The future of outsourcing continues to be bright even though there are trends that are changing the market, there are various projections of its expansion. The total value of the information technology outsourcing market came to $64.3 billion in 2017.
Technology is an indispensable part of almost every business and it plays a grand role in the operations and profit. With the necessity to keep up with the technological innovation, be reliable to the market, and obtain a competitive advantage, businesses require an on-going supply of IT talents and thats where IT outsourcing comes in.
What is IT outsourcing?
Companies outsource for a number of reasons and traditional cost-reduction is the main one. However, the outsourcing market climate is changing and the low price is no longer the main factor in the decision-making process when it comes to hiring an IT outsourcing provider, but we will discuss in more detail below.
While many branches of outsourcing exist purely for the cost-reduction (like call centers), software engineering brings in the expertise and knowledge that some companies require.
IT outsourcing is a flexible and cost-efficient way for many companies to meet their technological needs without heavily investing in an in-house team of software development specialists. Reaching the talents that may not be available locally can significantly help company growth.
Outsourcing is a convenient way for companies to make better use of internal human resources by delegating some of the business processes and allowing the employees to focus on more important tasks.
The current state
IT outsourcing as the industry is experiencing healthy growth and is predicted to grow by 4.42% by 2022. If it wasn’t for economic instability caused by the impact of Brexit and possible protectionist actions by the Trump administration we could have witnessed even higher numbers. The global software outsourcing market is on the rise.
There is still a certain stigma associated with the idea of outsourcing. Even though the majority of the companies use outsourcing services, they prefer not to mention it, but with the need for transformation and innovation businesses need to have reliable partners to fuel their growth.
The nature of IT outsourcing is changing. If before the price was the deciding factor, now the value has come to the forefront. Companies are seeking proactive partnerships, rather than detached third-party service providers. Strategic partnerships now matter more than ever.
Successful collaborations are based on supplier and client relationships and partnerships. The customer-oriented outsourcing suppliers with tech-savvy specialists that know how to benefit their clients will thrive the most in this climate.
India and China are still leading the market, with 80% of firms making them the first choice for outsourcing services for a reason - it offers access to the largest talent pool in the world with 3.1 million graduates are added to the workforce each year in India only. And needless to say, the flexible and low cost is still an important factor for many companies.
Software development outsourcing is the most popular type of outsourcing, showing the most growth, followed by website/e-commerce and hosted applications.
Onshore vs. nearshore vs. offshore
Because of the high costs of domestic developers, companies often search for technical help in the foreign countries, but there is a difference between the locations that affect price and project management and should be considered in the decision-making process when choosing the outsourcing supplier. The locations are onshore, nearshore and offshore.
Onshore is basically the same country where your business is located. For the business in the developed countries this would mean the highest hourly rates but at the same time low communication barriers, predictable level of service, same timezone and maybe even location that would allow in-person meetings.
As IT outsourcing is often associated with cost reduction, the next two options are more popular choices compared to onshore outsourcing.
Nearshore are the locations that lie within 2 to 4 time zones difference, often on the border with the home country of business. The convenient location and cultural affinity make it much easier for outsourcing providers to meet client requirements in these countries. The hourly rates can be 2-3 times lower than in onshore locations, which makes rates another important factor when choosing the outsourcing supplier.
Offshore are the locations that are more than 4 time zones away. These locations often offer the lowest prices in the market, but come with certain challenges in communication, cultural match and time management, as their location doesn’t allow the same working hours as onshore locations.
Countries in offshore locations are a great choice for companies that put cost-efficiency first for certain projects. We are not saying that these countries lack talents, but establishing a long-term partnership might be a bit more complicated than in onshore and nearshore locations.
When deciding where to find your IT outsourcing provider it’s important to know the exact requirement of your project, allocated budget and the timeframe in order to find the best fit. Don’t hesitate to look in the countries that are less popular or you haven’t considered before, you might find hidden talents at a very attractive price.
The geographic area is one of the definitive factors of the service price and the level of talent that you may get access to when working with a given outsourcing provider. The customary market positions are shifting, revealing the new competitive countries in the sight.
When we think about IT outsourcing providers, we tend to think first about Asian countries that for a long time were leading the market thanks to their low-priced services and skillful software engineers.
China, Philippines, and India have been ruling Asia Pacific region, attracting global companies all over the world to use their professionals in a number of industries including IT. These cultures have to offer intelligent, hard-working and skillful specialists at the rates that are hard to beat in western countries.
The attractive point about these outsourcing markets that the development doesn’t stop there. Software engineering skills, level of communications in English, customer service - all that keeps improving in order to compete with the new emerging markets and helps Asian countries maintain the badge of IT outsourcing leaders.
The emerging markets in outsourcing that can take the lead in the future are European countries like Bulgaria, Hungary, Chech Republic, Portugal and Latin American countries like Brazil, Costa Rica, Peru, Argentina, Mexico.
The reasons behind the fast growth of these IT outsourcing destinations are simple and obvious - their locations and the quality of services.
For both groups location plays a crucial role, placing them in a convenient distance from the leading economies that require a lot of software development services. Being able to work mostly the same hours as the businesses that hire them, outsourcing companies can offer better communication and collaboration on projects. Instead of having a 2-4 hour window as you would with Asian countries, you can have 6+ hours of contact without getting out of your own way.
The countries in both groups have been heavily impacted by their developed neighbors - the USA and Canada for LatAm, France, The UK, and Germany for European countries, which resulted in a better quality of education, language skills, training programs and alike take on the cultural questions. All of these factors play an important role in outsourcing IT projects.
Better understanding, clearer communications, and not to mention competitive rates make these destinations next hot spots for IT outsourcing, opening up a number of global opportunities for their talents.
Just like any other industry, IT outsourcing going through its own transformation and we can be sure that some traits of it will change or completely disappear in the next decade. Here are the trends that are dictating the direction of future development in IT outsourcing. So what can we expect to see in the years to come?
A transition from a third-party provider to a partner and collaborator is not a distinctively new development for IT outsourcing industry, but it certainly comes to the forefront among factors that are driving the change in the industry.
Companies are looking for a reliable and engaged partner that can give them a new perspective and share expertise where in-house teams may lack it. An involvement that goes beyond simply following the instructions, informed opinions and suggestions, active participation and ownership in the projects, the promise supported by actions and responsibility, providing value beyond the service - these all are the signs of a new level of collaboration between IT service providers and their clients.
Cost is no longer playing the deciding role when companies are selecting IT outsourcing supplier and while it is nice to maintain the costs low - other features drive the decision making the process for most of the companies.
Team model changes
Dedicated team model is a relatively new, but popular, outsourcing practice where the outsourcing service provider and the client agree on the workload and timeframe of the project and the provided professionals solely focus on one project.
A more focused and dedicated approach allows team members to deliver the projects in a shorter time period and with fewer errors thanks to eliminating multi-tasking, or shall we say multi-projecting in this case.
At Trio, we offer ETA, Engineering Team Allocation, to supply our client’s needs in software development talents. Whether it is one developer or a software engineering team, we know how to seamlessly incorporate them in your project without interruption to your regular business processes. The project-based approach allows our clients flexibility in team management and access to a dedicated team that focuses on one project at a time to provide the best software development quality to our clients.
While this model won’t completely replace regular outsourcing team model any time soon, it has already gained a lot of approval thanks to the simple pricing (salaries of team members + service provider fee), flexibility, team scalability, and cost-efficiency.
It is safe to say that whatever operations, that do not require creativity and human touch, can be automated with the rise of artificial intelligence and machine learning. While we might not live long enough to see the machines having feelings and emotions, we have already witnessed them becoming a part of our daily lives.
Take chatbots for example - they replace booking agents, customer support, call centers. The machine development is happening at the amazing speed and while it might be a threat to some jobs, it does create new jobs and possibilities in different fields in turn.
Automation, in turn, requires a reevaluation of the business processes. If the processes are inefficient or ineffective it doesn’t make sense to automate them, and some processes are better off being completely eliminated.
Outsourcing smaller projects
Small and medium businesses will get more involved with IT outsourcing. If before it was a privilege of global companies with the millions in operations, now size doesn’t matter that much. The niche providers are looking to establish long-term relationships while offering more narrowed specific services that fit perfectly the demand from small and medium enterprises.
IT service providers take a large number of smaller projects in order to be more competitive and generate revenue. While the bigger contracts take much more time to be set up and are much harder to find, smaller projects provide flexibility and can often lead to larger jobs afterward.
Focusing on narrow niches also leads to multisourcing when the companies operate several IT outsourcing providers for specific jobs or tasks. That helps to optimize costs and choose the best providers for a long-term commitment among niche experts.
For small companies outsourcing becomes a competitive advantage, granting access to more expensive and advanced technological solutions. With the lower cost of implementation and maintenance, small and medium companies can compete with the established large companies, which is especially important for start-ups that need to show their potential quickly.
Growth of new markets
As we mentioned before, new countries in South America and Eastern Europe are entering the international outsourcing arena with a strong intention to shift India and China off the pedestal. More convenient locations, geographical proximity, high English levels, and outstanding technical knowledge makes the developers from these countries attractive candidates for software development projects in international companies.
For businesses, it means access to a fresh pool of software engineering talent that can bring their expertise and fresh perspective to solving existing IT challenges. One of the nearshore location advantages is that the countries there invest in education for technical specialists and are supporting digital transformation in order to be relevant in the market.
The economic conditions are not the last thing to consider as well. Global businesses seek stable economies supporting technological development where they can turn to in order to set-up nearshore and offshore tech centers and find third-party IT service providers.
New Generation Of Outsourcing
As we have mentioned outsourcing is changing from its traditional ways to a new generation of service with the help of Intelligent Automation (IA). In the past outsourcing wasn’t a synonym of innovation, on the contrary it was a way to reduce the costs through delegating the repetitive time-consuming business processes. Now the situation is changing.
AI has created the opportunity for outsourcing providers to use data and automation to gain competitive advantage. The rise of machine learning requires a huge amount of data to be gathered and processed to supply learning processes. This creates a demand for the ability to analyze and process information through the automated processes.
Some of the characteristics of new generation outsourcing deals include greater standardization of services, more value-based pricing, coordination of outsourcing that address innovation as the goal of many organizations.