How to Outsource IT Services Wisely in 2022: Pros, Models, Examples, and Pricing
What is the best way to build a digital product today?
If the question is about the most time- and cost-efficient way that provides the best results, then the answer is IT outsourcing.
The list of outsourced IT services includes web and app development, quality assurance, UX/UI design, business analysis, DevOps, marketing, and more.
As of 2022, the revenue of the IT outsourcing sector is projected to reach $3.59 billion in the USA alone by 2026. This number indicates that more and more companies will be outsourcing IT services, and even more businesses will use them.
Even Google, GitHub, and Slack prefer to outsource some of their tasks for better business efficiency.
You have a complete information system outsourcing guide in front of you that uncovers the essential secrets of successful outsourcing
Here’s a sneak peek of what information treasures are waiting for you:
- IT outsourcing services & key outsourcing models
- Benefits of IT outsourcing in practice
- What benefits you can get from outsourced IT services depending on your industry
- Factors driving outsourced IT service costs
- Step-by-step instructions to find outsourced IT service providers
If you want to explore these and more principles, continue devouring this article.
What Are Outsourced IT Services?
IT outsourcing is the process of hiring third-party service providers to deliver some of the IT processes that the client requires. The main goal of outsourcing IT services is to help clients build digital products and solutions while reducing costs, accelerate the time to market, and provide access to the best experts from across industries.
Depending on the purpose of IT service outsourcing, you can either work with an onshore company or an offshore software development company. We’ll talk about key models later in the article.
In 2022, the list of top IT outsource service locations includes the following areas and the benefits they offer:
- Asia – cheap workforce at a relatively high level of provided services
- Eastern Europe – affordable services, high quality of provided services, strong technical experts
- Latin America & Mexico – low development cost, no extreme time differences
- USA – the center of the development world, no time difference but high prices
More and more companies are using IT outsourcing services from companies in Eastern Europe. The region is unique in its nature and offers numerous benefits.
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What the IT Outsourcing Industry Looks Like in 2022
So, what does the industry for outsourcing IT services look like today?
The industry is prospering, and it seems that nothing can stop its growth. Here are a few statistics that will allow you to evaluate its size and perspective:
- Global outsourcing market revenue was estimated at $92.5 billion in 2019. In 2021, the market is projected to have grown to $359.8 billion in revenue. By 2026, the market will grow to $425.19 billion at a CAGR of 4.5%, (Statista, 2022).
- From 2020 to 2024, the market of outsourced IT services is projected to grow by $97.51 billion at a CAGR of 4.58%, (Technavio, Jan 2020).
- Around 25% of all companies increased investments into outsourcing in 2021, (Flexera)
- In 2021, small businesses planned to outsource some tasks to improve efficiency and access required resources, (Clutch, 2021)
- In 2020, 70% of businesses turned to a company providing outsourced IT services for cost reduction, (Deloitte)
Without a doubt, the market for outsourcing IT services will continue to grow because of the advantages offered and the growing need for software development services.
List of IT Outsourcing Services: Examples
When we talk about outsourced IT services, we mean almost any service possible. The list below demonstrates the most popular examples of software development services that you might be interested in:
- Software development – businesses that need help turning their idea into a technical project often outsource software development. The list of services includes development, design, quality assurance, DevOps, etc.
- Web and mobile app development – these services help businesses expand their mobile and web presence by building applications for the most popular mobile operating systems, such as iOS and Android.
- Software support – after the release of a product, businesses need to continue working all the time on improvements, bug fixes, and the maintenance of their solutions.
- Quality assurance – an essential outsourced IT service that allows companies to test solutions to ensure that their performance and functionality match business requirements and don’t have any bugs.
- UX/UI design – this service helps companies create the visual side of their software solutions and define how users will interact with them.
IT Outsourcing Models
Outsourcing is a term that encompasses some more specific notions. Let’s review some of the most popular types of IT outsourcing:
- Staff Augmentation
This model of outsourced IT services is the best solution for businesses that already have an in-house development team but lack some specific talents like, for example, DevOps or designers. Since companies don’t always want to hire a whole team, outstaffing allows them to quickly find the required talent without the bureaucracies related to the hiring process.
- Dedicated Team
This type of IT services outsourcing is suitable for long-term projects that require the involvement of an entire development team. This model allows you to save money on recruitment, management, and office expenses since the team works off-site.
- Project-based Team
This model of outsourced IT services fits projects that take from 3 to 9 months of active development. This model allows companies to do the required work quickly and without a long recruitment process.
- Offshore Dedicated Center (ODC)
This model is suitable for large projects and for companies that want to have full control over the development team. Instead of hiring a team on-site, they can open a dedicated development center in a country with more favorable tax systems and lower labor costs. You can either open your own office or partner with an outstaffing vendor that will take on recruitment and hiring on your behalf. The team will work from your partner’s offices while you will retain complete control over its management.
Want to know all the differences between the types of outsourcing technology services?
Check out our article Offshore & Nearshore Software Development: Practical Guide to Choosing the Best IT Vendor. This exhaustive guide explains how to choose the best location for outsourcing technology services.
Based on the outsourcing location, IT outsourcing services are divided into the following types:
- Local outsourcing – hiring a team within your country; for example, when a company from the UK works with a development company located within the country.
- Nearshore outsourcing – hiring a company from nearby locations; for example, when a company from the USA hires a team in Mexico or Latin America.
- Offshore outsourcing – hiring professionals from a distant location; for example, a company from the USA hiring a team in Eastern Europe.
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Outsourcing IT Services: Pros and Cons
Why do companies outsource IT services?
There is not one, but a few reasons why small, medium, big, and even enterprise companies turn to outsourced IT services. The list includes reduced development costs, access to a broader talent pool, higher expertise, and more.
Let’s review the top 7 benefits of IT outsourcing in more detail.
1. Reduced Expenses
Cost reduction is the first and foremost reason why outsourcing IT services is so popular today. This is possible thanks to a number of reasons:
- Lower hourly rate – some regions in the world, such as the USA, UK, Canada, and Australia are very expensive when it comes to running a business. You can cut the development cost up to 70% by outsourcing services to Eastern Europe thanks to lower labor costs.
- Low tax rates – when comparing the USA and Europe, there is no doubt which region has a more favorable tax system for businesses. That’s why Eastern Europe has become a mecca for companies that need outsourced IT services.
- Paying for the job done – one of the key benefits of outsourcing IT services is that you pay only for the job done. For example, when you don’t have tasks for a QA engineer, you don’t pay for their time the way you do with full-time employees.
2. Access to Global Talent Pool
Local hiring is very limited. Even if you have offices in a few different cities, the choice of professionals is bound to these locations. When you move globally, you can get access to the best talents on the world’s market, even some of the rarest experts in the world who are very unlikely to relocate.
3. All-Encompassing Expertise
A software developer can’t possibly know everything. Something could change within your project even after you’ve hired a team. With an in-house development department, you would need to spend a lot of time on recruitment and spend twice as much money on salaries. With outsourced IT services, you can engage a professional on the project for a week or two as soon as the need for said professional arises.
4. Reliable Technicians & Qualified Service
Is your business actively involved in development? No? Then how can you gauge the skill levels of applicants?
You don’t have to run the recruitment process yourself when you decide to turn to outsourced technology services. You can trust the outsourcing company to find and hire the best professionals for your project. All the while, it’s much easier for these companies to hire top-level IT talent than it would be for you to hire them for a one-time project.
5. Significant Time Savings & Flexibility
Faster time to market is an indisputable benefit of IT outsourcing services. You can start the development process faster since you won’t have to waste time hiring a team. This means you can launch the project faster.
6. Ability to Upscale Quickly
You might find one day that your project has taken off. While this is good news, it also takes a toll on the business, as you will need to quickly scale the development team. With in-house tech departments, you might have issues with finding the required professionals right away.
Outsourced IT services free you from such problems, as vendors usually have a few experts that can extend your team. Even if there are no experts, outsourcing companies have a wide pool of professionals that could quickly join them on the project.
7. Uninterrupted Workflow
All of the advantages mentioned lead to uninterrupted workflow when all the processes run smoothly and without any hiccups.
A software development vendor takes on the most time-consuming tasks such as recruitment, taking care of the office, and all employment-related bureaucracies. As a result, you can concentrate on business-related tasks while professionals are working on the tech side of the project.
Disadvantages of Outsourcing IT Services
Outsourcing is associated with certain risks as you are entrusting a third-party vendor with an important part of the work. Let’s review some of the cons of IT outsourcing services:
- Security issues – when working with a third-party company, you need to fully understand how your partner handles security matters and what security protocols are in place. Otherwise, you risk interfering with local security regulations, leading to hefty penalties or successful hacker attacks on your digital product.
- Potential downtime – this problem can arise both with onshore and offshore outsourcing. When certain issues arise, you could face downtime. If there are no professionals to resolve the problem as soon as possible, this can damage your business reputation and cost you lost revenue.
- Missed objectives – the main goal of a company providing outsourced IT services is to deliver results based on your business objectives. In the event of misaligned objectives, you might not get the results you need.
- Limited scalability – if you don’t have very much experience in software development, you won’t know whether the software was built with scalability in mind or not. Every product should be built with a future outlook. However, some vendors choose to sacrifice future scalability for faster product delivery, leading to unexpected problems in the future with the growth of a project.
Thankfully, you can mitigate all the risks of outsourced IT services by choosing the right vendor. We'll talk about the process in more detail later in this article.
Now that we’ve reviewed the pros and cons of outsourcing IT services, let’s move on to the next part.
Industries that Can Benefit the Most from IT Outsourcing Services
All industries recognize the value of outsourced IT services. Still, companies from some business areas are more likely to adopt this approach than businesses from other industries.
Let’s take a look at business domains that outsource the creation of software development solutions to third-party vendors.
1. On-demand Economy Domain
The on-demand economy is growing exponentially. Between 2020 and 2024, the market will grow by $1,57 trillion at a CAGR of around 49%. This is why the number of startups in the industry continues to grow. These companies very often outsource development to third-party vendors to speed up the time to market and have a better concentration on business operations and processes.
Curious about how to build the most popular app type for the on-demand economy?
Check out the article How to Build a Delivery App [Ultimate Guide] to explore all the steps and processes involved in development.
2. E-commerce & Retail
Another industry that’s on the rise is eCommerce and retail. In 2020, online sales surpassed $4.2 trillion dollars worldwide.
eCommerce and retail can benefit from innovative technologies like ERP and CRP systems. Augmented Reality, Computer Vision, and Machine Learning are actively disrupting the industry by delivering a new level of shopping experience. Artificial Intelligence takes shopping personalization to an entirely different level.
3. Banking & Finance
There is no doubt that the banking and finance industry can count the money. That’s why it is actively investing in outsourced IT services to build financial solutions, HR, and marketing applications. The main goal is to reduce development costs and involve the best experts in the industry, all the while maintaining a high level of services delivered.
4. Healthcare & Medical Industry
This is yet another industry that’s actively reaping the benefits of outsourcing IT services. Companies usually engage third-part vendors when they want to access a wider talent pool at affordable prices. The medical industry can create all sorts of mobile and web applications, and internal systems for staff and hospital process management.
Does creating an app for healthcare seem like a good idea?
Read the article Healthcare Mobile App Development: Types, Trends, & Features. You will learn what it takes to create such an app and what IT outsourcing services are involved.
5. Automotive & Transportation
The automotive sector also relies heavily on outsourced IT services. The industry is going through rapid transformations and is facing increased demand for various in-vehicle options and systems. You can create navigation and geospatial systems, route and fleet management systems, warehousing solutions, and other software solutions that streamline processes within the industry.
Outsourced IT Service Costs: Main Drivers
The main question regarding outsourced IT services is the cost associated with them.
The average cost for IT outsourcing services doesn’t go below $50,000. However, the number can fluctuate depending on a number of factors.
Below, you can see some factors that impact the final development cost, which can fluctuate depending on the following factors:
- Service Specifics
The more complex the project, the more you’ll need to pay. For example, if we’re talking about web development, a one-page website will cost much less than an eCommerce marketplace.
- Engineers’ Professionalism
The level of professionalism directly influences the cost of outsourced IT services. For example, the services of senior professionals can cost a few times more than those of middle and junior experts. But with higher prices, you get higher competency and guarantee that you won’t need to change the code of your app because of its low quality.
- Vendor Rates
Depending on the vendor’s level of expertise, you might pay as low as $25 per hour or as much as $250 per hour. Vendor rates depend on the outsourcing location, project complexity, and business model. We’ll talk about key pricing models in a second.
When choosing an IT outsourcing service, the vendor's location will be the first indication of their prices. For example, the most financially viable option is to go to Eastern Europe for high-level and affordable information technology outsourcing services. When you outsource within the USA, development costs may double or even triple compared to other regions.
- Cooperation Model
The outsourcing model also directly influences the cost of outsourced IT services.
Let’s see some of the key models and analyze their strengths and weaknesses for your business.
1. Cost Plus
This model means that you pay your developer’s monthly salary and a fixed fee for your vendor. The fee is based on payroll, workstations, office infrastructure, and so on. This model is not suitable for companies that don’t have a full-time load for professionals or want to manage the team directly. As well, the vendor feed might increase unexpectedly, taking a toll on your company.
2. Time and Materials
Many companies prefer to work within this model, as you only need to pay for the hours developers spend working on your project. This guarantees that you won’t need to overpay and can easily control your monthly budget. You can easily adjust project requirements, add new features, or stop the development process without losing money.
3. Fixed Price
With this model, the vendor estimates the cost for the whole project. You will need to pay the cost in full, and the vendor is obligated to deliver the project within the predefined timeline and budget. While you know the final development price, the main disadvantage of this model is the lack of flexibility. You can’t make any changes to the project scope and it could cost more in the long run, as vendors usually charge around 30 percent more to cover unexpected shifts in the resources required.
4. Rate Card
This model allows you to cover the monthly rates for developers involved on the project. The main downside is that you can’t influence who will work on your project; instead, the vendor makes the decisions.
Choosing a company that provides outsourced IT services to work with is a strategic task that you should approach in all seriousness. We will cover the key steps of the process so you can easily navigate all the steps and choose the best partner.
1. Choose a Region & Country
Identify all available outsourcing locations and analyze them based on available skills, time differences, English proficiency, cost options, and any possible cultural differences that might interfere with the development process.
2. Decide on the Engagement Model
Do you want to be actively involved in the project and directly manage your team? Or, maybe you want to concentrate on business tasks while entrusting development processes to the experts. Your answer will directly influence what business cooperation model you’ll need to choose.
3. Prepare RFP or RFI
Create a Request for Proposal (RFP) or Request for Information (RFI) with all the project details, required results, and the whole scope of work for outsourcing.
4. Shortlist the Best Vendors
Use platforms like Clutch, ITFirms, and the Manifest to shortlist 3-7 vendors that are best-suited for your tasks. Get in touch with them and send your RFP to get a better understanding of their processes and proposals.
5. Analyze PFP Replies
Analyze replies and provide your feedback. You might need to organize a stakeholder meeting to choose the best options. Shortlist 1-3 vendors.
6. Hold Video Interview
Hold video meetings with 1-3 vendors that you’ve selected to get an idea of their expertise and evaluate their general fit for your business.
7. Apply Vendor Assessment Matrix
Create a vendor assessment matrix with key decision factors and assign some weight to each of them. This approach will help you further pinpoint vendors that are the most suitable for your project.
8. Conduct Final Calls & Negotiations
Conduct the final round of calls with 1-2 best vendors. Decide on the vendor and sign an agreement.
Congratulations! You’ve successfully selected an outsourced IT services vendor.
When to Outsource IT Services to MLSDev
We’re almost at the finish line, but there is still one open question.
How will you understand when you need to find an outsourcing company?
The following factors will help you decide when you need to hire a team:
- If you lack in-house IT
This is the most common occurrence, especially among small companies that need help from developers but don’t have an in-house team, don’t want one, or can’t afford one. Outsourced IT services allow you to work with the best experts without the huge upfront investments of time and money.
- If you want to save costs and find real experts
If this is the case, outsourcing will help you mash two potatoes with one fork. You can outsource some tasks to offshore locations and hire the best experts at lower prices.
- If you want to augment your in-house team
Even if you have an in-house team, IT outsourcing services can still benefit you. A company can outsource some additional tasks like regulatory compliance, software support, or even customer support.
- If you want the utilization of the best, the newest, or the most mature technologies
Machine Learning, Artificial Intelligence, and Big Data experts are extremely expensive. If you need to implement some of the latest innovations in your project, hiring in-house experts might not be an option because of the associated costs. Outsourcing IT services opens up access to the rarest talents, and you won’t even have to sell your kidney.
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