What Is Outsourcing? How Does IT Outsourcing Work?
What Is IT Outsourcing?
Outsourcing is the business model when a company hire a another company to to perform services and develop projects/ produce goods that previously where developed/performed in-house by 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.
What Are the Benefits of Outsourcing?
Outsourcing is getting ever more commonplace from day to day, and those considering this option should have a firm grasp of all consequences such a business decision entails. Here is a snapshot of outsourcing IT pros and cons for the client.
- How does outsourcing save money
While hiring an outsourced coder, team, or even company requires just finding one and paying to them, hiring a new in-house staff member may be labor- and cost-intensive. You need to invest time and money into the process of candidate search, interviewing, and recruitment. Afterwards, you are likely to pay taxes and social package extras for him/her, as well as equip the working place for each new staff member with the required hardware. Too much to make a single project (or even part of it) done, right?
- Greater choice of workforce
If you hire locally, your choice is very limited by the staff available nearby. It’s hardly a good idea to find a talented specialist in another country and pay a pretty penny for his/her relocation unless this employee possesses some extremely rare talents and knowledge. When it comes to outsourcing, your choice is unlimited as you can search worldwide and get a great employee to your team at a highly competitive rate.
- Lower rates if you outsource
By hiring outsourced workforce, you traditionally pay less than you would to a full-time in-house employee. That’s why the outsourcing option emerged, after all!
- Better business focus
Once you outsource some non-core tasks to an external vendor, your in-house team will surely have much more time for the core business tasks to take your company to a new level.
- Enhanced efficiency and productivity
If you have a small in-house team, it won’t be able to manage all tasks on time and with stable quality. Thus, hiring outsourced supportive workforce can become a great investment into enhanced business efficiency.
- Greater competitive advantage due to diversity
Most Western companies prefer to find outsourcing vendors in Asia, Eastern Europe, or South America. Such a choice is reasonable for economic reasons, and it brings in new insights and new cultures to the company. A flexible and diverse business with understanding of various perspectives is doomed to success in the modern globalized market.
IT Outsourcing Risks
- 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 and 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.
Cost-Effective Outsourcing Techniques
Outsourcing comes in many forms and types depending on the criteria you set. By location, it is offshore, nearshore, and onshore outsourcing. 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 nearshore or offshore IT staff, as web app development costs are more or less similar across one country.
Check out Outsourcing Country Guide, that will help you with a research.
In terms of service types, IT outsourcing is divided into:
- Professional (accounting, advertising);
IT Outsourcing Services
Outsourcing vendors provide two broad types of services:
- 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.)
- 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 dedicated team (with a ready team working exclusively on one client’s project).
Outstaffing may also come in two forms:
- Staff augmentation. 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 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.
Overall, the price is determined by:
- Tech stack
- Seniority level
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.
– the cost of outstaffing 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 – https://qubit-labs.com/how-to-hire-php-developer/. This sum is only salary, not including bonuses, social package, and overhead costs.
12 Benefits of Outsourcing for Small Businesses
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:
- No capable specialists in your location (city or country), which is especially topical for small states.
- Ability to select among a broad variety of developers based on skills and budget.
- 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.
- 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.
- 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.
- Adding diversity. Outsourced employees usually come from different cultures and countries, thus bringing new perspectives to your business.
- 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.
- Team expansion. You can always consider entering to a new market and setting up a new office in a new country.
- Convenience. By hiring a Project Manager, you can avoid the management hassle with a remote team.
- 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.
- 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.
- Flexibility. You can scale your company flexibly by using additional resources on demand, without costly local investments.
Outsourcing Companies in Ukraine Landscape
Did you know that Ukraine is home to one of the largest IT communities in Europe? It ranks the 9th in the list of the countries with the biggest IT talent market, having 180k+ software developers.World-renowned companies like Jooble, DepositPhotos, Petcube, CleanMyMac, Grammarly, InvisibleCRM, and Readdle, just to name a few, started in Ukraine.
What are the largest software development companies in Ukraine, and what do they do?
But if there are so many outstanding software development companies in Ukraine, where do you start? In February 2019, the Developers of Ukraine community DOU.ua, which is the leading online community for software developers, compiled a rating of Ukraine’s top 50 IT outsourcing companies https://dou.ua/lenta/articles/top-50-jan-2019/. We want to introduce you to some of the leaders.
With 6600 employees in Ukraine and headquarters in the USA, EPAM is on the very top of the list. Also, this company has ranked #12 on the Forbes’ list of Fastest Growing Public Tech Companies https://www.forbes.com/pictures/59234347a7ea434078d44581/12-epam-systems/#34c6bd167e16. This developer provides services in areas like banking and finance, commerce and travel, media and entertainment, software and hi-tech, healthcare and life sciences.
SoftServe Inc. is the largest global IT-company with purely Ukrainian roots that has proudly been the best employer of 2010-2015 according to the Developers of Ukraine, AON Hewitt, Hewitt Associates and HR Center, among others. With just over 6300 employees and headquarters in Lviv (Western Ukraine), this is one of the leading global outsourced product and application development company. And, taking into consideration SoftServe’s 200+ new job openings, the company is well set for continued growth.
With just over 4000 employees and headquarters in the US, GlobalLogic is a full-cycle software development company with offices in four Ukrainian cities. Concentrating on digital media, electronics, finance, retail business and telecommunication, GlobalLogic works with startups as well as with industry leaders well known on both hardware and software markets.
Luxoft ranked #4, with just a bit under 4000 employees in Ukraine and an HQ in Switzerland. With its deep expertise in finance, telecommunication, energy, automotive, travel, and aviation industries, Luxoft managed to build long-lasting partnerships with companies like with Boeing, IBM, Deutsche Bank, and many others.
Ciklum ranked #5, has seven offices in Ukraine, and the HQ located in Denmark. Of more than 2800 employees, about 2500 are technical specialists who are involved in over 200 global client teams worldwide. Its areas of expertise are as diverse as gaming, digital advertising, banking, and financial services. Ciklum was the first company in Europe to receive IC Agile certification in 2009. Workers of this company are native speakers in 15 languages: English, German, French, Italian, Irish, Danish, Hebrew, Russian, Ukrainian, Belarusian, Pakistani, Arabic, Swedish, Dutch, and Polish.
On top of it all, 17 Ukrainian IT outsourcing companies got ranks in The Global Outsourcing 100 https://www.iaop.org/GlobalOutsourcing100, which is the International Association of Outsourcing Professionals annual list of top tech firms (as of February 2019).
Which Countries Are Suitable for IT Outsourcing?
Among outsourcing destinations 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.
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.