What is IT outsourcing? Definition and guide for businesses

From large enterprises to small startups, businesses of all sizes and specializations are now outsourcing IT services such as software development. 

But what exactly is IT services outsourcing? How many companies are using this model to win in their industries and get ahead of their competitors? How does outsourcing work?

If you've been asking yourself these questions and wondering whether your business could benefit from IT outsourcing, this article is for you. Here's everything you need to know about outsourcing IT services to make the smartest decision for your company.

What is IT outsourcing?

In IT outsourcing, you employ an external service provider to deliver some or all of the IT functions your business requires. This could be anything from IT strategy and software development to running the service desk or managing the infrastructure.

The core of outsourcing lies in the fact that the provider takes full responsibility for all the tasks delegated by you, including development team management, project management, and product development.

IT outsourcing can take on many different forms (more on this later on). At this point, it's important to differentiate between two basic models:

• Managed service - in this scheme, the provider takes full responsibility for all of the IT maintenance and support tasks,
• Team extension/co-sourced IT support - in this model, the provider provides additional support for the in-house IT teams.

Outsourcing allows us to get the best specialists on the market. You can use one provider for all your IT requirements or delegate different elements to multiple service providers. The choice is yours, and you have full control over the shape IT outsourcing takes to bring maximum benefits to your company.

Benefits of outsourcing

Businesses decide to outsource IT tasks for many reasons. Here are some of the most important ones:

• You get to hire the best talent available on the market to contribute to your business growth - geographical location is no longer a problem in outsourcing schemes such as offshoring where you can hire specialists from all over the world.
• Your business can save up a lot on IT costs - running a full IT department or having an in-house development team building your product is expensive. By teaming up with an expert company, you get great value for money because you save up on sourcing, recruiting, and managing an in-house IT team.
• Outsourcing helps to mitigate risks or long-term commitments that come with hiring a full-time team of IT experts - a provider can scale the engaged team up or down depending on your changing business needs.
• You save lots of time - IT outsourcing is a standardized service that is easy to set up, leaving you free of worrying about administrative issues or overhead expenses.
• Your business can grow faster - the world is going remote, and the current Covid-19 pandemic has only accelerated the process. By outsourcing IT tasks, you can benefit from top experts in the field and accelerate your business growth thanks to the value they bring to your company.

Risks of outsourcing

Business owners looking to outsource software development and other IT tasks should be aware of the following risks:

• Language/cultural barriers, 
• Time zone differences,
• Hidden costs - The total amount of an outsourcing contract doesn't always accurately represent the number of resources you will spend when delegating IT services to a third party. 

Solution: When choosing the provider, make sure that the company has the tools and processes in place that allow collaborating with businesses in your region seamlessly. 

For example, at Teams by Sunscrapers we hire only candidates with demonstrated knowledge of the English language because we know how important this is for smooth communication during the project. We take extra care to provide our clients with candidates who have the right mix of hard and soft skills, ensuring that they’re a good culture fit for the company. Many years of experience in working remotely and with companies located on the other side of the planet allowed us to create battle-tested processes and proven toolkits that help to mitigate these risks of IT outsourcing.

What about the hidden costs? You can easily avoid this expense by teaming up with a company that has an excellent track record in such collaborations with companies from your region. If that's the case, it's likely that the provider has processes, tools, and workflows that support long-term outsourcing partnerships and eliminate unforeseen costs.

Key IT outsourcing statistics you should know

Wondering how popular IT outsourcing really is? These statistics show the value and impact of the IT outsourcing market:

• The global outsourcing market was worth $92.5 million in 2019. (Statista)
• In 2019, $26 billion in global revenue was generated by business process outsourcing (BPO). (Statista)
• In 2020, the market size of the outsourcing industry in the United States reached $132.9 billion, and it's expected to grow by 1.6% during the year. (IBISWorld)
• Cost optimization is still an important reason for outsourcing, but it's no longer at the top of the list for executives who instead look for IT innovation, increase in time to market, performance improvement, and rapid scalability enabled by outsourcing (especially in the area of cloud computing). (Deloitte)
• The United States is the largest outsourcing market - in 2017, 84.2% of IT and BPO outsourcing deals came from the States. (KPMG)
• Businesses with 50 or fewer employees are less likely to outsource than businesses with more than 50 employees (27% vs. 66%). (Clutch)
• More than 1 in 3 small businesses (37%) currently outsource a business process - and more than half were planning to do it in 2019. (Clutch)
• Small businesses outsource to increase efficiency (24%) and gain extra available expertise (18%). (Clutch)

Which IT services are typically outsourced?

• Software development - starting from product development to the actual creation of a desktop, web, or mobile application.
• Infrastructure - spanning over hardware, software, and network support, installation, and management
• Data - database development and management, data storage, data center management, disaster recovery strategy
• Cybersecurity - protection against malware, security policy development
• Technical support or help desk management
• Application support or management

Types of IT outsourcing

Offshore outsourcing (offshoring)

This model involves delegating IT-related work to a company located in a foreign country, usually located on another continent. It's important to choose a provider in a politically stable country and with a well-developed IT infrastructure. That's why Eastern Europe - and, in particular, Poland - has become such an attractive outsourcing destination for companies from the United States and Canada.

Nearshore outsourcing (nearshoring)

In this scheme, you outsource the work to a provider located in a foreign country that shares a border with your country or is located nearby. An excellent example of a nearshoring collaboration here at Teams is a collaboration between our team in Poland and the client’s team in Sweden.

The idea behind nearshoring to enable easier travel and communication between companies. Another advantage is mitigating the risk of language/cultural barriers, and potentially smaller differences in local legislation (for example, regarding data localization). 

Onshore outsourcing (domestic outsourcing)

This model involves contracting an outsourcing provider located in the same country. The provider can then carry out the work either remotely or on-site (or in a mixture of the two). The benefits of domestic outsourcing lie in the easier tax and legal matters - after all, the company abides by the same local rules.

Managed services

In this model, you outsource the responsibility for maintaining various processes and functions with the goal of improving operations and reducing expenses. Managed services is a strategic partnership where the provider anticipates the client's needs and provides the company with a comprehensive range of services to meet them.

Cloud computing

Cloud-based services account for a large chunk of outsourcing partnerships today. For example, a company can contract an external service provider to provide IT-related services over the internet. Popular examples include Infrastructure-as-a-Service (IaaS), Platform-as-a-Service (PaaS), and Software-as-a-Service (SaaS).

IT outsourcing pricing models

Here are the most common ways companies structure an outsourcing engagement:

Time and materials

The client pays an amount based on the time and material the provider used to complete the work. This approach is often used in long-term application development and maintenance contracts. It works well in scenarios where the project scope and specifications are difficult to estimate or change rapidly.

Fixed pricing

This pricing scheme is a deal determined at the start of the project. That's why it's used only when project requirements, objectives, and scope are clear, and we expect them to stay the same. Paying a fixed price is attractive because it makes the costs of outsourcing predictable. 

Conclusion

We hope that this article clarified the meaning and value of IT outsourcing for business development. If you'd like to get more expert advice about outsourcing, keep a close eye on our blog. 

To check how such partnerships work in practice, have a look at our case studies section, where we show how our staff augmentation helped our clients grow their companies.

Are you looking for a team of experts who have the right skills and cultural fit for your project? Get in touch with us to learn more about our staff augmentation services.