What is IT Outsourcing: The Definitive Guide For CEOs

IT Outsourcing

Iva Kozlovskaya, Managing Partner

Dec 21, 2022

Updated – December 22, 2022

Currently, the global market size of IT outsourced services is valued at $92.5 bn and is expected to reach $397.6 billion by 2025. Hiring developers is a challenge, especially considering the increased competition between the companies in the labor market.

Outsourcing is gaining momentum due to the bunch of benefits it provides. If you hesitate about opting for IT department outsourcing, Qubit Labs is here to help you address all the questions. Read on to see why companies favor this solution, its advantages, types, cost, and more.

What Is IT Outsourcing?

IT outsourcing is the practice of hiring external providers who deliver information technology services, such as software development, infrastructure solutions, and software support.

What is IT outsourcing services? IT outsourcing helps businesses achieve their goals and increase performance by delegating a number of tasks to the outsourcing providers. IT outsourcing services include full-cycle software development or hiring a team of dedicated specialists especially for your project worldwide. In this way, the companies can focus on core business goals, improving operational efficiency, and gain a competitive advantage.

Reasons for IT Outsourcing

What is the top reason for global outsourcing of IT services?

According to statistics, around 70% of companies opt for IT outsourcing because of cost reduction. Meanwhile, 40% of them view programming outsourcing as a way to become more flexible. Other reasons include:

access to a global talent pool
high price to quality ratio
the opportunity to free up internal resources
improved productivity
access to expert talent and knowledge

Also, around 20% of the companies opt for outsourcing because it increases speed to the market, while 15% leverage it because of the agility and access to tools and processes.

IT Outsourcing Types

Outsourcing comes in many forms and types depending on the criteria you set. By location, it is offshore, nearshore, and onshore outsourcing.

IT outsourcing stands for the outsourcing model presupposing the recruitment of individuals or teams outside your country. Nearshore outsourcing means that you find nearshore partner in a nearby location (e.g., US-based companies may outsource to Canada or Mexico).

Onshore outsourcing is the model presupposing the external provider’s recruitment inside one’s country. For example, if a coffee shop needs a mobile app, it turns to a local web app development company. The latter model is the best in terms of absent time, culture, and language differences. However, the cost will be higher as compared to hiring IT staff, as web app development costs are more or less similar across one country.

Check out the software development rates by country guide to gain more insights on the topic.

In terms of service types, outsourcing is divided into:

Professional (accounting, advertising);
Manufacturing;
Process-specific.

Types of IT Outsourcing Services

Vendors provide two broad types of services:

Outsourcing (IT outsourcing services are provided by a team built by the vendor. Collaboration may be both short- and long-term.)
Outstaffing (the vendor hires a team specifically for the client’s project).

Outsourcing comes in two forms: project-based (with the vendor’s team employed in several projects at the same time) and full-time (with a team working exclusively on one client’s project).

Learn more about the differences between offshore development team, project-based outsourcing or IT staffing.

Outstaffing also comes in two forms:

Dedicated team. It’s outstaffing per se, which implies recruiting the entire IT team from scratch based on the client’s requirements. The vendor doesn’t have ready-made teams; they are built for each separate project individually.
Offshore development center. It can be established if the client wants a large team and a development center in another country. The recruiters build a team from scratch alongside selecting offices for rent/purchase and hiring administrative staff to run that ODC.

What are the Costs of Outsourcing IT?

How to calculate outsourcing costs? It’s hard to determine the IT outsourcing cost in advance because numerous factors affect the final price.

You may expect to pay between $10 and $90 per hour on average. This is the overall cost, including the vendor’s fee and the programmer’s salary.

Qubit Labs regularly conducts international rates’ overviews, so you can check them or use the numbers from this research to know the approximate cost of outsourcing and check how companies use IT outsourcing.

How to estimate IT outsourcing cost? Take into account the following factors:

Location
Tech stack
Seniority level
Experience

To make it simple, let’s consider the outsourcing price based on a specific example:

– the cost of outsourcing middle-level PHP development

There are usually around 160 working hours in a month. Let’s multiply that by the average hourly rate of a middle-level PHP developer — if we consider Ukraine IT outsourcing, it’s $25–50 per hour.

The result is $4,000–8,000 per month or $48,000–$96,000 per year. A specialist with the same level of expertise in, say, San Francisco will cost you a minimum of $120,000 per year.

– the cost of middle-level PHP development

The IT outsourcing cost may also be estimated by a formula: developer salary + vendor fee.

For example, say, you want to hire a middle-level PHP dev in Ukraine, then we’ll have the following equation:

$2,000–2,500 (their monthly salary) + $1,000–$2,000 (the vendor’s commission)= $2,500–4,500 (per month) or $28,900–$54,100 (per year).

For comparison, a developer with similar expertise from New York will cost you around $106,000 per year (not including bonuses, social package, and overhead costs).

As you can see, the IT outsourcing costs are almost twice lower compared to hiring local developers.

What is the IT Outsourcing Market Size?

The IT outsourcing market size is expected to reach a total contract value of over $409 billion by 2022. The annual growth rate is anticipated to register a CAGR of 8.5% from 2021 to 2028.

Based on our IT staffing market research, its growth will be facilitated by the increased focus of organizations on making their businesses more agile. They’ll be trying to adapt to the constantly changing environment, striving to improve their efficiency and decrease operational costs.

Most companies will leverage IT outsourcing market benefits to focus on their core competencies.

IT Outsourcing Pros and Cons

There are plenty of pros and cons of outsourcing IT services, and their number keeps increasing due to the rising popularity of remote work.

Nevertheless, it is quite challenging to point out specific outsourcing IT services pros and cons that will perfectly fit everyone. The thing is that some consider this option only as a way to reduce costs, while others see it as a solution to enhance their business performance.

Whatever your case is, the pros and cons of outsourcing IT services might significantly affect your decision about leveraging or not leveraging it.

So, first, let’s address the question: what are the benefits of outsourcing IT services?

Top Benefits of Outsourcing IT Services

Access to a global talent pool

You can hire vetted developers to create any product without setting up a new department.

Speed of closing the vacancy

Outsourcing countries have a dynamic labor market, so you have all chances to get to work in 2–4 weeks instead of wasting 2–3 months only on recruitment.

Improved performance

The in-house team will be happy with your decision to hire outsourced employees because then, the load will be spread more evenly, preventing burnout cases.

Reduced expenses

When outsourcing to countries with a lower cost of living (which implies lower salaries, operational and infrastructure costs), you can save money on production costs.

Flexibility

You can easily scale up your software development team without handling the extra expenses, like renting additional office space, buying equipment, or purchasing tools.

Read more about the benefits of outsourcing IT in our research-based article.

IT Outsourcing Risks

When reviewing the pros and cons of IT outsourcing, you should remember that you can also face many challenges despite considerable advantages. Nevertheless, strategies and metrics help mitigate these risks and make you confident that you outsource software development successfully.

Some of the most common failures of outsourcing IT services include the following:

Lack of control

One of the most notable risks of outsourcing IT is that it reduces the level of control you have over your software development operations. Most of the communication takes place online, so the level of control might be significantly lower than the one you’re used to.

Security issues

Nobody canceled cyber-threats and cyber-crime, so one of the most prevalent risks of IT outsourcing is compromising your confidential business data.

Quality concerns

Often, IT outsourcing risks are associated with poor quality of services. Clients that hire cheap labor in third-world countries often face various issues because the delivered products don’t match their expectations. You can introduce a quality assurance checklist for outsourced projects to mitigate such risks.

Communication/cultural gap

Working with remote staff can be burdensome. The companies often face many challenges, from time zone differences to contrasting approaches to work, communication, and punctuality.

How Can IT Outsourcing Cure Skill Shortage?

Entrepreneurs from around the world choose outsourcing to deal with their hiring difficulties. Startups from Spain, UAE, USA, Australia and Sweden are already improving their development capacity by cooperating with teams from different outsourcing locations and outsourcing regions, including:

Most often, they decide between India and Ukraine.

Webinar: Presenting Best IT Outsourcing Destinations in Ukraine

What are the Best IT Outsourcing Locations?

Where best to outsource your IT?

Ukraine is one of the top locations for IT outsourcing but having several options is always better. If you prefer the Eastern European region, you can opt for one of the following countries:

Poland
Czech Republic
Romania
Bulgaria

Also, you can consider Asia for software outsourcing. The most popular destinations in the region include:

Kazakhstan
Armenia
Philippines
India

And the next region is Latin America, which includes the following locations:

Argentina
Brazil
Mexico
Costa Rica

You can choose the one that matches your preferences or reach out to Qubit Labs for advice.

IT Outsourcing with Qubit Labs

As you can see, IT outsourcing is rapidly growing, making more and more companies opt for it. It’s a convenient, cost-effective, and flexible solution that allows you to hire just one developer or set up a dedicated team.

Whatever service you’re interested in, we’re ready to help. With us, you get access to a vast pool of vetted developers, reasonable costs, and high-quality services.

Feel free to schedule a consultation to discuss your requirements and get the best offer.