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What is IT Outsourcing?
Outsourcing IT is a business strategy involving outside providers to manage information technology: software development, infrastructure, and software support.
Outsourcing is often done for various reasons, including better skill sets, a price-quality ratio and the ease of scaling up.
Outsourcing data storage is also a common practice because it's cheaper for companies to hire a third party than buy, maintain and operate their storage equipment and facilities.
Advantages of Outsourcing
- Cut Expenses.
- Global Talent Pool.
- Save Significant Time.
- You can Upscale Quickly.
- Workflow uninterrupted.
You Can Reduce your Expenses
Outsourcing to countries with lower production costs can result in significant savings. That includes lower wages, lower costs of living, and lower operational costs.
Global Talent Pool
You can contact professionals who may not be available locally or need more.
Save Significant Time
You don't need to spend time advertising, selecting, training, and interviewing new employees when working with an outsourced vendor.
It is possible to improve your employees' qualifications by giving them various study materials.
You can Upscale Quickly
It will allow you to take on more clients or projects without spending time with the above processes.
Workflow Uninterrupted
The time difference between your in-house staff and that of the vendor will allow you to run your business around the clock.
Disadvantages of Outsourcing
The Time Difference
It can both be a blessing and a curse. In the worst case, it could significantly hinder communication between your company and its outsourcing partner.
Language Barriers
Language barriers may lead to miscommunications and waste of effort unless you and your vendor partner speak at least one common language.
Diverse Work Habits
You may need to adapt your work habits if you are in a different culture.
Long Distances
Distances that could be better between the vendor and you can make business trips expensive and exhausting.
Why Outsource?
You can Reduce Costs
Outsourcing is often a way to save money. Outsourcing often results in savings due to cheaper labor, infrastructure or tax systems.
You can Access Skills that are Not Available Locally
Outsourcing allows you to easily access resources that may be scarce in your own country.
How to Better use Internal Resources
Delegating certain business processes to third parties will allow your employees to concentrate on other important tasks.
How to Accelerate Business Processes
You'll move much faster with your core product if you save time on time-consuming, mundane processes.
Globalization
You outsource a non-focus part of your functionality to a third-party vendor, transferring the associated risks and responsibility.
There are Different Types of Outsourcing
Outsourcing can be defined as an umbrella term that includes several more detailed definitions. Offshoring is often used as a synonym for outsourcing, even though it isn't interchangeable.
What is offshoring, then?
Offshoring
It is also known as "offshore outsourcing". That means outsourcing IT services remotely to take advantage of lower labor costs or more advantageous economic conditions.
We are talking about time differences of at least five or six hours. Companies that provide customer service or tech support and perform constant maintenance and updates can benefit from extreme time differences.
An Interactive Marketing Agency based in the US outsources its web development work to a Ukrainian firm.
Nearshoring
Nearshore outsourcing can be compared to offshoring. However, there is one major difference. Nearshoring is the practice of outsourcing IT or software functions closer to home.
Communication is much easier with nearshoring than with offshoring. More than that, close-by countries share cultural similarities that make communication easier. A startup in the Netherlands might hire a team of developers in Ukraine.
Inshoring
Homeshoring is the process of delegating certain business functions to another location in a country. The chosen location usually has lower operational and labor costs.
Although cost savings are the primary reason for onshore operations, companies need more talent to seek alternative places to find skilled workers. Sometimes, "homeshoring" is used to describe situations where employees work at home.
An example: A company in Washington hires IT experts from Texas.
Multisourcing
The term refers to outsourcing business operations to several vendors in order for them all, or some of them, thus reducing risk.
Munich is the home of one German software company's main development facilities. Sometimes, the firm works on projects which also need design services.
They hire a small agency in Hamburg to provide these services when this occurs. The company then lands an important long-term contract requiring skills their Munich team needs to possess. They partner with a Ukrainian development company to complete the project.
The company then releases its product in China. It engages a Chinese agency that has a better understanding of the market.
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Prices for IT outsourcing
Cost Plus
In the Cost Plus pricing model, you will pay both the monthly salary for the developer and a vendor's fixed fee.
Vendor's fees include payroll, infrastructure and office costs, and support staff. You pay the monthly salary of your developers and an agreed-upon fee to use vendor services. That includes payroll, tax, office infrastructure and workstations, and support staff.
The Pros and Cons of Using Each Other
- No one in the extended team is a vendor employee. Vendors prescreen developers according to your needs. You can then interview and select the most suitable ones.
- No middlemen will be involved. You or your CTO/tech lead, etc., can manage the team without any intermediaries. Direct communication can lead to higher team commitment and better outcomes.
You can also find out more about the Cons
- You are responsible for the time, costs, and quality of working with a team. The team is yours to manage and choose. You won't have the option to get your money refunded if something goes wrong.
The Time and Material
T&M is an acronym for Time and Materials. In this pricing model, the client pays only the time the developers spend working on a project.
It is a very common pricing model in IT outsourcing because the client can easily adjust requirements and has flexibility without paying additional fees.
In the T&M cooperation model, clients only pay for hours that developers spend working on a project. T&M contracts are the most commonly used contract types in outsourcing projects.
The Pros
- Flexibility is the biggest benefit of T&M.
- The T&M model is flexible.
- You can change requirements anytime or replace goals, features, etc.
The Cons
- Budgeting needs to be better controlled. You can only predict how much you will spend with this cooperation model.
- The charge for idle time. An "idle" time is when developers cannot work on projects while waiting for client feedback. A T&M agreement may require you to pay for time when the developer is not working.
Fix Price
A Fixed Price Contract requires the vendor to finish a project within a specified budget, within a specified time frame, and within a budget.
Clients make a single payment and can't change specifications or requirements without paying extra fees.
A fixed-price contract is a one-time payment. The company responsible for the development is also fully responsible for completing the project within agreed deadlines and meeting all client requirements.
The Pros
- Budgets and timelines are predictable with fixed price models. That only works if your project requirements are predictable and you can communicate your desired outcome to the developers.
- A landing page and a corporate site are good examples of a project that works well with a set price arrangement.
- If the project takes longer than anticipated, you won't be charged for the additional time developers spend working on it (as long as the scope of the work is kept the same).
The Cons
- Flexible? Not really. You will be charged extra if you decide to change the project scope after signing the contract. These changes often result in a shift in the project deadline.
- Clients often must be aware that the fixed-price model is the most costly. Vendors know that projects can often take longer to develop than originally planned. Therefore, they add 30 percent more to the real costs of the project to cover risks.
- In this case, developers are usually working on several projects simultaneously. Therefore, they are only partially dedicated to each project, which can hurt the final product.
Price Card
The rate-card payment model, billed each month to clients, allows them to pay the monthly fees for the developers involved in a project.
This model allows you to save time using the developers the vendor has already hired.
The vendor will give you the monthly rate for all the developers involved in the project and bill you monthly.
The Pros
- The offshore company does not need to include any risk in the cost. You pay for the full month's work.
- The team is also much more engaged than in an outsourcing project. You don't need to invest time or money in recruitment because the vendors already employ the developers.
Read More: Types of IT Outsourcing Models and How to Choose Between Them
The Cons
- It's easier to determine how they will fit into your project when you don't get to choose the developers. The dedicated team only allows direct communication with the team. Instead, You'll get to speak to a manager who will pass your needs on to the development team.
- It's okay if your interest is in managing the process of developing yourself. If this is the case, it can cause miscommunications and slow the team's progress. Look at the next cooperation model if this is your situation.
The Main Problems of Outsourcing and Solutions
What you can do to solve nine of the most common outsourcing problems.
The Wrong Outsourcing Model
Your chosen model should be based on the project's requirements, budget and timelines. If you choose the right model, it can have a positive impact on your service or product quality.
In a model of fixed-price outsourcing, for example, all costs, including time and resource allocation, are determined at the contracting stage.
The model works well for outsourcing customer service but could be more useful regarding software development.
Materials, time, and resources are all constantly changing. The fixed price model needs to be more flexible to accommodate such changes.
It would cost more, or you could compromise product quality.
Solution:
Understanding the three models will help you choose the best one for your project. Three models exist:
- A model with a fixed price. Provide a list of requirements, deadlines and budget. Outsourcing vendors are usually inflexible and will drop features or charge more to satisfy your requirements to meet deadlines. That is a good model for short-term projects with pre-determined limitations.
- This model allows you to avoid hidden charges by only paying for the time and materials. This model suits long-term partnerships.
- A dedicated development team is a model that involves hiring experts or an experienced development team to close any knowledge gaps within your parent company. That is a more economical option than hiring an internal team. You'll be able to have greater control over the outsourced team.
Uncertainty Regarding the Vendor
You may have serious problems with outsourcing if you need more clarification about the skills and background of the person doing the work.
- Costs increase.
- Misunderstandings.
- Disruption of the Workflow
- Productivity decreases.
Some firms outsource their work with a smaller vendor because they are cheaper. Still, small vendors may need more resources to scale their business.
A more entrepreneurial outside vendor might have a much less personal relationship but charge more.
Solution:
Do not base your decision on the price of vendors. You may pay more for the cheapest vendor due to poor service, scalability and lack of resources.
Your vendor selection should be based on your outsourcing project's requirements, not the price quoted. It's important first to assess your business and only then select a vendor that will support growth.
Differences in Language and Culture
Outsourcing your business to an outside vendor is called offshore outsourcing. Language and cultural differences may affect communication, decision-making, or service quality in such situations.
It is possible that the outsourced employees need to understand your company's culture or certain terms used in their country. Both parties might find it difficult to communicate in such situations.
If American companies outsource customer service to Mexico, they may encounter accents and language differences that affect client communication.
The work schedules of your business may differ from the cultural and religious holidays or festivals observed in outsourced countries. These cultural aspects will cause confusion, delays and disruptions to your work schedule if you ignore them.
Solution:
When outsourcing services such as customer service, the team you are using will need to speak to your customers.
It is important to ensure they have received language training, including accent naturalization.
When scheduling your work, consider the outsourced company's local culture and festival events. Diversity training can be held for both your in-house and outsourced teams so they can all better understand one another.
They will feel included and develop loyalty to the parent company.
Unclear costs
Outsourcing can be problematic for firms that underestimate their budget. You may face unexpected costs if you must clearly define your project's budget and scope.
These could include additional software, employees, longer timelines, etc.
Outsourcing will therefore cost more than doing the work in-house, for example, was hired by the Queensland Health Department to manage its payroll.
The project cost approx USD 1.2 billion, a 160% increase due to incorrect cost estimates and budgeting.
Solution:
To prevent such a challenge from outsourcing, specify the project specifications to get accurate estimates of costs and avoid financial surprises.
You can ask your outsourcing company about wages, the skills needed, the costs of resources, etc.
That will allow you to select the right price model and avoid unexpected costs. It would be best to communicate your budgeting limitations to the outsourcing company so they can work with you within that limit.
Control loss
You can't control an outsourced team the way you do an internal one, whether outsourcing a project or an entire division.
When the company you are outsourcing to shares different standards and goals than your company, problems can arise. Some outsourcing vendors will compromise quality to maximize profits, affecting your service.
The less control you exert, the more difficult it is to make changes in the products and services of your business.
It also affects the flexibility and productivity of your company.
Read More: 6 Reasons Why Enterprises Prefer Outsourcing When It Comes to Software Development
Solution:
Find a service provider you can trust and who will let you have some control of your process. It depends on how easy it is to communicate between an outsourced team and an outsourcing company.
You'll lose control, for example, if you outsource to another country. You can avoid this problem by scheduling regular meetings or calls and requesting reports.
Many project management software tools can also help to track each working hour and provide detailed reports. They make it easy to monitor your productivity.
This information helps you to make better decisions regarding your company and employees.
Transfer of Poor Knowledge
Two things can happen when there is a lack of knowledge transfer:
- If your outsourcer has not maintained the systematic documentation of your project, your details could be confusing and unclear. If you decide to terminate the vendor or move it yourself to another one, this will harm your project.
- Outsourcing partner: With a project framework and documentation, your outsourcing vendor could understand the project's requirements. They may also need to meet productivity standards.
Solution:
Document the service or product you plan to outsource. You can add the following to your product documentation:
- The vision statement for the product.
- SWOT analysis is a method of analyzing a company's strengths, weaknesses, opportunities, and threats.
- Research on user prototypes.
- The Product Roadmap.
These details will allow the vendors to understand your expectations better, and they can cater to them accordingly.
To avoid any confusion, arrange regular calls with outsourcing vendors using tools such as Slack or Zoom. Ensure that you also ask your outsourcers to maintain the documentation of your project using tools such as Trello, Asana etc.
Outsourcing Tasks still Need to be Done with Expertise
You may have difficulty evaluating the results of an outsourcing service if you need to know more about the job you are outsourcing.
By misjudging the work of an outsourcing company, you may hire a service that does not meet your quality and delivery standards.
Solution:
Hire an expert if you need more knowledge about an outsourcing service, such as the software development process.
You can use them to help set up performance metrics or standards for judging the quality of work done by an outsourcing agency. Hire a vendor with experience and trustworthiness if you need more money for an extra employee. They will guide you throughout the work process and provide you with results.
Find out how to find a local one.
- Assess the expertise of potential suppliers and their specific skill sets.
- Do not use vendors who have unclear service level agreements.
- You can find client testimonials on the vendor's website or other sites.
Unfair Negotiations
A perfect outsourcing negotiation would be one where the parties can balance their risks and rewards equally. The primary objective of outsourcing agencies during negotiation is often to maximize profits while minimizing risk and responsibility.
You could find yourself with a contract without quality control, performance metrics or timelines. You have nothing to hold the outsourcing partner responsible for.
Solution:
Set a deadline for the end of your negotiation instead of delaying it for several days. If you need to consider a particular issue carefully, take the necessary time until a satisfactory decision is reached.
Take the initiative and prioritize your issues rather than letting your outsourcer prioritize them. Only start transferring your services once you have signed your contract.
The outsourcer will have more leverage in negotiations if you start transitioning your services before signing the contract.
A good outsourcing contract should include the following.
- Service-level agreements.
- Services offered.
- Prices and charges.
- Underperformance is punishable.
- Directives on data security and protection of intellectual property.
- Reward and incentive programs.
- Protections against technical hazards.
- Compensation for termination or exit.
Concerns About Security
Third-party agencies are exposed to critical information about your company, including product prototypes and business policies.
Client databases may also be at risk. It can lead to serious data breaches and security issues, compromising your company's competitive edge.
Solution:
In their contract, firms can include Service Level Agreements and Non-Disclosure Agreements to ensure they are protected.
That will protect the intellectual property of firms, including copyrights and patents.
Data Processing Agreements can be included, which outline how the data will be processed and stored. You can outsource important services and not worry about sensitive information being leaked.
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The Wrap-Up
The benefits of outsourcing include skilled workers, advanced technology, lower overhead costs and many more. You must understand possible issues such as time zones, language, and inaccurate cost estimates before leveraging the benefits.
But don't worry! Our guide will help you to resolve these issues and ensure a smooth transition for your business.
