What is IT Outsourcing: The Definitive Guide For CEOs

What is IT Outsourcing: The Definitive Guide For CEOs

What Is IT Outsourcing?

IT Outsourcing is a business model when a company hires another company to perform services and develop projects/ produce goods that previously were developed/performed in-house by the company’s own staff and employers. Outsourcing is usually a way to decrease expenses and cut budgets, because the performing company has optimized processes and staff for it.

IT outsourcing is a specific area of outsourcing presupposing the achievement of business objectives by means of delegating the completion of IT-enabled processes, services, applications,

and/or infrastructure solutions to providers outside the company, i.e., outsourcing providers. Check how is outsourcing being utilized in modern companies to improve their cost effectiveness.

Outsourcing Types

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

What is Onshore Nearshore Offshore IT outsourcing stands for the outsourcing model presupposing the recruitment of individuals or teams outside your country. Nearshore outsourcing means that you hire a vendor in the 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.

types of IT outsourcing - outsourcing and outstaffingCheck out software development rates by country guide, that will help you with a research.

In terms of service types, it is divided into:

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

Types of IT Outsourcing Services

Vendors provide two broad types of services:

  1. Outsourcing (in IT, the outsourcing service is provided by a ready team in the vendor’s office. Collaboration may be both short-and long-term.)

 

  1. Outstaffing (the vendor hires a team specifically for the client’s project)
    Outsourcing comes in two models: project-based outsourcing (with the vendor’s team employed in several projects at the same time) and team (with a ready team working exclusively on one client’s project).

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

 

long-term short-term outsourcing

Outstaffing may also come in two forms:

  • Dedicated team. It’s outstaffing per se, presupposing the recruitment of the entire IT team from scratch based on the client’s requirements. The vendor doesn’t have ready teams; they are created for each separate project with long-term collaboration in mind.
  • Offshore development center. It can be created if the client wants not just a team but a large team and a development center in another country where recruiters will create a team for him/her from scratch, together with selection of office for rent/purchase and administrative staff to run that ODC.

Is Software Development Outsourcing Cost-Effective?

How to calculate outsourcing cost? It’s hard to determine the IT outsourcing cost in advance as numerous factors affect the ultimate price. On average, you may expect to pay between $10 and $75 per hour, which is the compound price including the vendor’s fee and the programmer’s salary. Qubit Labs regularly conducts international rates overviews, for instance, you can use updated numbers from this research to know the expected cost of outsourcing and check how companies use IT outsourcing.

How to estimate IT outsourcing cost? We prepared a data

Overall, the price is determined by:

  • Location
  • Tech stack
  • Seniority level
  • Experience

To make it simple, let’s consider the outsourcing price on a concrete 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 take Ukraine IT outsourcing, it’s $25-50 per hour. The result is $4,000-8,000 per month, and $48,000-$96,000 per year. A specialist with the same level of expertise in, let’s say, San Francisco will cost you minimum $120,000 per year.

This picture explains on what factors depends it outsourcing cost

– the cost of middle-level PHP development.

The IT outsourcing cost may also be estimated by a formula: developer salary + vendor fee. For instance, you want to hire a middle-level PHP dev in Ukraine, his/her salary will be $1,500-2,500 per month + the vendor’s commission (typically varying from $1000 to $2,000). As a result, you get the total cost of $2,500-4,500 per month, which is $28,900-54,100 per year.

For comparison, a developer of similar expertise in New York, the USA, will cost you around $101,000 per year. This sum is only salary, not including bonuses, social package, and overhead costs.

Outsourcing and outstaffing cost

Benefits of IT Outsourcing

In articles and books about outsourcing published over 5 years ago, the primary reason for opting for this hiring model is money.

They say, every business wants to save costs. But today, we observe a major business shift in terms of considering outsourcing as an alternative employee recruitment method. Many clients are ready to pay as much as needed to get a talented, capable specialist to their team. Thus, the focus shifts from money to people. Here are 12 common reasons (besides money) that may urge you to seek outsourcing:

  1. No capable specialists in your location (city or country), which is especially topical for small states.
  2. Ability to select among a broad variety of developers based on skills and budget.
  3. 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.
  4. Involvement of IT specialists. Not all companies specialize in IT. For instance, you may be a travel agency requiring a platform for tour ordering. That platform is not your business goal but a tool helping your firm work. It needs to be created and maintained; moreover, it requires a regular addition of new features. Outsourcing is the best solution for this goal, especially for small companies.
  5. Reducing the workload of in-house team. Business efficiency isn’t synonymous to working 24/7 and eventually burning out. It’s more about correct allocation of tasks, proper planning, and the work-life balance. The in-house team will be happy with your decision to hire additional remote staff if the latter is of real help.
  6. Adding diversity. Outsourced employees usually come from different cultures and countries, thus bringing new perspectives to your business.
  7. High local rates. Shortages of local talent supply induce developers to raise their rates, so hiring a worthy coder may become a true challenge to your business budget.
  8. Team expansion. You can always consider entering to a new market and setting up a new office in a new country.
  9. Convenience. By hiring a Project Manager, you can avoid the management hassle with a remote team.
  10. Ability to delegate all administrative tasks to a vendor. No need to worry about office rent or purchase of equipment – it’s the vendor’s task.
  11. Expenditure optimization. For instance, if you don’t have enough money for an in-house team, you may consider outsourcing because it presupposes only the programmer’s salary. You don’t need to buy equipment, licenses, and tools, as well as rent an additional office space for new employees.
  12. Flexibility. You can scale your company flexibly by using additional resources on demand, without costly local investments.

Here you read more about benefits.

IT Outsourcing Risks

Software development outsourcing have it’s own risks and problems. You should take it into account and have strategies and metrics to mitigate these risks before starting your new project with a team overseas and to be sure you outsource software development successfully.

  • Lack of control
    Outsourcing any operations, no matter how non-core they are, always reduces the level of control you have over them. The provider is located far away, with most of the communication taking place online. Thus, you have to be ready for such diminished control before sharing any sensitive corporate data with an outsourcing provider.
  • Security issues
    Let’s face it – we live in the world of cyber-threats and cyber-crime, so the risk of losing your confidential business data is always high if you outsource. Thus, it’s vital to exercise due diligence and conduct thorough checks of your prospective partner before sharing any sensitive information.
  • Quality concerns
    Unfortunately, outsourcing enjoys bad fame because of poor quality associated with this mode of work. In an effort to save costs, clients often hire cheap labor in third-world countries and then face the dilemma of either redoing the whole project from scratch or sending it for dozens of revisions to low-skilled IT “professionals” they hired. But this risk can be offset if you conduct a thorough preliminary analysis of the outsourcing market, creating a quality assurance checklist for outsourced projects find the one with a perfect combination of rates and quality – e.g., many countries in the Eastern Europe, including Ukraine, have it.
  • Communication/cultural gap
    Working with people is hard sometimes – task confusion, internal team conflict, absenteeism, etc. can undermine any project even in-house. But working with remote staff may be even harder; here you face more challenges such as the time zone difference, a cultural gap revealed in the work process in the form of different values and attitudes to punctuality, communication, etc.
  • Less attention to your business goals
    Most often, outsourcing companies work with several clients and handle several projects at the same time. As a result, they can’t dedicate 100% of their attention to your project, and you might feel disappointed with such dispersed attention and low commitment to your business goals.

How IT Outsourcing Cure Skill Shortage

Entrepreneurs from around the world choose outsourcing to deal with their hiring difficulties. Startups from Spain, UAE, USA, Sweden are already im proving their development capacity using teams from different outsourcing locations and outsourcing regions like Ukraine, Mexico, Poland, Argentina, Eastern Europe, Asia,  and other locations. You can choose between India and Ukraine,

 

Webinar: Presenting Best IT Outsourcing Destinations in Ukraine

Software Development Projects Entrepreneurs Can Outsource

What can IT tasks and projects do companies outsource? You can start from MVP, startups and enterprise comapanies outsource e-commerce development, web development, app development, web design and QA. You can find vendors that will help you with your, Magento e-commerce project tasks,

Best IT Outsourcing Locations

Best IT outsourcing locations

developers talent pool in largest countries in Europe

Among IT outsourcing destinations in Eastern Europe popular today, Ukraine stands out as a perfect combination of developer rates and service quality. Here are some key features that have already made it an ideal choice for hundreds of clients:

  • Large talent pool (184k+ coders currently available; the number is estimated to reach 200k+ by 2020);
  • Numerous tech university graduates (important for those who require a higher education diploma from employees; potential for future scaling);
  • High level of tech knowledge;
  • Abundance of tech conferences and meetups suggesting an active development of the Ukrainian tech environment and tech skill development;
  • R&D centers of famous international companies;
  • Fair coder rates;
  • Flexible labor market allowing quick head hunting and recruitment;
  • Mature outsourcing market;
  • Multiple collaboration opportunities (dedicated team, project-based outsourcing, etc.);
  • Legal compatibility. It’s hard to work with some countries because of sanctions. In Ukraine, you’ll never experience any trouble; on the contrary, legal and political conditions of collaboration with Ukrainian firms have recently improved.
  • Convenient time zone for online communication during overlapping working hours.
  • Comfortable location allowing vendor office visits; there are numerous plane routes to Ukraine from a variety of countries.
  • A big number of Ukrainian IT outsourcing companies

Conclusion

Now you might have a good idea of why outsourcing IT is a favorable option for any business regardless of the budgetary constraints and opportunities.

Embrace the global talent and choose from millions of available coders in any corner of the world. Take your business to new heights with outsourcing IT services and enjoy the full scope of their benefits for your business efficiency and flexibility.

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Iva Kozlovskaya
Managing Partner
Iva Kozlovskaya is a Managing Partner of Qubit Labs. Iva has been working in operations, sales and project management from the beginning of her career path. Nowadays Iva runs her company that helps clients from the USA, Europe, and the Middle East to establish their development teams in Ukraine.