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IT Outsourcing 2021 Overview & Trends

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.

Ryan Kahn
Ryan Kahn
Founder of The Hired Group
"Master your strengths, outsource your weaknesses."

Contents

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.

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

3. Why Companies Outsource?

‍Following the research made by Deloitte, there are a few reasons why companies outsource.

web development services outsourcing: benefits and drivers


  • 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.

- Deloitte

importance of technology in outsourcing

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.


IT Specialists Market Overview

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.

Wages increase in 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. 

Covid-19 Impact

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.

IT budget increase

‍Covid-19 Impact 

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.

expected it budget change by year
expected it budget change by region
expected it budget change over prior year


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.

Term
Definition
Sample
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:

  • qualification
  • language requirements
  • cultural similarity
  • time difference
  • service costs

Regions overview

Region
Qualification
Language
Cultural Similarity
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

software development 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.

Model
Description
Sample
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 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
  • Training
  • Taxes
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

  1. 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.
  2. Might Be Hidden Costs
    It may appear in case if the companies don’t review contracts thoroughly before starting the work with service providers.
  3. 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.
  4. 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.
  5. 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.
  6. 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.

  1. Analysts predict that by 2022, AI-based chatbots will facilitate 90% of customer interactions.
  2. 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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