Outsourcing IT Functions: Pros and Cons
Over the last twenty years, outsourcing has evolved into a business strategy used by thousands of companies worldwide. The global IT outsourcing market scale is vast: Technavio forecasts it will reach $486.16 billion by 2024. In comparison, the GDP of Norway amounted to $403,3 billion in 2019.
Hiring an independent third-party provider has profound benefits – from cost-optimization, increased efficiency to an ability to reach out to a larger talent pool. Yet, many people often associate risks, such as lower quality, security threats, and loss of control with outsourcing. Today, we’ll deconstruct the concept of outsourcing, look at the benefits and risks of outsourcing IT services, and learn about the key things to be aware of when choosing the outsourcing vendor.
Most likely, you’re well-acquainted with the core concept of outsourcing. It is simple: you hire a third-party individual or company to handle specific business tasks on your behalf. But what is the difference between outsourcing types? How does IT outsourcing work? Let’s start with figuring this out. Outsourcing types vary between:
- Onshoring (contracting a third-party vendor from your own country);
- Nearshoring (opting for a vendor from a neighboring state);
- Offshoring (working with a vendor from a distant land) and
- Outstaffing (buying out employee time from an IT outsourcing provider).
You can outsource anything from web and mobile development, data storage, security, technical support, IT project management to complex legacy management, business digitalization, and more.
Some of the global tech companies have already enjoyed the competitive advantages of IT outsourcing. For instance, Slack, now valued at $2,8 billion, hired an outside firm to help refine its website, app, and logo. Google employs 121,000 temporary, vendor, and contract workers besides its 102,000 full-time employees. Giants like Microsoft and Amazon chose India to take advantage of the country’s vibrant tech ecosystem.
Misconceptions about IT outsourcing
Myths, stereotypes, and misconceptions surround outsourcing. And while some of them aren’t baseless, most include risks you can quickly mitigate.
One popular myth is that since outsourcing is usually lower in cost than in-house work, it will be lower in quality. The thing is, outsourcing vendors offer skilled experts at a more affordable price due to labor costs in offshoring countries. For comparison, the average salary of a software engineer in the USA is $103,379 per year, while in Ukraine, according to Glassdoor, it is $40,000. Lower cost of living and taxes are the reason behind such a drastic difference.
How to ensure you choose the vendor with the needed expertise? Something as simple as taking a glance at a vendor’s portfolio and references will reduce risks related to the quality of delivered results. Regularly checking in with the vendor’s team is also a good tip on measuring the quality of work.
Another widespread misconception is that outsourcing IT functions means outsourcing responsibility. The reality is, outsourcing is about mutual understanding and collaboration. If the goals aren’t set clearly (or at all), achieving them won’t be easy for anyone, let alone the vendor’s team on their own.
Acknowledge the fact that the project’s outcomes don’t depend strictly on the vendor. If you want your project to succeed, you cannot simply hand over the control over it to an external provider.
IT outsourcing challenges might include language barriers, time differences, and the adjustment process, but as in any business, communication is vital in outsourcing. While you might have agreed on the final product, it’s always better to review the project’s progress from time to time. How can you ensure the task progress meets your expectations and needs?
- Appoint a dedicated manager for the project;
- Set up clear communication channels;
- Use remote collaboration tools;
- Remember to provide feedback.
Finally, companies often regard outsourcing as something that only big corporations can afford, which is not exactly true.
Small and mid-size outsourcing companies on the market are available to take up projects too small in scale for the behemoths of outsourcing even to consider. The number of outsourcing options is so vast that 80% of small businesses intend to outsource their business functions in 2021, the new study by Clutch reports.
When outsourcing is the right solution for your business
Deciding whether your company needs outsourcing requires thorough research. There are times when outsourcing is simply unavoidable (for instance, when you lack in-house employees with particular expertise) and times when it offers the most compelling benefits compared to other solutions.
Some signs you might need outsourcing are:
- You want to concentrate on new products, not on updating software;
- Software becomes a bottleneck that stifles your company’s growth;
- Hiring full-time developers and other staff in-house takes too much time;
- You cannot invest in your own IT department;
- Your infrastructure cannot withstand the ongoing security threats.
Before you embark on the outsourcing journey, make sure you weighed the pros and cons. Ask yourself why you need to outsource. Is it the financial advantages, increased efficiency, or professional help? Carefully consider the outsourcing location and select the vendor you can trust. After all, the end quality of your project will highly depend on the choices you make.
The advantages of IT outsourcing
Regardless of your business size or location, you can also reap the benefits of using a third-party provider. Let’s dive into the core advantages of outsourcing to see how your business can profit from it.
More focus on your core competencies
One of the significant benefits of outsourcing IT functions is that it can free up your team, allowing it to focus on areas that require attention. Small companies, for instance, can benefit from outsourcing without the technical equipment, software, or staff you’d need to complete the project in-house. Concentrating on core business processes will bring added value to your business in the long term.
Extended talent pool
Undoubtedly, your in-house team is highly qualified, but it cannot have the same level of skills in every technical niche. Outsourcing opens up opportunities to work with niche-specific experts that your country or even continent might lack. For instance, the IT department’s demand for AI talent has tripled between 2015 and 2019, but the number of available vacancies still considerably outnumbers available candidates. The smaller your city is, the more challenging it is to find the right technical expert. Once you need the expertise and skillsets your team lacks, outsourcing is a convenient way to get it.
Growth is the end goal of any company, but as the business evolves, so does the need for qualified staff. To expand the in-house team, you’ll need to invest in extra training, which is time-consuming and costs a fortune. One of the apparent advantages of IT outsourcing is the ability to scale up faster by hiring already trained talent. Besides, outsourcing IT infrastructure to cloud service providers allows companies to scale on an as-needed basis without investing in expensive equipment. We at Catware champion in-depth experience working with one of Europe's biggest IT talent pools — the Ukrainian market has over 200 000 IT specialists. Let's discuss how we can help you.
We at Catware champion in-depth experience working with one of Europe's biggest IT talent pools — the Ukrainian market has over 200 000 IT specialists. Let's discuss how we can help you.
One of the apparent advantages of IT outsourcing is cutting down on delivery times, hence getting to the market faster. By choosing to outsource, companies can look outside the box and bring fresh ideas to their products. As a result, the overall quality and productivity of the business increase.
Companies review the quality of vendor’s work more closely and frequently compared to in-house staff. As a result, the third-party team always strives to show excellent results. According to Forbes, when P&G outsourced its R&D activities, the company’s productivity boosted by 60%, with over $10 billion in revenue.
It’s not a myth that outsourcing provides companies with a demonstrated cost-saving strategy. Hiring and training employees usually costs time and money. By saving those resources, you can reinvest them in specific areas of your business or focus the released capital on something else. Deloitte Global Outsourcing Survey reports that 63% of vendors cited cost reduction as the primary benefit of outsourcing IT services and functions.
Mitigating and analyzing potential risks is essential for the successful execution of any project. By choosing a vendor with professional expertise in a given field, you can ensure the project’s risk assessment will be under control. For instance, if you’re outsourcing data storage to a reliable data center, you can be confident it has the proper hardware, backups, and disaster recovery plans. Of course, your contract with the vendor should include guidelines and potential fines if the third party fails to keep up with the agreed terms.
The disadvantages of IT outsourcing
Despite the numerous benefits, you need to be aware of certain drawbacks of outsourcing IT functions. With proper research and suitable approaches, you can eliminate most of the disadvantages, but, still, some of the potential risks to acknowledge include:
Losing visibility and control over your business is one of the critical factors that make companies hesitate whether IT outsourcing challenges are worth the effort. Yes, outsourcing presupposes transferring management responsibility for some functional areas of the business to a chosen vendor. And while different factors than your company might drive the vendor’s team, it doesn’t mean you cannot avoid potential risks.
It all breaks down into two essential things: research and communication. The market for outsourcing vendors is booming, and most claim they know how to mitigate risks. To be on the same page with the potential vendor:
- Discuss your fears of losing control over a specific function (and knowledge associated with it);
- Remember to communicate your goals and desires;
- Create a knowledge transfer plan, and make sure you identify critical processes without disrupting the core business activity;
- Assign a project manager to review the success of your partnership regularly.
Another factor that makes small and medium-size companies ponder over the advantages of IT outsourcing is the fear of dependence on an external service provider or technology linked to them.
How can you make sure your business doesn’t grow to be reliant on one specific provider?
- Ensure you sign an agreement that gives you ownership over technology or data;
- Document the entire development process;
- Research the market for specialists who use similar technology (if you decide to change your service provider over time).
If you are having a hard time choosing the vendor, outsourcing a specific function to two potential vendors at first could help you decide which provider to stick with for the long haul.
Cultural differences may bring about particular IT outsourcing challenges. Even though English is traditionally the language of communication in the IT industry, not all team members might speak it equally fluently, which means some things might get lost in translation.
Achieving 100%-cultural compatibility is not easy. Remember never to underestimate the importance of intercultural communication. Be aware of time differences, national holidays, and work ethics peculiarities when choosing an international IT outsourcing vendor. If you and the service provider work in different time zones, taking the most out of the overlap hours and scheduling meetings ahead can help ease the communication process. Also, make sure teams dedicated to the same project use the same communication channel; this will help avoid misunderstandings and track work changes regardless of time differences.
Outsourcing IT services or functions means you’d have to share sensitive information with a third-party provider. Doing this might carry some risks, such as intentional or unintentional misuse of your data by the vendor’s team or security breaches of the vendor’s system.
To mitigate potential security risks, make sure you choose a trustworthy outsourcing vendor and agree on sound privacy and intellectual property policies. Educating both your and the third-party team on handling sensitive data and conducting regular security audits could also save you a ton of money. The IBM 2020 Cost of Data Breach study reports that a data breach costs businesses an average of $3,86 million.
Cutting down on costs is one of the key benefits of outsourcing IT functions. However, opting for the wrong vendor can end up in you encountering the flip side of the coin. If you set yourself flexible project goals, most likely, they will result in flexible price estimates.
To avoid hidden costs in the future, ensure that you define project goals clearly (and in writing). If your requirements or deadlines change after signing the contract, notify the vendor immediately, and work on possible solutions together.
Aiming to bring tangible value to your business by choosing outsourcing IT services, it is vital to acknowledge the pros and cons and potential challenges. Finding a vendor that offers a high-quality code and shares the same values is not an overnight task. Strategic research, communication, and clear expectations are the cornerstone of outsourcing principles.
In 2021, when the pandemic has eliminated the borders and remote work is necessary, outsourcing is closer than ever. Cost-efficiency, lack of in-house talent, and globalization will continue to drive outsourcing in 2021 and beyond. With high-level technical skills and an extensive talent pool, emerging markets in Eastern Europe such as Ukraine, Poland, Romania, and Belarus remain the most favorable IT destinations.
How we can help
As your outsourcing partner, we can offer a wide range of services: system analysis and audit; solution architecture; custom software development; DevOps and cloud architecture; system integrations, and more. All while mitigating the risks of outsourcing through proven workflows and hands-on experience.
For starters, our management team is in Oslo. This seemingly simple addition to the well-known outsourcing formula offers tremendous benefits when it comes to mitigating cultural differences, establishing meaningful communication channels, or working in appliance with any and all legal regulations such as the GDPR.
We’ve come up with several additional benefits for our clients and partners over Catware’s years “in the field”
- You are, in fact, working with a Norwegian company that has R&D and development divisions in Ukraine.
- Our services are 100% transparent so you don’t have to worry about hidden costs.
- Your data and sensitive information are protected with Non-Disclosure agreements that are enforced by Norwegian law.
Lastly, our access to talent in Ukraine is a rock-solid guarantee you will have the best available developers working on your projects. This level of on-demand access to qualified staff without any back-office hustle has allowed our clients to scale effortlessly while saving up to 60% without compromising quality.
Frequently Asked Questions
What are the primary advantages of IT outsourcing?
1) Ability to focus your effort on mission-critical challenges and more time one can dedicate to executing business goals.
2) Access to a larger talent pool from a global market of IT professionals.
3) Reduced development costs.
What are some of the best ways of mitigating IT Outsourcing challenges?
Start with analyzing your potential vendor. Check their portfolio to make sure their expertise meets the scope of your project. Take a closer look at references and reviews. Invest some time into designing a fool-proof contract that clearly defines your goals and the vendor’s responsibilities. Don’t forget about NDA’s.
How quickly can I start working with an IT outsourcing provider?
This generally depends on the scope of your project. You’ll always have access to business analysts and solution architects with Catware so the initial stage can kick off within a couple of days from submitting a request. Our talent pool in Ukraine allows us to stack a team within two to four weeks.
Still have questions?