Choosing whether to outsource some or all of your IT needs to a third-party partner is a big decision and should not be taken lightly. Outsourcing has pros and cons, and this blog post will help you decide whether you’re better off using an in-house team or working with an outsourcing partner. For those who choose to outsource, we also provide tips to reduce risk and improve your odds of success.
Outsourcing software development and other IT projects can be an effective way to reduce costs and time-to-market for new releases, and it’s proving to be a vital strategy during the current IT developer shortage. A 2020 study by McKinsey showed that 87% of IT departments report a labor gap in their existing IT teams, and a 2022 study saw a 25% decrease in applicants for IT jobs while job posts doubled over the same time.
The global IT services outsourcing market was estimated at USD 525 billion in 2022. It is expected to hit around USD 1149.24 billion by 2032, poised to grow at a compound annual growth rate (CAGR) of 8.2% from 2022 to 2032. – Precedence Research
If you’re thinking about outsourcing some or all of your software development, you may be wondering about the advantages and disadvantages of outsourcing. This blog post will help you decide whether outsourcing is right for your business.
What is Outsourcing?
Outsourcing is a business strategy that involves hiring workers outside of a company to handle specific tasks rather than using in-house employees for everything. Outsourcing in IT can take the form of software development, Quality Assurance (QA) testing, design, project planning, and front-end and back-end development.
Outsourcing is subcontracting a process, such as product design or manufacturing, to a third-party company.
What are the pros and cons of outsourcing?
Outsourcing is on the rise, and recent data suggests that it accounts for more than 13.6% of total IT budgets within the U.S. and Canada. If you’re considering outsourcing, exploring the advantages and disadvantages before deciding is essential.
Pros of outsourcing
Outsourcing has several advantages, especially when you research and thoroughly vet potential partners before hiring them. What follows are some of the most potent benefits of a successful outsourcing program.
1. Cost savings
Full-time employees are costly, and it’s easy to overlook those costs when you focus on base salaries alone. Full-time employees come with payroll taxes, overhead costs, and pricey benefits. Outsourcing some or all of your IT needs can be much more cost-effective, especially when using a competent outsourcing partner overseas—where labor costs are typically lower.
Remember, of course, that you don’t want to sacrifice quality for cost savings. Going too cheap will cost you if you end up with an inferior product or if your full-time staff is forced to spend their valuable time fixing your partners’ mistakes.
2. Greater talent pool and specialized expertise
Hiring full-time employees specializing in everything you’re hoping to accomplish can be costly or even impossible, given the size of your business. Outsourcing partners can help fill that gap, providing expertise precisely where and when needed.
If you find, over time, that you could benefit from having someone on your full-time staff who specializes in an area you’ve come to rely on an outsourcing partner to handle, you can always fill that role when the time is right. In the meantime, outsourcing can help companies remain lean and direct their resources exactly where they’re most needed.
3. Boost efficiency and productivity
A qualified outsourcing partner can help your current IT team become more efficient, focusing on what they do best. And when you’re dealing with an outsourcing partner on the opposite side of the world, you can strategize so that your outsourced team works while your in-house team sleeps.
For example, at Net Solutions, we handled Kitco’s QA testing on the code their in-house team developed during regular work hours. Every morning of every business day, the development team woke up to thoroughly tested code and a complete list of any bugs they needed to fix.
4. Greater scalability and flexibility
Scaling is one of the most significant challenges businesses face, especially concerning IT talent. After all, a growing business doesn’t always have the lead time or the resources to hire new talent at the exact moment they need it.
For example, if you need new front-end developers to handle significant changes to a new release, it would take weeks to hire someone in-house. If work slowed after the release, you must pay those in-house developers to twiddle their thumbs. By contrast, if you have an outsourcing partner who can handle the spike in work as it arises, you only have to pay them when they’re producing for you.
5. Smarter risk management
Outsourcing allows companies to control costs more efficiently. As economies rise and fall, companies that don’t outsource may be forced to go through periods of layoffs and subsequent rapid hiring. Outsourcing makes it easier to respond to these challenges and manage those risks.
Cons of outsourcing
Can things go wrong when you outsource IT projects? Absolutely!
Yes, we’re an IT outsourcing firm, but we want to give you an honest look at both the rewards and the potential risks of outsourcing so you can make the right decision for your business.
Here are some common challenges associated with outsourcing and what you can do to reduce your risk should you decide to outsource your software development or any other IT work.
1. Risk of poor quality
Many outsourcing firms do excellent work, but many do not! They might have a fancy website and slick salespeople ready to convince you they can handle anything at an unbelievably low price. However, as the adage goes: “If it sounds too good to be true, it probably isn’t true.”
How to reduce your risk: Thoroughly vet any potential outsourcing partner. Read their reviews on websites like Clutch, GoodFirms, and G2 Crowd. Demand samples of their work, ask tough questions, and look for potential partners who set realistic expectations, and don’t simply tell you what you want to hear.
2. Communication and language barriers
When outsourcing overseas, sometimes you might face communication challenges if your partners don’t speak fluent English. This can slow things down or result in otherwise unnecessary rework if your partners don’t understand what you’re trying to accomplish the first time.
How to reduce your risk: Work with companies whose employees demonstrate strong fluency and communication skills in English (or whatever language you operate in). Before even getting on a call with them, you can read their website and blog posts to understand how well they communicate in your language. If their written communication style is stilted, or packed with grammatical errors, you’ll want to look for a different partner.
3. Dependence on a third-party provider & lack of control
By its nature, working with an outsource partner means giving up some control of your business to that third-party provider. If the third-party provider is unreliable, it can impact your business in countless ways. It also might be challenging to transition elements of your IT strategy to in-house staff down the line if your outsource partner isn’t supportive.
How to reduce your risk: Find an outsource partner who will work with you to give you as much control of your IT operations as possible, helping you integrate any software they build with your current systems.
4. Confidentiality and security threats
When seeking IT outsourcing services, ensure you’re working with someone trustworthy because they will have access to confidential systems that are pivotal to your business.
How to reduce your risk: Work with a well-respected firm that has been in business for many years, has plenty of good reviews and has worked with recognizable brands.
The good & the bad: A tale of two outsourcing projects
Now that you know the benefits and the risks of outsourcing, it’s time to look at two real-world examples. We’ve provided one example of a famous outsourcing project that went poorly and another example of an outsourcing success that we were involved with.
Unsuccessful outsourcing: Cambridge University NHS Trust
In 2014, the Cambridge University NHS Trust hired a U.S. firm to digitize its patient records, but the project garnered countless headlines for the problems it generated. The system’s performance dropped after its launch, and employees complained that it experienced constant glitches. This impacted efficiency and made it harder to serve patients.
According to an article in The Guardian, some users complained that the outsourcing provider didn’t spend enough time interviewing end-users and patients, so they failed to understand their needs and challenges.
Successful outsourcing: Harvard Business Review
Harvard Business Review decided to launch an educational platform called HBR Ascend, designed to target young business people and help them gain the skills they need to become tomorrow’s leaders.
Harvard Business Review turned to Net Solutions to design and build a highly usable platform that gelled seamlessly with the parent company’s branding. Net Solutions’ teams gathered Voice-of-the-Customer (VoC) feedback to ensure success in creating a powerful user experience. Ultimately, HBR Ascend was a profitable, popular platform for young business people with big dreams.
Making the right choice for your business
The decision to outsource any aspect of your IT strategy is something you should take seriously. Before outsourcing any IT projects to a third-party provider, you should carefully consider what you hope to accomplish and whether your prospective vendors are up for the task.
If you decide to work with an outsourcing partner, ensure you can communicate well with them and that you don’t have a significant cultural mismatch. Once you’ve vetted potential suppliers, put the proper contracts in place, outlining everything from the scope of work to data security and confidentiality agreements.
A development partner with 30+ years of experience
Net Solutions has developed software for major international brands, from Xerox to Euro Car Parts, and lean startups with big dreams. If you’re ready to see what a skilled outsourcing partner can do for you, let’s talk.
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Frequently Asked Questions
What is the difference between outsourcing and offshoring?Outsourcing is a general term that describes hiring a third-party vendor to handle a project that a business would otherwise engage an in-house team to complete. Offshoring is a type of outsourcing involving hiring a vendor in a faraway country. Many U.S. companies, for example, depend on offshore software development services in India.
What are the most common mistakes of outsourcing?A standard mistake companies make when outsourcing projects are failing to thoroughly vet their outsource partners to ensure they’re up for the task. This means reviewing past work and ensuring that previous customers were satisfied. It’s also essential to verify that any potential partner has a strong command of the language you’ll be working in, and it’s vital to ask tough questions so you know their team has the skill set required to meet your needs.
What are the 3 phases of outsourcing?Outsourcing is a three-phase process that includes (1) the decision phase, (2) the transition phase, and (3) the operational phase. The first phase involves careful vendor selection. The second phase involves setting up new processes to transition all key tasks to the outsourcing provider. The final phase involves careful monitoring and communication between key stakeholders on the client’s and the outsourcing partner’s teams. This helps maintain smooth operations.
Who benefits the most from outsourcing?Many companies can benefit from outsourcing, from large enterprises to small startups. Large companies can benefit from outsourcing by reducing costs and allowing their IT departments to focus on what they do best. Startups benefit from the flexibility that outsourcing provides, allowing them to scale at just the right times without committing to hiring new in-house employees all at once.
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