The benefits of IT outsourcing are still there despite protectionism

09.08.2018
7 min.
title

Where does the IT outsourcing model stand right now? Different sources show that the growth is all there, and the CAGRs vary from 30.25% for data analytics outsourcing specifically in 2017-2021 to 4.7% for SMBs during the 2016-2021 forecast period. It’s even more interesting then to look at how this growth is likely to be affected by such recent protectionist moves as shown by the new US foreign policy and Brexit.

The research conducted by KPMG’s Shared Services and Outsourcing Advisory (SSOA) to analyze the information technology and business process outsourcing deals with the total contract value of over 5 million USD shows that Americas remain the key buying region for outsourcing services.

At the same time, there are growing concerns about the changing landscape that shifts from classic offshoring to protecting domestic jobs.

Amid such conflicting moods, it’s worth taking some time to reflect on the inherent benefits of IT outsourcing that make companies still turn to this age-old cooperation model, and see whether there is a place for it in the modern economic conditions.

Is It Still All Quiet on the Outsourcing Front?

Anna Frazzetto of the Forbes Technology Council makes a point about the rising wave of IT outsourcing business repatriation from offshore centers like India back to the US soil in lieu of President Trump’s protectionist political course. Brexit adds anxiety across domains that thrive on supply chains.

While this “reshoring” trend is apparent, we need to distinguish between outsourcing and offshoring—the former doesn’t equal the latter, contrary to popular belief. Outsourcing doesn’t necessarily mean hiring contractors from abroad: it can well be local talent doing work for you outside your in-house team.

That said, Trump’s politics and Brexit shakeups are unlikely to influence the outsourcing status-quo where it pertains companies’ original motivations to outsource at all, which are mostly about cost optimization, focus on core business, and access to rare talent, among others. So even when we see negative figures like in the stats below, it’s likely to reflect that offshoring-outsourcing entanglement related to bringing information technology outsourcing (ITO) back home but not stopping outsourcing per se.

To Outsource or Not to Outsource?

On the cusp of every IT project, there are many decisions to make, and the one about whether to outsource or not is probably the most burning.

Apart from the offshoring confusion, many businesses are tentative about outsourcing because the perceived risks of IT outsourcing scare them away—even though they can be mitigated effectively with a vendor’s long-standing experience of collaboration on custom software development and appropriate project management methodologies in place.

Sure, it’s true that not all types of projects are suitable for outsourcing. If a project is complex and requires constant immersion in the customer’s business, it could be better to rely on in-house teams. Obviously, the type of industry plays a big role here too, so highly sensitive projects for regulated industries, where a security breach can wreak havoc, should be planned out carefully. The projects that involve sensitive data like in healthcare or breakthrough know-how as many startups have should be approached with caution. Yet there are technical and legal tools known to top-tier outsourcing vendors to solve these problems.

Another option is to go for a mixed approach that combines in-house and outsourcing specialists within the same project, which can work wonders to balance the value from external talents and the security of having business-critical data staying within the customer’s organization.

Taking into account all these considerations, if your project does suit the outsourcing model, the payoffs prove to be truly impressive. In an ideal world where businesses enjoy unlimited budgets, open deadlines, and zero competition, outsourcing wouldn’t be necessary at all. But outsourcing starts gaining traction when the economy is recovering from major downturns and the faster time-to-market imperative grows stronger.

Yet, as we’ll see in the next chapter, the benefits of IT outsourcing are not only in that it’s cheaper and faster than in-house development.

New Focus on Value-driven Partnerships

If you’re going to outsource, go for quality outsourcing provides. In the majority of cases, ITO shows a better quality-investment ratio as well as the overall value you get from the collaboration.

This quality drive is behind the current trend of outsourcing customers looking for value in their partnerships above all. This drive makes the offshore argument irrelevant too, as the focus shifts to how competent the ITO vendor is and which business outcomes can be achieved through such cooperation versus the vendor’s location. Factor in the reasonable pricing of ITO services, and you get the new value-based outsourcing model that businesses are not yet ready to give up on.

As the combined study by KPMG Global Advisory and HfS Research shows, the digital realm sees the emergence of shoulder-to-shoulder partnerships that are based on the shared understanding of business outcomes, where the outsourcing vendor is proactive and helps their client to innovate effectively.

This focus on innovation is not accidental. At the moment, technological innovations gain more visibility as key business differentiators, and here’s where ITO partners can prove their paramount role.

Gateway to Innovation

Focusing on their core business, be it healthcare delivery or logistics, most companies don’t have the right skill set to break into innovations that are here to transform their operations toward more efficiency and competitiveness.

The recent advances in artificial intelligence, internet of things, cloud computing, and blockchain are telling examples of such innovations. From better customer experience to more transparent transactions and accelerated data exchange, these can help propel businesses to a new level of their workflow optimization but may be still out of reach because of the lack of technological proficiency of in-house staff. This is where IT outsourcing can become a gateway to innovation.

By choosing the vendor with a pool of software engineers who are well‑versed in the required competencies and, what’s more important, have a track record of related projects, companies that rely on innovation to stay competitive can remove their technological barriers and keep focusing on their chief line of business instead.

NACE International is a good example of this approach. This corrosion control non-profit finds success with outsourcing its cloud infrastructure maintenance and cybersecurity tasks to external vendors. At the same time, the company keeps developing its customer-facing applications in-house without putting all the eggs in one basket.

A Step Up to Business Growth

Other benefits of IT outsourcing may be not that high-level but more of the operational nature. You may be a small or mid-sized company that needs specialized competencies but have neither office space nor human resources capacity to fit the required talents in. Or it may be a short-term engagement only so that you can briefly develop your lacking reporting tool, employee intranet, you name it, and shoot off with the new efficient tool in tow without having to bother about an entire in-house IT team left with no more work to do.

IT outsourcing was conceived with the idea to help companies take such critical steps on their business development journey. This is where delegating tech-related responsibilities to an external partner can show up as a strategic decision at its best.

Final Considerations on Project Management

As this brief review shows, the state of IT outsourcing in 2018 is still solid, resting on its time-proven benefits and reinforced with companies’ current drive to outsource for value and not for a threadbare cost-cutting. Yet there are still some considerations to be made about the critical role of project management in ITO success stories.

For inherently non-IT companies that don’t have much experience managing software development projects, having the vendor with one can be bliss. Outsourcing providers have cut their teeth both with Waterfall and Agile practices, as well as their spin-offs and hybrids, so that their customers can have a choice of methodologies to go for without fearing they wouldn’t be able to pull it off.

Another consideration comes from the dichotomy of engaging either freelancers or full-scale outsourcing vendors. Although it’s common to hire freelancers for sporadic or minor software development gigs like occasional website development, outsourcing vendors can offer so much more:

  • Larger pools of diverse competencies and skills apt for multidimensional projects
  • The dedicated team option that allows bringing together full‑fledged project teams with all the required roles covered
  • Access to enterprise software licenses and advanced partnership statuses that make such specialized platforms as Microsoft Office 365, Oracle, Magento, and SAP accessible
  • A solid organizational foundation, corporate ethos, and stability that comes from respecting contractual terms
  • Opportunity for personal intercompany connections to develop higher collaborative synergy through regular on-site visits

And the last consideration is here to reiterate the importance of having a single contact point in any IT outsourcing project.

For the overall project efficiency, it’s strongly recommended to assign a project manager, a team lead, or a business analyst on the customer’s side so that the vendor has someone to build the bridge with. Providing that the vendor makes sure to have a mirroring contact point on their side, the entire partnership then becomes transparent and manageable.

This project management imperative becomes much more important in the light of value-based partnerships described above. As soon as both parties connect on the structural level, achieving this value gets a whole lot easier.