You may already be familiar with the many benefits of working with outsourcing companies for app development and IT services, but if you’re looking to build a business case for outsourcing, solid data will back up your claims.
In this blog post, we provide data and analysis concerning the latest trends in the global IT outsourcing market, along with predictions for the future of this growing industry.
Armed with recent, relevant data, you and our leaders can make an informed decision about working with global outsourcing providers—either to spearhead your software development efforts or to supplement your in-house teams.
Key Benefits of Software Development Outsourcing
Outsourcing comes with a number of benefits, and recent reports from Deloitte, McKinsey, and other reputable firms back up the value outsourcing provides. Here are some of the benefits of outsourcing, with data to support each claim.
Cost-effective development: Outsourcing services reduce costs, especially when working with offshore partners where labor costs are lower. According to Deloitte’s 2022 outsourcing survey, 57% of executives list cutting costs as a main driver for outsourcing.
Access talent across a global market: According to Deloitte, 50% of U.S. companies list talent acquisition as the top internal challenge. Outsourcing plugs companies into the global talent pool.
Reduced time-to-market for software products: Outsourcing can significantly reduce time-to-market for new products and releases. A McKinsey report tells the story of a global hotel chain that reduced time-to-market by 25% by outsourcing its software application development.
Scalability: More than half of all executives reported increasing their staff in recent years, according to the Deloitte survey. At the same time, the majority are struggling to find the right talent, leaving a major skills gap. The outsourcing industry allows these companies to scale staff and keep up with their annual growth rate—while maintaining the flexibility to reduce expenses at a moment’s notice.
These are just a few of the advantages of outsourcing. Visit our in-depth blog post about the benefits of outsourcing software development for more information.
Recent Trends in Software Development Outsourcing
The following five trends in software development outsourcing shed light on the state of the outsourcing industry and where it’s heading through the end of the decade.
The increasing demand for the services listed below is driven by the fact that in-house development teams often lack the time or expertise to handle many tasks internally. Companies instead turn to outsourcing service providers for strategic guidance and augmented staffing in the following areas.
- Emphasis on cyber security: According to Deloitte, 81% of executives list cybersecurity as a top concern, and 3 out of 4 are turning to outsourcing partners to handle all or part of their cybersecurity needs.
- Cloud computing and Cloud-native app development: According to International Data Corporation (IDC), 90% of all apps will be cloud-native by 2025
- Artificial Intelligence (AI), Machine Learning (ML), and Internet of Things (IoT): IDC claims that by 2025, 90% of all new enterprise apps will be infused with some sort of AI.
- Growth in Agile: Agile has long been the go-to software development methodology for both outsourcing companies and in-house development teams, and it’s growing even more popular, with 86% of companies adopting it according to Forbes Magazine.
- Software automation: The market for software automation is expected to continue its massive growth rate throughout the decade, increasing at a rate of 16.5% annually through 2030, according to Acumen Research.
Outsourced development teams that produce high-quality work will continue to play a role, supporting in-house teams in their development process.
Growth of the software development outsourcing market
Outsourcing has been on the rise for years, and it shows no signs of slowing—especially with the uptick in digital transformation among enterprises, small businesses, and startups alike.
- Steady growth: The outsourcing market is expected to grow 9.4% annually through the end of the decade, according to a report from Grand View Research
- $500 billion industry (give or take): Estimates for the current total value of the outsourcing market range from $460 billion to $525 billion, and Prudence Research predicts the market will grow to over $1 trillion by 2023.
The rise in digital transformation efforts and the current software engineer shortage both contribute to the need for outsourcing, with more and more European and North American companies turning to places like India, China, Poland, Ukraine, and the Philippines for software solutions.
The most outsourced software development services
What are some of the most highly coveted services from software development companies? According to the data, the following services are among the most commonly outsourced.
Cyber Security: According to Deloitte, 81% of executives consider cybersecurity their top technological challenge today, and more than 3 out of 4 are working with outside partners to support their security efforts
Managed IT Services: According to a study by Kearney, 90% of Fortune 500 companies have multi-year contracts with Managed Service Providers (MSP) to handle things like IT support and other day-to-day IT needs.
Digital Transformation: Deloitte found that 62% of companies that worked with MSP outsourcing firms consider “the increasing pace of technology and digital transformation” a key driver behind their decision to outsource.
Artificial Intelligence (AI) and Machine Learning (ML): The rise of AI and ML has produced a skills gap, and Deloitte found that 52% of those companies surveyed rely on the outsourcing sector for expert consulting in these areas.
Data & Analytics: Data analytics is key to digital transformation, since cloud-native apps break down data siloes and allow companies to harness valuable information. Deloitte found that 52% of companies turn to outsourcing partners for guidance and support regarding data collection and analytics.
Robotics Process Automation (RPA): While not currently at the top of the list, Deloitte found that 34% of companies are working with outsiders to support RPA efforts, and that number will continue to grow in the years ahead.
This is by no means a comprehensive list, but it offers a snapshot of key areas that are in high demand at the moment, and they are expected to grow as the landscape evolves.
Industries that heavily rely on outsourcing
Many industries rely on outsourcing to support their software development, managed IT services, and other key elements of their IT operations. Here are some large industries that turn to outsourcing partners.
- Healthcare ($57.9 billion worldwide value): Healthcare is a massive industry that relies heavily on IT outsourcing these days to support record-keeping, administration, life-saving technologies, maintaining compliance, and more.
- Finance ($1.3 billion worldwide value): The financial industry, like healthcare, is heavily regulated and relies on the latest software technology to fuel its success. IT outsourcing gives financial services companies, from banks to brokerages, the flexibility to scale and remain competitive.
- Retail & eCommerce ($5.2 trillion worldwide value): Retail trade is a massive industry—one of the largest in the world—and these days even legacy brands are successfully competing online. The retail industry uses IT outsourcing to support everything from fulfillment to supply chain management.
- Media & Entertainment ($2.32 trillion worldwide value): Media and entertainment is another massive industry that relies on technology outsourcing to handle everything from the transfer of video to data processing that helps them understand their audiences.
What is the state of software development outsourcing around the world? Read on to learn about important data related to outsourcing in different regions across the globe.
The world’s largest continent features numerous hubs for software development outsourcing, and according to Statista, software development in Asia is expected to grow by 9.16% annually over the next five years.
Many companies in the U.S. and Europe use the time difference to their advantage, ensuring production around the clock. Communication and language barriers could prove to be a problem in some cases, but properly vetting potential vendors can prevent any issues.
Many turn to software development outsourcing firms in India, thanks to the country’s high level of English fluency and its large population of young software engineers. This and other factors prompted the Global Innovation Index to consider India a technology leader.
Quite a few software hubs have popped up throughout Eastern Europe, offering competitive rates and nearshoring opportunities for Western European Companies. Statista reports that the outsourcing industry in Europe is around $138.20 billion currently, with Eastern Europe producing a healthy portion of that revenue.
Latin American countries like Chile, Argentina, Mexico, Panama, and Brazil are becoming popular outsourcing destinations. According to Statista, the Americas is the fastest-growing outsourcing destination in the world at the moment, with $62 billion created in contracts throughout 2019.
Latin America can work well for U.S. and Canadian countries that want to work within similar time zones, although that’s not entirely necessary since many Asian outsourcing firms will adapt to local hours (we do that here at Net Solutions).
North America has a growing outsourcing market that is set to reach $227.40 billion by 2027, according to Statista. The downside of outsourcing to Canada or the U.S. is that labor costs are high, eliminating much of the cost savings.
Mexico is the only outsourcing destination in North America that offers a cost-of-labor advantage to Western countries, and many U.S. companies turn to Mexico for software development because of its high level of English fluency and familiarity with U.S. culture.
Africa has a number of software hubs stretching across its vast continent, from North African countries like Morocco to Kenya in the east—and all the way down south to South Africa.
Revenue from IT services in Africa is expected to reach $23.7 billion expected to reach $23.7 billion this year, according to Statista. The market is bolstered by these countries’ large populations of young people and some of Africa’s shared time zones with Europe.
Outsourcing Models and Engagement Types
There are a number of different approaches you can take to outsourcing, from working with companies nearby to those on the opposite side of the world. You also have a variety of options in terms of how you choose to work with a given partner, from hiring them on a per-project basis to engaging a dedicated team.
Let’s explore different outsourcing models, along with the advantages and disadvantages to each.
Offshore, nearshore, and onshore outsourcing
The Harvard Business Review suggests that companies can save 20-30% or more on costs through outsourcing, and those savings directly impact the bottom line.
The amount you’ll save, of course, depends in part on which country you outsource your work to, since labor costs vary from one country to the next.
Delegating software development and IT services to your home country will likely not save as much money as working with a country overseas if you’re headquartered in an industrialized country.
In case you’re not familiar with the terms used to describe outsourcing to different locations, here’s a quick breakdown.
Onshoring: This describes outsourcing to partners in your own country. It usually has the benefit of eliminating language and cultural barriers, as well as time zone differences, but the cost savings are greatly reduced.
Nearshoring: Nearshoring describes outsourcing to partners in a nearby country (e.g., a German country outsourcing to Poland). Nearshoring does not eliminate potential language barriers, but it does ensure that everyone is in a similar time zone, and it can provide a healthy cost savings.
Offshoring: This involves working with distant countries, such as a U.S. company outsourcing to India. When you carefully vet your provider, you can avoid cultural and linguistic barriers while experiencing tremendous cost savings.
When offshoring, just be sure to find a partner that is willing to work in your time zone if that’s something that matters to you. On the other hand, you may benefit from asynchronous work days, as KitCo did when they hired us to handle their QA while their developers slept.
Staff augmentation, dedicated teams, and project-based outsourcing
There are a number of different approaches you can take to outsourcing based on your needs and your budget. Here are three different outsourcing models to choose from, along with relevant statistics that explain the drivers behind each option.
Staff augmentation: In Deloitte’s study mentioned above, 50% of executives listed talent acquisition as a top challenge, and 30% listed employee retention as their top challenge. Staff augmentation allows them to close the talent gap, meet current demands, and scale as the market requires.
Dedicated teams: Dedicated teams help address the concerns listed above, and they also enable leaders to manage skills gaps. 28% of executives surveyed by Deloitte listed “lack of adequate skills” as their top challenge.
Project-based outsourcing: A project-based model of outsourcing enables companies to address the skills gap listed above, along with protecting their budgets as they scale. 22% of executives listed budgetary concerns as their major challenge and a key rationale for outsourcing.
Challenges in Software Development Outsourcing
There are plenty of IT outsourcing success stories, but we would be remiss if we didn’t mention some of the potential challenges associated with outsourcing.
Understanding those challenges, and how widespread they are, will adequately prepare you when it comes to vetting potential partners. After all, proper vetting (along with clear contracts) is key to avoiding problems in the first place.
Outsourcing challenges may include:
- Communication issues: When working with overseas partners, communication problems can arise when an outsourcing vendor doesn’t speak your company’s operating language. A survey by UpCity found that 21% of companies that use outsourcing partners found communication issues to be their biggest challenge.
- Poor work quality: The same survey listed above found that 14% of customers struggled with vendors who failed to meet deadlines,12% struggled with those who failed to follow instructions, and 9% worked with vendors who produced poor-quality work.
- Confidentiality issues: The survey also found that 9% struggled with confidentiality issues.
Once again, thoroughly vetting potential outsourcing partners will all but eliminate these issues. Find a partner that has been around for a decade or more, with plenty of happy customers as evidenced by case studies, testimonials, and solid reviews on websites like Clutch.co.
Future Outlook and Predictions
IT outsourcing is expected to grow steadily in the coming years, with a 9.4% annual growth rate and an expanded emphasis on emergent technology.
A recent Gartner study predicted a growing need for IT expertise in the following areas:
- Digital transformation and app modernization
- Artificial Intelligence and Machine Learning
- Cybersecurity and compliance
- Automation technology
Many companies will undoubtedly turn to outsourcing partners to support these efforts, relying on an extended workforce to meet the demands of tomorrow.
Learn More About Software Development Outsourcing
Are you considering outsourcing any part of your software development or IT needs?
Net Solutions has been supporting enterprises, startups, and everything in between for more than twenty years, developing award-winning software and supporting digital transformation for organizations like Euro Car Parts and the Harvard Business Review .
Frequently Asked Questions (FAQs)
1. How much of software development is outsourced?
Kearney found that 90% of Fortune 500 companies outsource at least some portion of their software development, engaging a staff augmentation model. Many small companies also engage outsourcing partners, including many startups that hire full-service firms to handle every element of their software development.
2. How many companies outsource software development?
While it’s difficult to establish a hard figure for the total number of companies that outsource development, a 2019 study from Clutch.co found that more than one-third of all small businesses engaged in IT outsourcing. Combined with the data above about 90% of Fortune 500 companies outsourcing at least some portion of their IT needs, the total number of outsourcing clients is substantial.
3. What are the most popular programming languages for software outsourcing?
As you might expect, popular programming languages used by outsourcing firms track with popular programming languages across the industry. After all, what works in Silicon Valley to build great software will work in New Delhi.
Five popular programming languages for outsourcing (and in-house) developers are:
- JavScript Developer
- Ruby Developer