What Is IT Outsourcing in 2022, Full Guide: Types&Models, Definition, Benefits, And Reasons To Outsource

IT outsourcing has become a mainstay for both big companies and startups. The global IT Outsourcing market was valued at $520.74 billion in 2019 and it is anticipated to grow at a CAGR of 7.7% by 2027. It is a fast-growing part of the industry, and it’s easy to see why. Technology, data, and cybersecurity are now vital to the operation of every business, and as they evolve and become more complex, it's almost impossible for one company to manage everything on its own. IT outsourcing spending is expected to exceed $1.3 trillion by the end of 2023 as companies step up their search for digital transformation experts to help their business stay ahead of competitors, find new efficiencies, and improve productivity.

Types of Outsourcing

What is outsourcing in business, and whether all companies need it? IT outsourcing is the business practice of hiring external specialists to effectively deliver IT-enabled business processes, infrastructure solutions, software development, or outsourcing QA testing. Companies may choose to outsource IT services in three ways:

• Onshore. This type of outsourcing means the outsourced specialists are located in the same country as the client organization. The main advantages of this method are in-person collaboration and greater perceived responsibility. There are also minimal potential differences in language or professional culture between partners. The most common disadvantage of onshore outsourcing is the high local cost for IT specialists.
• Nearshore. This process implies hiring specialists based abroad but in neighboring countries with the same time zone. The advantages of nearshore outsourcing include significant cost savings, unproblematic remote collaboration, and geographical proximity, allowing professionals to conveniently travel and spend time on-site with the client's organization if and when needed. Professional culture is also considered closer between Western and Northern Europe and Eastern Europe nearshore destinations than most offshore alternatives. However, similarly to the onshore type, this option isn’t always profitable.
• Offshore. Offshore outsourcing of IT services refers to more distant destinations with time differences between countries of at least 5-6 hours. Which of the following is an advantage of offshore outsourcing? The core advantage of this type of outsourcing is cost savings, which are usually more pronounced than nearshore or onshore alternatives. For example, IT professionals in California, USA, can cost 2-3 times more than similar professionals in the Midwest. The downside of the offshore method is that specialists have to work after hours due to extreme time differences to provide the overlap needed for live collaboration.

Common IT Outsourcing Services

The most popular services offered by IT outsourcing companies include

• Software development, including web development, native and cloud-native development, and mobile app development.
• Technical support.
• Hosting.
• Database development and management.
• Infrastructure design and set-up.
• Telecommunications.
• Quality assurance and software testing.

IT Outsourcing Models

The most popular cooperation models between the client and IT outsourcing vendor include staff augmentation, project-based outsourcing, dedicated team, and opening an offshore development center (ODC). The appropriate model for an IT service is typically determined by the type of service provided and can be varied from one project to another, depending on needs and business case.

Staff augmentation

This outsourcing strategy is aimed at hiring top-level tech specialists on an external basis for short- or long-term projects. Staff augmentation allows businesses to choose candidates that fit the requirements to cover necessary positions in the team.

“Despite the fact that everyone working on the project is immensely talented, you're still missing key skills necessary to bring your product to market (Forbes).”

Staff augmentation is a great way to expand your team, increase productivity, and get closer to your goals. The right team can significantly optimize the workflow and offer solutions you may not have thought of before. Staff augmentation is also usually less expensive than hiring local IT talents and allows you to save the time needed for existing team members to acquire the knowledge required to complete your project. According to a Deloitte survey, 70% of companies reported cost reduction as their primary goal of outsourcing.

Project-based outsourcing

With the project-based IT outsourcing model, the client hires a team of specialists to implement the part of work, which is already planned and defined. This strategy is suitable for not complicated projects that have well-studied functionality and aren’t likely to change during the development process. The project-based model saves time for your in-house team and doesn’t require your full control as the PM from the outsourced team takes full responsibility for the project. The model also speeds up the hiring process and has clear deadlines and the output. The project-based outsourcing downsides are less control over the project and developers and a lack of flexibility. Moreover, it also requires the full specifications of your project at the beginning.

Dedicated team

With this model, you hire remote developers who create a project and report directly to you. These specialists may form your entire development team or collaborate with the in-house developers. Unlike the project-based model, a dedicated team is more engaged in the project and works on it full-time. This outsourcing model works well for clients interested in long-term cooperation as their projects require a significant amount of work. An outsourced team can offer ideas and suggest alternative solutions and doesn’t need the complete set of project requirements at the beginning. Hiring a dedicated team gives you full control over the project and more flexibility with the project costs as you can change the team size as requirements change. This model also gives extra time for your in-house team to work on the big picture. A dedicated team best suits for complex long-term projects with the potential to expand and for early-stage startups that are expected to grow.

Offshore Development Center (ODC)

An ODC is a development office with a team of software engineers located in an offshoring country. This outsourcing model allows the company to gain access to larger talent pools and benefit from lower labor costs. The ODC is an effective business model for startups and large IT companies. It helps to establish the company’s presence in another country, allowing development teams to operate under the same brand as the head office and follow the general corporate policy. Apart from cost-saving opportunities, the offshore software development center model also leaves much room for independence, giving you complete control over the work process. It means that without third parties having access to the development of your product, you will reduce the risks associated with your intellectual property rights.

IT Outsourcing Pricing Models

Traditionally, most contracts provided by IT outsourcing companies have been billed based on time and materials or a fixed price. However, outsourcing services have evolved from simple basic needs and services to more complex partnerships capable of generating innovation and transformation, leading to new contractual approaches that include managed services and more result-oriented arrangements. For the moment, there are eight most common ways to structure an outsourcing agreement. Time and materials. T&M or Time and Materials is a pricing model in which the client pays the developer based on the time spent working on the project. This approach is prevalent in IT outsourcing as it provides the client with the flexibility and ease of adjusting requirements without additional fees. The T&M pricing model can be appropriate for large and long-term projects where scope and specifications are difficult to estimate in the initial stages. The most significant advantage of this model is its flexibility, as specifications and enhancements can be negotiated upon at any project stage. The downsides of T&M pricing are low budgeting control as you can’t accurately predict how much money you’ll spend and pricing for ‘idle time’ - a period when developers are waiting for client feedback and can’t work on a project.

Unit/On-demand pricing. Within this cooperation model, the client pays for computing capacity hourly or per-second for the EC2 instances he uses. This model is the most flexible and best suits for apps with short-term, widely fluctuating, or unpredictable workloads that cannot be interrupted. With on-demand pricing, you pay more than in other pricing models, although it can be an excellent option for organizations running the EC2 instances in a minimal amount, like a couple of hours, a few days a week. Some organizations may also start with on-demand pricing to get a better idea of their usage before moving on to a cheaper pricing model.

Fixed pricing. In the case of fixed pricing, the deal price is determined at the beginning. Any extra work that was not specified in the documentation goes under an additional agreement. This model works well for projects with stable and clear requirements, goals, and scope. Fixed pricing can be appealing as it makes costs predictable regardless of the time and expense. Among the disadvantages of this model is long planning, as the fixed-price contract demands discussion of every detail and action along with possible pitfalls.

Cost-plus. In this pricing model, the client pays the IT outsourcing provider actual costs plus a fixed profit percentage. The cost-plus pricing plan is very transparent and is most commonly used when building dedicated team fees. In this model, the expenses include the costs of human resources, management, infrastructure, and operational fees. The cost-plus pricing method focuses on internal factors like production cost rather than external factors like consumer demand or competitor prices and is a good fit for businesses pursuing a cost-leadership strategy.

Performance-based pricing. This model is also known as incentive-based pricing. It implies the provider is rewarded with a bonus payment when the performance goals are achieved or exceeded. Conversely, this type of pricing requires suppliers to pay the penalty for unsatisfactory service levels. This model is often used with a traditional pricing method, such as fixed-price or T&M. Performance-based approach can be beneficial when the customer can identify specific investments the provider could make to deliver a higher level of performance.

Gain-sharing. This pricing method is based on the value provided by the supplier beyond its typical responsibilities but deriving from its contribution and expertise. The gain-sharing approach is best for customers aimed at significant business improvements. This pricing model encourages collaboration and creative problem solving as both parties work toward common business goals while working in an alliance. The gain-sharing approach also affords the IT suppliers greater freedom to determine how to achieve the best results.

Shared Risk-Reward. Within this pricing model, a customer and provider fund the development of new products, services, or solutions and share both the risks and the reward. This model spreads the financial risks between both parties and encourages the provider to develop ideas to improve the business. It also reduces some risks of new technologies and processes by assigning responsibility to the vendor.

Why You Should Use IT Outsourcing

No one today can deny the popularity of outsourcing in all business spheres, whether it be finance, software development, accounting, or any other type of service. While comparing the costs of outsourcing to the cost of staff employees, in most cases, it’s much easier to plan your budget with the outsourcing option. With in-house staff, you would need to pay for annual and sick leaves, while with outsourced IT specialists, you would only pay for the services your company ordered.

Recruitment costs are one of the most significant points in favor of outsourcing. According to Deloitte’s Global Outsourcing Survey:

• 59% of businesses said cost-cutting was a key reason to outsource IT specialists.
• 57% of companies stated IT outsourcing services enabled the company to focus on its core business functions.
• 47% confirmed IT outsourcing solved their capacity issues.

Outsourcing means saving money. Due to the lower labor costs, cheaper infrastructure, and advantageous tax system in the outsourcing countries, IT companies can significantly reduce operational costs. However, besides the financial benefits, outsourcing also gives access to skills that are unavailable locally, allowing customers to find the necessary specialists for their projects to increase productivity, offer new ideas, and suggest alternative solutions. A tech talent shortage is an emerging problem in the IT industry, with many companies saying they are already experiencing gaps in their IT teams or expect them within a few years. In 2019, 54% of companies reported IT talent shortages, and this number is expected to grow.

Source: Manpower Group

Another reason for organizations to outsource solutions for their IT needs is the growth of IT budgets. Often, hiring in-house employees to keep pace with capital investment in IT is not practical.

There are several important moments in each company's life. There is obviously the day of establishment, a day when 100 professionals join the team and the day when the flow of tickets becomes so big that you start to ask yourself whether your business needs to outsource some tasks (Forbes).

While outsourcing IT providers, you can also better use internal resources, as by delegating some of the projects to a third party, you allow your in-house employees to focus on more meaningful tasks for your company. To maintain productivity and steady growth of a company, you should find an optimal balance between outsourced employees and in-house specialists. During growth, many companies find they would benefit from more staff, but not all can afford the expenses coming with hiring more full-time employees. Hiring outsourced professionals is more affordable and is a great way to ensure your company’s sustainable growth while keeping your team focused on internal tasks.

Another benefit is that outsourcing provides you with flexibility. For example, you can scale your outsourcing needs before a busy season without the financial commitment to hiring in-house employees and quickly switch back to an entirely in-house team when it’s needed. If you outsource your business to a well-experienced and trained team, you can also significantly accelerate the business processes and manage workloads.

Outsourcing Locations by Region and Outsourcing Cost

By hiring outsourcing IT specialists, a company can reduce the cost of developing a web or mobile app by up to 60% without losing quality. For example, the average software developer rate in the US ranges from $75-125 per hour, while the same quality developer in Ukraine will need $35-40 per hour. Global market analysis and price comparison between different countries is the first thing any businessman does before hiring an IT provider. Let’s look at the best outsourcing locations by region in 2021-2022.

Ukraine is the best company for IT outsourcing in Eastern Europe due to many skilled specialists, favorable prices, location and culture, convenient time zones, and a decent level of English. Choosing a Ukrainian IT company for your outsourcing needs will provide you with access to the extensive talent pool of IT engineers and other specialists you need to develop your projects.

About Brocoders

We are a company specializing in building web-based and mobile app products. Working in Agritech, Fintech, Fitness&Healthcare, Ridesharing, Foodtech, and Events management industries, Brocoders can help manage your product at any stage of its development. Whether it will scale or be developed from scratch - our team of 87 top specialists can successfully handle it. Our company has eight years of experience and, besides programming, can also provide you with user experience, graphic design, and project management consulting. Brocoders team has successfully implemented 85 projects worldwide regardless of the client's location and time zone differences.

You have an opportunity to hire a single developer or a whole dedicated team for your project. We have 60% of senior engineers on board, and each of our developers will work directly on your project, diving deep into its essence and bringing you closer to your business goals.

In IT outsourcing, the adage “You get what you pay for” doesn’t work. Accessibility to top-notch professionals all over the globe allows you to find excellent services at very different rates. The only thing that matters is finding the most suitable team for your needs. And here the choice is simple - choose the best. Choose Brocoders.