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IT outsourcing vs offshoring: differences, pros and cons

Guide

IT outsourcing

It may seem intimidating to start outsourcing software development if you haven’t done it before. That’s perfectly understandable! It is a big decision to entrust your IT projects to an external IT company, regardless of size or capacity, especially when your business’s success depends on it.

In a McKinsey survey, 87% of respondents reported they either have gaps in their IT teams now or expect them shortly due to recruitment bottlenecks.

This statement is supported by many other sources, and the global IT talent shortage has grown significantly in recent years. The Manpower Group reports a shortage of IT talent in 54% of companies.

What is IT outsourcing?

IT outsourcing is a business model in which outsourced services are provided by third-party companies to help businesses improve their efficiency and performance. Outsourcing can have a significant impact on businesses because it can provide them with better value for their money, increased flexibility, and increased worker productivity.

The benefits of IT outsourcing can be significant, and there are a variety of reasons why businesses might choose to outsource certain tasks or services.

Outsourcing vs offshoring: are they the same?

Let’s clarify the difference between offshoring and outsourcing.

Offshoring is just one type of outsourcing. Overall, there are three types of it outsourcing:

Onshore\domestic outsourcing is a process by which businesses outsource their work to another company whose premises are based in the same country.
Nearshore outsourcing involves outsourcing work to a company in another country, usually within the same continent and with a similar time zone.
Offshore outsourcing is the process of handing over work to a third party that is based in an overseas location.

Lack of expertise is the main hindrance to effective software development.

By outsourcing your software development projects, you save on hiring and get the opportunity to optimize and improve your business operations.

Benefits of IT outsourcing

According to Deloitte’s research, companies outsource for a variety of reasons.

63% of companies outsource to reduce costs or control them;
65% use it to accomplish business objectives;
53% to address capacity issues;
28% to improve the quality of services;
26% seek the assistance of talented professionals;
18% of companies use it to manage their business environments.

Reduced costs

The fierce competition in the marketplace has led many enterprises to restructure and downsize their workforces to save money. Outsourcing helps businesses reduce costs by about 15% on average but this number can reach 60% in some cases. It is primarily for financial reasons that management decides to opt for information technology outsourcing.

Outsourcing providers can reduce your business’s expenses because they

Take advantage of the low-cost labor market and locate data centers in low-cost areas with modern telecommunications.
Ensure that overhead structures are much leaner.
Have to remain on schedule to meet contractual obligations.
Control software licensing better due to their knowledge of the industry.
Can purchase all software and hardware in bulk and implement more efficient leasing arrangements.

A wide choice of qualified resources

Whenever you hire someone, you get only the skills this person possesses, and despite the person’s great skills, sometimes they lack the expertise needed for a specific project.

Outsourcing allows companies to access a variety of experienced and skilled human resources. Besides, it increases business productivity since outsourcing service providers can coordinate human resources and use them to their full potential. Moreover, labor efficiency increases if human resources are used effectively.

Access to advanced technologies

In today’s technology-driven world, most companies must adopt a broad range of advanced technologies to avoid being left behind by competitors. Even so, investing in technology innovation isn’t easy, as it always requires a significant amount of investment. The more technology changes, the more difficult it becomes to absorb them. As a result of outsourcing, businesses will be able to solve all their problems. They will still be able to innovate and develop new and modern methods without spending too much money.

Hiring isn’t your concern

If you create an in-house IT department you’ll need adequate office space and equipment, such as desks and computers, as well as insurance and sick and holiday pay. Outsourcing developers requires no hiring – just signing a contract. By doing so, you can save on employee benefits, training, and employment costs. You have partial responsibility for the employed developers who work in your team, and they are not on your payroll.

What is more, with outsourced teams, the hiring and research work has already been done. You can hire an outsourced team at the same time it takes to hire a single developer in your own company. Consider the potential savings in time and money that this may bring you.

Focus on your core business

Outsourcing enables companies to focus on broader issues and let an outside firm handle operational details. One of the most compelling reasons to outsource is to relieve management of low-priority issues that consume a great deal of their time and effort.

In some cases, outsourcing is done to strengthen weak areas of the organization or to assist with larger projects. This allows on-site staff to concentrate on their specialties and prioritize goals. A company that outsources IT, for instance, can prioritize larger tasks such as cybersecurity monitoring, network upgrades, or infrastructure installation.

Concentrating on your core business will certainly help you achieve a better result, since you won’t be distracted and won’t lose sight of your original idea. A key benefit of using outsourced workers is that they help to protect regular employees from swings in demand and allow the organization to strengthen its bonds with its own staff.

Team flexibility and scalability

One of the best things about outsourcing software development is that you can get on-demand services. In terms of time and money, scaling your project as needed has huge benefits.

By outsourcing IT, you can delegate tasks to several highly qualified experts to improve turnaround time. Greater flexibility in staffing allows you to scale IT resources to meet project requirements and seasonal changes.

Outsourcing can be a great way to scale up your development team. By outsourcing certain tasks you can reduce the amount of work you need to do on your own, optimize resource use, and reduce the risk of project failure. This allows for a higher degree of flexibility, which can save you time and money.

Competitiveness

In organizations lacking proactive IT leadership, outsourcing providers can enhance their efficiency, agility, and competitiveness. In addition to strengthening your competitive position and protecting you from cyber threats, IT outsourcing companies assist you in embracing new technologies, building innovative processes, and adopting a more efficient business model. So, the use of outsourcing is becoming increasingly common among organizations to reposition themselves, reconfigure how they do business, and transform the competitive landscape.

Disadvantages of IT outsourcing

Outsourcing can be a great solution for businesses that need to keep up with the latest technology trends, but it’s important to consider the potential drawbacks before making any decisions. Here are four key things to keep in mind when deciding whether to outsource IT services.

Inability to fully control processes

The notion of handing over large parts of your organization’s infrastructure and processes to another outsourcing company can be unsettling for a business leader. Those who oppose IT outsourcing argue that an external vendor will not be as responsive as your own IT department, primarily because the vendor is not under your supervision. In fact, there is no risk inherent in lack of control, but rather in what might arise from it.

Solution

There must be transparency between your company and the outsourcing provider on what aspects of the management structure you will retain control over.
Concentrate on outcomes and metrics, whether they are related to performance, customer experience, or something else. Focusing on results can give the outsourcer some flexibility regarding how those results are achieved.
Plan the flow of communication. A regular report from the outsourcer can be a useful way for the client to get periodic updates.

Communication and cultural roadblocks

That is quite natural that when you have a remote team working for you, it’ll be more difficult to arrange frequent communication rather than with a team working on-site. This also hinges on the person who will be handling the communication on the outsourcing side, on their competence and reliability in terms of communication. Provided that the communication manner is alike and the time intervals in the communication work fine — well, there’s no need to worry then and there will be no problem in establishing a friendly and productive relationship.

Solution

Select a vendor based on reviews and experience. In case you need to hire an individual developer, arrange an interview with them, check their cultural fit and their hard skills. Consider conducting a technical interview if you don’t feel they have enough expertise.
When hiring a team of developers, you should first choose a technical Lead from the vendor to describe the tasks and expectations. Using their experience, they will form a team to carry out the tasks.
Video calls can be helpful since most communication is non-verbal.
Ensure that time zone-based working patterns are agreed upon. Time zone differences can affect collaboration if they are significant. It is not necessary for an outsourcing team to overlap your working hours completely. Establish regular meetings at a time that is convenient for both parties.
You need to understand at the outset that you will be comfortable working with each other, as if the developer were one of your internal team members. Personal qualities are just as important as technical skills. For outsourcing to succeed, it’s essential that outsourced specialists share the same mentality and values as your in-house employees. For example, North American and Western European companies are more similar to CEE providers than companies from India.

Quality issues

Although IT outsourcing has a lot of advantages, it’s worth it only when the the work done is of high quality which you hoped for. If the results don’t live up to your expectations, then the result will be total frustration. Of course, this doesn’t mean that the off-site team won’t manage to fulfil some certain tasks, however, the advice is to talk over the quality awaited in advance.

Solution

Keep an eye on the work standards and due diligence of your outsourced team.
Assess the results of their employees based on customer feedback.
Do not overlook the importance of hiring PMs and quality assurance specialists from the service provider since they are responsible for building and monitoring quality processes.
When you first contact the service provider, you should ask them about the processes they use to monitor the timely fulfillment of obligations, to report on results and to monitor code quality. A high-quality outcome requires structured processes, competent team management, and regular reporting.

Costs exceed expectations

Often, outsourcing reduces costs by taking advantage of economies of scale within the third party and moving work overseas.

The old saying “buy cheap, buy twice” holds true, and it is important to make sure that any upfront savings are not realized later on. Fees associated with contract renegotiation, infrastructure upgrades, currency fluctuations, etc. are not clearly stated from the start. Outsourcing services can skyrocket your budget if you do not factor them in early on.

Solution

Make sure there is no ambiguity about quality standards from the beginning. This organization will bear any costs associated with the third party’s time spent clarifying these matters.
Decide how the third party will operate. Both time & materials and fixed price models have their pros and cons so each one works best for different types of projects.
Create robust quality measurement processes that allow you to pinpoint areas where quality has fallen short, along with qualitative feedback where employees can share concerns and suggestions.
Don’t be afraid to discuss your projected budget for each month or each project. The vendor may ask you this information to determine your resource needs and ensure that you do not get any unexpected charges.

Outsourcing IT poses many challenges

As IT permeates an organization, it cannot be outsourced in the same way as other tasks. IT outsourcing is distinct from outsourcing other types of services, e.g. legal, accounting, etc. Business organizations have certain types and sizes, thus they need IT systems that are tailored to their infrastructures. Software and IT systems can’t grow on their own, so you need a knowledgeable and reliable partner to help you.

Solution

Give a clear definition of project success. It is important that both parties have a clear understanding of what success looks like.
Provide a top-level walkthrough of the user journey. It motivates the outsourced team to adopt a more user-centric approach and align sprints/milestones deliverables with long-term goals.
Keep in touch and ensure the offshore team has all the necessary information. You should assign someone from your in-house team to track any changes to the project and communicate with the outsourced team.

Outsource software development with Innowise

There will be a dramatic increase in IT outsourcing in the coming years. The continued growth of IT outsourcing both in breadth and depth suggests that this practice is more than just a passing fad and has enough benefits to justify its use.

By choosing the right IT outsourcing provider, you can accelerate the growth of your business. As a leading provider of long-term strategic IT outsourcing solutions, Innowise has been helping our customers achieve their long-term IT goals for more than 15 years. If you’re looking for full-service IT outsourcing, we can show you the right direction.

Innowise Software Development Process

Dmitry Nazarevich CTO

Date: Dec 13, 2022

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