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 the company to manage some business activities for the business.
- What Is Outsourcing?
- What Is IT Outsourcing?
- Why Companies Outsource?
- Forms of Outsourcing
- IT Outsourcing Models
- Benefits of IT Outsourcing
- IT Outsourcing Risks
- IT Outsourcing Trends
- In Conclusion
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 that 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.
- The outsourcing industry’s total value is estimated to hit $405.6 billion by 2027.
- Outsourcing helps companies reduce costs by about 15% on average but up to 60% .
- 30% of the US-based companies outsource at least one function.
- 57% of companies outsource their work to increase productivity.
- 24% of SMBs that outsource do so to increase efficiency.
- 64% of outsourced services are related to software application development.
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
3. Why Companies Outsource?
Following the research made by Deloitte, there are a few reasons why companies outsource.
- 63% of companies outsource to reduce or control costs.
- 65% do it to focus on business objectives.
- 53% to solve capacity issues.
- 28% to improve service quality
- 26% to take help from talented professionals
- 18% to manage their business environment
81% of outsourcing buyers and vendors surveyed previously affirm the importance of technology as a means to achieve improved cost and quality benefits.
3.1. IT Specialists Market Overview
One of the reasons why companies outsource their IT tasks is getting access to additional IT specialists with the experience and expertise needed. Finding them can be a challenging task for most businesses. To give a clear picture of why this point is becoming one of the drivers for IT outsourcing growth, we would like to make a short overview of the 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 is higher than the supply, the available specialists increased their service prices significantly.
The Bureau of Labor Statistics predicts 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 an increase in wages in the IT-sphere.
Increase of wages in the IT-sphere.
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 the 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.
However, due to Covid-19 in 2020 many businesses started to use remote work and move their offices from Silicon Valley to less expensive regions, like Texas.
3.2. IT budgets
Before Covid-19 we also observed 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.
As business income stagnates, we may expect IT spending to decrease. Although the year-on-year growth has slowed slightly, it is expected that the growth of the IT budget in 2021 will exceed the contract.
In fact, 80% of companies in North America and Europe expect year-on-year technology spending to remain the same or increase (up 33.3% compared to 46.3%). At the same time, 17% of organizations expect IT budgets to fall in 2021, which greatly exceeds the expected 8% reduction in organizational budgets in 2020.
80% of companies surveyed expect IT budgets to grow or remain stable in the next 12 months.
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.
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
Overlapping working 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 outsourcing.
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 the U.S.)
5) IT Maturity: Belarus stands 4th among the 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 a 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 a 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.
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 that the companies can benefit from. Here are just some of them.
1. 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
2. Increased Efficiency & Innovation
Outsourcing brings 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.
3. Access to Skilled Resources & Staffing Flexibility
As it was mentioned and proved, the demand for skilled IT specialists will grow. Fast. IT outsourcing is 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).
4. Internal Staff Education
One of the reasons for working with a 3rd party service provider is that the in-house team doesn’t have the required knowledge and/or skills. Outsourcing (especially on-site) may result in improving in-house team qualification thanks to the knowledge sharing and mentoring by the IT company specialists.
5. Focus on Core Activities
Working with an IT service provider allows business owners to focus their activities on 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.
6. Operational Costs Control
IT service providers are responsible for keeping control over the time & budget of the project (especially if it is project-based cooperation).
7. 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 starts 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.
8. 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.
9. Project Management Simplification
The success of the project depends a lot on the quality of project management and on how well business owners can organize the cooperation of the team. Outsourcing on a 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.
10. 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 onshore outsourcing, the chance to work with 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 cultural differences. Both sides should take into accouте language and cultural differences while setting up the cooperation.
8. IT Outsourcing Trends
8.1. Business plans resulting from COVID-19
- 44% of businesses have already or plan to accelerate digital transformation.
- 33% of businesses plan to improve security, risk, & governance.
- 30% of businesses plan to develop training aids to support remote employees.
- 36% of businesses plan to improve IT operations & systems performance.
- 32% of businesses plan to connect employees using standardized, secure, and easy-to-use tools.
- 27% of businesses plan to refine disaster recovery plans to account for additional scenarios.
8.2. IT Outsourcing Trends in 2021
8.2.1. Growth of Ecommerce and Automation
Statistics confirm that the technological transformation of online businesses will aim to make online shopping more convenient.
Statista predicts that by 2021, more than 2.14 billion people worldwide will purchase services and goods online. Compared to 2019, when about 14.1% of online retail was carried out online, by 2021, we expect that 22% of all online retail will be retail.
Nasdaq goes further, predicting that by 2024, about 95% of all retail purchases will be made online.
8.2.2. Growth of the Cloud Services
Cloud migration is a difficult and expensive process, but more and more companies plan to migrate from on-premises to cloud-based data storage. Cloud computing can ensure better data protection, faster data operations, and the ability to modernize business processes by easily implementing various business applications.
The value of global cloud computing has reached a high of 180 billion U.S. dollars, SaaS alone is expected to earn 113.1 billion U.S. dollars by 2021.
The PaaS, SaaS, and IaaS markets are growing 24% annually. Two years later, the global cloud computing market will reach 623.3 billion US dollars.
8.2.3. 5G Network
Information technology, telecommunications, and manufacturing are the three digital industries with the fastest penetration of 5G. With 5G, companies can develop powerful IoT systems to connect manufacturing, transportation, and other systems to make their business processes more efficient.
The success and widespread adoption of 5G connections led analysts to conclude that from 2021 to 2027, the 5G industry will expand at an annual growth rate (CAGR) of 43.9%.
According to Statista's forecast on the number of 5G connections in various regions from 2021 to 2025, 5G will be widely adopted in China and North America by 2021.
8.2.4. Artificial Intelligence: AI-Powered Chatbots, and Robotic Process Automation
IBM, Samsung, and Microsoft are major investors in global AI start-ups. In pursuit of perfect and cost-effective customer service, technology giants tend to turn to AI-based chatbots and robot automation.
The areas currently using AI in customer service include chatbots and virtual customer assistants.
- Analysts predict that by 2022, AI-based chatbots will facilitate 90% of customer interactions.
- About 60% of millennials claim to be satisfied with the purchase process assisted by chatbots.
8.2.5. Remorse Work and Cybersecurity
Nowadays, companies are actually forced to work remotely and lack proper cybersecurity expertise.
The World Economic Forum claims that by 2021, the number of permanent remote workers will double. Just like many other high-income industries, after the COVID-19 pandemic, IT departments have turned to remote work.
They are ideal targets for cyber attacks. Experts estimate that the personal data stolen from social media users is worth $630 million a year.
Important cybersecurity statistics in the HLB Cybersecurity Report:
- 51% plan to hire a full-time cybersecurity team during 2021.
- 42% of people are satisfied with the quality of the network security services they receive and get the best return from their network spending.
- More than 25% plan to reduce their cybersecurity budget.
- Only 13% will not change their cybersecurity budget.
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 skeptical about working with people who they might not meet personally ever. However, just like in any business field, there are companies that 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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