Basics of IT Outsourcing: Advantages, Disadvantages, Trends

The IT sector remains today the main driving force of global progress, so it traditionally attracts many people and companies. 

Industry specialists rightfully earn high salaries because they create unique projects, for example, based on blockchain, and change the world around them, making it more advanced and convenient. Developing organizations that exist in this rapidly changing world find it difficult to adapt, meet ever-tighter requirements, and maintain efficient internal processes, which is why IT outsourcing is gaining more and more popularity.

Recent studies by GSA showed that up to 70% of companies planned to outsource most of their processes by 2020, and up to 84% of respondents saw high potential for significant growth in IT outsourcing. Technavio estimates this market at $409 billion by 2022 with a CAGR of over 4%. This impressive growth will be driven by the fact that the boundaries between hired developers, partners, and clients are practically disappearing today.

Statista notes that the global size of outsourced services reached $85.6 billion in 2018. The relevance of the topic prompted us to try to understand the main features of such IT services, formulate and describe a basic concept of IT outsourcing, and also talk about the most effective ways and rules of delegation.

What is outsourcing and IT outsourcing?

Let's start by saying what outsourcing is, and particularly IT outsourcing. Techopedia indicates that the first term means the practice where external companies or individuals perform certain work or manage internal processes that essentially belong to a different business. Thus, your employees can focus on other things, free up their time, which will ultimately reduce the company's overall costs. In short, outsourcing allows you to perform core functions without spending resources on secondary tasks.

Accordingly, IT outsourcing is the same thing, but only in the specific field of information technology. In this case, companies can outsource virtually anything — software development, database-related processes, customer support, and so on. Typically, IT corporations contract with freelancers or teams from countries where wage requirements are lower than in the client's home country. High-level outsourcing is also possible, where enterprises make deals with equal partners and transfer core tasks to them. This is value-added outsourcing.

To summarize, we can identify three main types of geographic IT outsourcing:

1. offshoring — moving tasks to a significantly distant country; helps reduce costs, avoid high taxes, and enter a market with a milder economic climate;
2. nearshoring — moving business processes, for example, to neighboring countries; it is more convenient if you need to control everything personally;
3. onshoring (work at home) — in this case, local teams or even your own employees work, but from home.

In addition to these categories, there is also functional outsourcing — BPO (transfer of non-core processes and entire areas, such as support or HR), co-sourcing (when a company delegates literally everything, not just one or two functions), and multi-sourcing (one client works simultaneously with several teams under a single contract).

Examples and Services of IT Outsourcing

The IT industry is huge, consisting of several levels — from initial business analysis to lifetime support of the finished product. Formally, you can create and manage all these areas, but at some point you will likely encounter difficulties. So first, simply look at the list of the most popular outsourcing functions, created back in 2017 but still relevant today (the directions are listed in descending order of popularity for transferring to an external contractor):

1. software application development;
2. software application maintenance;
3. data centers;
4. IT infrastructure;
5. support;
6. networks;
7. integrations;
8. HR.

Now let's separately discuss the core concept of IT outsourcing in SCM. Supply chains greatly benefit from the use of information technology because developers can simplify each stage. For example, e-commerce digitizes many secondary functions and reduces costs, while ERP tools enable internal integration and thus help parties gain access to a single database. Many organizations outsource precisely ERP tasks and other IT functions to improve the profitability of the supply chain or any other business.

To make it clearer, let's compare similar processes and tasks that can and cannot be outsourced. Typically, you can delegate certain ongoing routine work, such as data verification or quality control, but you cannot do the same with unique and creative activities.

This also applies to work that essentially requires only formal knowledge (programming, testing), but does not apply to the «higher level» where advanced skills, unconventional thinking and moves (top management) are important. Additionally, any measurable things can be outsourced to a third party, but do not outsource what you cannot measure, because then you will not be able to properly evaluate their work.

Finally, the «golden rule» of IT outsourcing: never reallocate processes that are naturally closely linked to other internal processes. Remember, it is always better to do related things, so to speak, under one roof, to avoid possible misunderstandings and the costs of correcting errors.

Understanding and Embracing the Concept of IT Outsourcing

Now you understand how outsourcers work. If you plan to diversify your business, it is better to first clearly define your needs, wants, and goals before delegating anything.

First, set global goals and break them down into smaller ones to see which things are less essential and which are core. Keep key processes for yourself; your team should focus on the most important points. Secondary ones can be outsourced. However, if you are still unsure right now, look at illustrative examples of the pros and cons of IT outsourcing.

Strengths

So, there are three main benefits you can gain from delegating internal processes:

1. lower costs — a properly chosen foreign partner will be cheaper in all aspects — this applies to personnel, equipment, and services such as hosting or maintenance;
2. high qualification — good outsourcing companies are experienced enough to provide a better level of expertise, even higher than that of your employees;
3. additionally, you will be able to freely acquire and release additional resources (human, material) to solve other tasks.

Weaknesses

Similarly, we identify three main disadvantages of outsourcing:

1. possible pitfalls — without costly oversight, unreliable teams may not meet your requirements or demand huge sums;
2. different time zones — when collaborating with companies that are too far away, you must be prepared for more complex coordination and mismatched work rhythms;
3. cultural and language issues — this creates communication difficulties, and combined with the previous point, can lead to increased work completion times.

Key Trends in IT Outsourcing

Today we can confidently say that in the near future, partnership relationships in IT outsourcing between various teams and organizations will actively develop, because clients are purposefully looking for providers focused on the most advanced innovations. At the same time, companies that prioritize customer needs and end results, implement the full development process, and guarantee timely product deployment will surely succeed.

Below are the 7 main trends in IT outsourcing in SCM and other sectors (forecasts based on data from Statista, Deloitte, GSA, and Gartner):

1. less focus on price-based cooperation — the parties will concentrate on the value of the interaction rather than its price; obviously, costs matter, but they are no longer the key metric;
2. due to growing needs for industry knowledge and skills, clients typically choose multiple specialized companies at once;
3. alternative geographic outsourcing destinations — more interest can be expected in players from Central and Eastern Europe, particularly Ukraine;
4. new business models — as partners share responsibility for the outcome, new contracts based specifically on results achieved within the initial project will emerge, while timelines will shorten;
5. expansion of outsourcing scope — accordingly, with increased reliability, partners will outsource not only secondary tasks but also key processes;
6. automation, bots, robots, AI, and virtual assistants will become even more skilled in the future and will be able to handle most IT tasks;
7. cloud technologies — more and more things will migrate to cloud platforms, so the IT sector should prepare for a boom in storage and security projects

Furthermore, there is another notable trend that affects more and more companies, as they tend to turn into full-fledged technology partners rather than mere executors. Some of them no longer position themselves as 'outsourcing companies' because they create unique solutions that help clients achieve their goals. Moreover, today it's not hours that are sold, but results. With solid experience, employees of such firms can determine what your business needs and how long it will take to deploy your custom product. As a result, you get a working product that perfectly matches your tasks, delivered right on time.

Hiring an Outsourcing Partner

In conclusion, a few words should be said about your first contract with an outsourcer. First, remember your needs and look for a person or team that will best match them. One qualified worker handles one or two tasks well, but you will definitely need a whole group of experts for complex processes.

Individual outsourcers and small teams are widely represented on Upwork, Easy Outsource, and Guru. At the same time, large companies that take on various, including the most global, tasks for IT outsourcing have their own platforms and individual pricing.

Collaborate with Partners Instead of Freelancers

Considering all the above-mentioned trends, you will likely want to find a reliable company that properly takes on outsourcing projects, fully understands the risks and responsibilities, provides all key services including analysis and support, and knows your wishes.

By consciously following the main ideas, rules, and trends of IT outsourcing, such partners apply the most innovative approaches to meet client needs, offer a full development cycle with minimal risks and a guarantee of the final product's quality.

See also: Software Development, What is Web Development and How Can It Benefit Your Business.