the greatest extent.
Drawing on our substantial experience, we’d like to share a few insights with those who are only starting their journey in outsourcing:
- Don’t prioritize the cost. Choosing a partner based only on the cost is risky: low cost may signal low quality. The best way to make the decision is to consider various factors, as an attempt to cut costs may compromise quality and cause other issues.
- Set clear and measurable goals. You need to be clear on why you’ve decided to outsource, what your goal is, what you expect and how you can measure success. Also, you need to make sure your partner is aware of these.
- Communicate effectively. Reliable companies provide smooth communication regardless of the time zone, language, and other factors, so ensure that you have complete visibility of your project and are on the same page with your partner.
- Respect cultural specifics. Although business is business in any language, cultural characteristics must be carefully considered and anticipated — this is the key to successful cross-cultural collaboration.