The strategic benefits of IT outsourcing

As we venture further into the digital age, the demand for skilled IT professionals continues to grow, presenting significant challenges for businesses worldwide. This prompts organizations to seek innovative solutions to meet the escalating talent shortages.

Over the years IT outsourcing has emerged as the go-to strategy for tech companies striving to navigate the ever-evolving technology landscape and secure the expertise necessary for their success in the digital era. This approach offers access to a full range of different skills, a good balance between cost and value, and the opportunity to tap into the foreign market.

In this article we delve into the world of IT outsourcing, focusing on its benefits, the various outsourcing types and models available, and top-trending outsourcing destinations.

IT outsourcing is the business practice of using external providers to handle specific tech functions, activities or processes. It enables companies to focus on their core competencies while leveraging third-party resources to streamline operations and achieve desired outcomes.

Outsourcing can take various forms, but the most commonly outsourced IT services are:

• Web development;
• Hosting;
• Software and application development;
• Website/application maintenance or management;
• Technical support;
• Database development and management;
• Telecommunications;
• IT infrastructure.

Outsourcing is an umbrella term that encompasses several concepts, all of which involve the delegation of certain tasks or functions to external parties. Depending on the company’s preferences and objectives the vendors can be located domestically or internationally. Geographical proximity is the factor that defines the type of outsourcing engagement – offshoring, nearshoring, or onshoring. Each of these strategies offers distinct advantages and considerations, and companies must carefully evaluate their goals and requirements to determine the most suitable approach for their specific needs.

Offshoring is a practice used to outsource IT-related activities to external service providers in distant locations. It is typically pursued to take advantage of lower labor costs and more favorable economic conditions, get access to specialized talent pools, or tap into emerging markets. 

This outsourcing strategy is often characterized by significant geographical, cultural, and time zone differences. While managing teams who are 5 to 12 hours apart can be challenging, the time differences can come in handy for customer-oriented companies that provide 24/7 tech or help-desk support. 

Since offshoring allows for round-the-clock operations, it is also an ideal option for organizations set to achieve fast time-to-market, enabling them to run constant updates, do uninterrupted maintenance work, and swiftly resolve any production issues before they go into the mainstream. 

Example: a Silicon Valley startup outsources web development to India.

Nearshore outsourcing is very similar to offshoring, albeit one important difference. Under this engagement model, organizations outsource IT functions to a country that is much closer to their home – usually in the same region.

Since the in-house team and remote service provider are located in the same time zone or within a couple of hours of it, nearshoring enables much smoother communication compared to offshoring. What’s more, geographical proximity usually prompts cultural affinity, which further facilitates collaboration and productivity. 

Example: a UK-based marketing agency hires a development team in Ukraine.

Onshoring, also known as domestic outsourcing, refers to the practice of delegating a number of business processes to a different location within the same country. This approach is often chosen to support local businesses, maintain control over operations, or address concerns related to data security and regulatory compliance. 

The most popular choice for onshore outsourcing is data storage services. Moving these operations to alternative locations offers companies significant cost savings compared to investing in their own data storage devices and facilities. By contracting a third-party provider, businesses can leverage economies of scale, avoid the upfront costs of installing their own infrastructure, and eliminate ongoing maintenance expenses. 

Example: a tech company from Washington contracts IT security experts from Texas.

The transformative power of IT outsourcing makes it an integral part of successful business strategies in the modern digital landscape. Many companies are increasingly turning to this practice as a way to streamline operations, enhance productivity, and foster growth. And while the exact rationale behind the decision to turn to IT outsourcing can vary, there are five key drivers that make it an attractive proposition for any tech firm looking to optimize its IT functions:

Resources that are scarce at home can sometimes be found in abundance elsewhere, meaning you can easily reach them through outsourcing. Whether it’s leveraging cutting-edge technologies, implementing industry best practices, or accessing niche domains, IT outsourcing enables you to bridge skill gaps and harness the expertise of global professionals. 

By delegating some of your business processes to a third party, you’ll give your in-house employees the opportunity to focus on more meaningful tasks. This move allows employees to concentrate on their areas of expertise, driving innovation, and enhancing overall productivity. 

Outsourcing frees you from mundane, time-consuming processes, so you’ll have more time to work on your core offerings. Moreover, since your business will function round the clock thanks to the time difference between your in-house and remote teams, you can speed up product development, rapidly resolve any arising issues, and achieve faster time-to-market.

As businesses expand their reach across borders, the outsourcing of various functions has become a strategic business imperative. It promotes cross-collaboration, facilitates knowledge sharing, fosters innovation and leverages diverse perspectives and ideas. By embracing outsourcing, companies can unlock new opportunities, gain a competitive advantage and effectively navigate the complexities of the global marketplace.

Entrusting specific tasks or functions to external service providers enables organizations to achieve cost savings in various aspects of their operations. Outsourcing eliminates the need for upfront investments in infrastructure, software, and equipment, as the service provider typically bears these expenses. Additionally, companies can save on operational costs such as salaries, benefits, and overhead expenses associated with maintaining an in-house team dedicated to the outsourced functions. 

IT outsourcing prices are highly dependent on the cooperation model. Selecting the one that aligns with your business needs can optimize the development process and safeguard you against difficulties and financial setbacks. To facilitate your decision-making, we have compared some of the most widely used cooperation models.

Within the cost-plus model, you pay the developer’s monthly salary as well as a fixed fee for your provider. The vendor’s fee includes payroll, office infrastructure, fees, workstations, and support staff for your extended team. 

Pros

• The vendor pre-screens developers based on your specific needs, after which you can personally interview them and choose the best ones.
• You, your CTO, tech lead, or someone else on your team will manage the remote employees directly, without any middlemen involved. 
• Working in close collaboration with offshore developers often results in higher team commitment, which in turn leads to better performance and outcomes.

Cons

• When you work with an extended team, the responsibility for time, cost, and quality is entirely on you. You’re the one who picks the team members, and you’re the one who manages them. If something goes wrong, you won’t be able to blame the vendor and get your money back.

Time and materials (T&M) is a pricing model in which the client only covers the hours that developers spend working on their project. This practice is very popular in IT outsourcing because it grants businesses the flexibility to adjust product requirements without paying additional fees.

Pros

• You’re free to change requirements, shift goals, replace features, and even stop the development process altogether at any moment.

Cons

• The T&M cooperation model provides low budgeting control, meaning you can’t accurately predict how much money you’ll end up spending.
• You will have to cover “idle time”, which is a period when developers are unable to work on a project as they’re waiting for the client’s feedback. So despite being very cost-efficient, a T&M contract might require you to pay for the time the developers are essentially doing nothing.

According to the fixed price contract, the vendor has to complete a project within a predetermined timeframe and budget limit. The client makes a one-time payment and cannot change any specifications and requirements throughout the development lifecycle.

Pros

• This model is a perfect solution for small projects such as a landing page or a corporate website since the requirements are easy to predict and the client can clearly explain their vision of the desired outcomes to developers.
• Even if the development ends up taking longer than expected, the extra time developers have to spend on the project comes at no cost to the client (provided the initial scope of work hasn’t changed).

Cons

• Any changes to the project scope the client wants to initialize after the contract has been signed will trigger additional charges. 
• The fixed price cooperation model often turns out to be the most expensive for the client, without them realizing it. This is because vendors are aware of the fact that project development can take longer than initially planned, so they add an extra 30% to the project’s real cost to cover the risks.
• Developers who work within this model usually juggle several projects at a time. As a result, engineers aren’t fully committed to any of them, which can hurt the end result.

Under the rate card model, the client pays an external provider a monthly fee that covers the salary of developers involved in the project. Thus, they can save up time and resources on recruiting developers and leverage the capabilities of the ones pre-hired by the vendor.

Pros

• You don’t overpay because the offshore development company doesn’t need to add any risks to the total cost — you pay for a full month of work anyway.
• You get a team of full-time developers that work exclusively on your project, so they’re much more involved than they would be in standard project outsourcing projects. 

Cons

• You don’t have much say in deciding which developers are assigned to your project, so it’s hard to judge how well they actually fit your specific needs. 
• Usually, the rate card model doesn’t allow you to communicate with the development team directly. Instead, you get to talk to a project manager, who then passes your requirements on to the team.

One of the critical factors to consider when opting for outsourcing is choosing the right destination. With numerous countries offering cost-effective services, a talented workforce, and favorable business environments, it is crucial to explore multiple locations to make informed decisions. 

The top-trending tech hubs you should consider for outsourcing partnerships are Latin america, Eastern europe, South asia, and Africa.

Eastern europe is home to over 1 million software developers, which makes the region an attractive outsourcing destination. More than one-third of them (36%) are located in Poland, another 25.6% live in Ukraine, and 12.7% in Romania. 

Thanks to a strong educational focus on science, technology and engineering, the number of Eastern european developers keeps growing every year. The region houses over 200 universities and colleges, which produce 60K IT specialists annually. Plus, 87% of newly minted professionals claim they have learned a technology or a programming language by themselves, which proves Eastern europe’s status as a veritable treasure trove of tech talent gems.

The best outsourcing locations in Eastern europe are:

• Ukraine
• Hungary
• Poland
• Romania
• Czech Republic

Asia is a varied region, which has made a name for itself on the global IT scene as a pioneer in the software outsourcing industry. The rapidly expanding popularity of information technology during the dot-com boom created an internal dynamic in South asian countries that led to the formation of a strong tech ecosystem. The combination of robust infrastructure, the versatile expertise of local developers, and a wide range of tech vendors allowed Asia to become the world’s biggest hub for mobile application development, customer support, data entry, business process outsourcing (BPO), and data center operations.

India and China are leading the way as the region’s primary offshore services locations. With a combined talent pool of 12 million software developers they are the world’s largest tech hubs.

Over the past couple of years, other countries in South asia also started to gain prominence in the global IT outsourcing market. Currently, the best outsourcing locations in the region are:

• India
• China 
• Philippines
• Thailand
• Vietnam

Latin america is actively positioning itself as a significant offshore software development hub. Thanks to its proximity to North America, favorable business environment, and mature talent pool of roughly 1.5 million developers, it’s the most desirable outsourcing destination for tech companies from the US and Canada.

LatAm countries tick all the boxes for the perfect outsourcing location, offering cost-effective rates, a tech-savvy workforce, great English skills, effective teamwork, and innovative thinking. They have managed to grow a solid reputation on the global tech scene by investing in their technological infrastructure, promoting computer education, diversifying skills training, providing business incentives, and fostering startup activities.

The best outsourcing locations in Latin america are:

• Argentina
• Brazil
• Mexico
• Colombia
• Uruguay

Africa is an emerging software development frontier on the global map. Due to its growing young population, skilled IT professionals, and advantageous time-zone compatibility with Europe, the region has become an attractive destination for Western businesses seeking nearshore outsourcing options. Many companies turn their eyes to Egypt, South Africa, and Nigeria, recognizing these countries as ideal spots to leverage the benefits of a tech-savvy workforce and maximize collaboration and efficiency in close proximity to European markets.

The best outsourcing locations in Africa are:

• South Africa
• Egypt
• Nigeria
• Kenya
• Morocco

The acceleration of technologies has embraced all industries, prompting companies to look beyond the border in search of skilled talent. Since the global tech landscape is constantly evolving, so does the nature of outsourcing. 

Widely used technologies such as big data, cloud computing and others are complemented by disruptive ones, such as robotics, encryption and artificial intelligence. According to Deloitte, 93% of companies have already implemented these technologies (or are going to do it) within their organizations. All of them are also expecting their outsourcing providers to embrace new technological advancements, as they provide more flexibility and scalability in comparison to common software development practices.

If you are looking for a digital-native technology services partner that keeps its finger on the pulse of IT industry trends Grid Dynamics is the right choice. We bring cutting-edge solutions to our customers through technology-enabled partnerships with major tech providers like Google, Amazon, and Microsoft. Driven by business impact and agility, we create innovative, end-to-end products in digital commerce, AI, data and cloud, helping our clients to grow.

As a global digital engineering company with 15+ years of commercial experience, we have developed an efficient services system, which ensures support at each stage of the development lifecycle. We offer team augmentation & agile POD services to make your development and digital transformation process easier. 

If you’re interested in working with a remote team to get the best performance, we’re ready to help. Head over straight to the contact form below to tell us what skills you’re looking for.