What Is Outsourcing? IT Outsourcing Types, Models, Benefits, and Examples

Dec 12, 2016

What is outsourcing?

These days, you can contract out everything from laundry to internet security — a practice widely termed as “outsourcing”. So what exactly is outsourcing in business, and specifically in the tech industry? In this article, we list the pros and cons of information technology outsourcing, and take a look at the most common outsourcing types and models. Here are the main themes we’re going to cover:

What is outsourcing?
What is IT outsourcing?
IT outsourcing examples
Reasons for outsourcing
The advantages and disadvantages of outsourcing
Forms of outsourcing
IT outsourcing models
How to choose the right outsourcing model

What Is Outsourcing?

Outsourcing is the process of engaging a third party individual or organization outside of your company, either locally or internationally, to handle certain business activities for you. It is a common business practice that allows companies of all sizes to grow as and when they need it, without major risk or investment.

What Is IT Outsourcing?

IT outsourcing is the practice of hiring resources from outside of an organization to handle certain information technology functions. For instance, companies often outsource data storage because it is cheaper to contract a third party than it is to buy and maintain their own data storage devices and facilities.

The most commonly outsourced IT functions include:

  • Web development
  • Hosting
  • Software and application development
  • Website/application maintenance or management
  • Technical support
  • Database development and management
  • Telecommunications
  • Infrastructure

IT Outsourcing Examples

The individual or company that becomes your outsourcing partner can be located anywhere in the world — one block away from your office or on another continent.

A Bay Area-based startup partnering with an app development team in Utah and a call center in the Philippines, or a UK-based digital marketing agency hiring a Magento developer from Ukraine are both examples of outsourcing.

Reasons for Outsourcing

Reasons for outsourcing

What exactly prompts companies to hire people that work for third party organizations? Why do companies outsource? Here are a few common reasons that can help explain the trend:

  • Cost reduction. More often than not, outsourcing means saving money. This is often due to lower labor costs, cheaper infrastructure, or an advantageous tax system in the outsourcing location.
  • Access to skills that are unavailable locally. Resources that are scarce at home can sometimes be found in abundance elsewhere, meaning you can easily reach them through outsourcing.
  • Better use of internal resources. 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.
  • Accelerated business processes. When you stop wasting time on mundane, time-consuming processes, you’ll be able to move forward with your core offering a lot faster.

The Advantages and Disadvantages of Outsourcing

The Benefits of Outsourcing

  • Reduced expenses. You get to enjoy significant cost savings when you outsource to a country with lower production costs: a lower cost of living for employees, meaning lower salaries, as well as lower infrastructure and operational costs.
  • Access to a global talent pool. Outsourcing allows you to reach professionals that may be in short supply or unavailable locally.
  • Significant time savings. When you partner with an outsourcing vendor, you don’t have to advertise for, interview, select, and train new in-house employees, all of which can be very time-consuming.
  • Ability to upscale fast. You’ll be able to work with new clients and take on new projects without having to spend time on the processes described above.
  • Uninterrupted workflow. Your business will function round the clock thanks to the time difference between the in-house team and the outsourcing vendor’s team.

The Disadvantages of Outsourcing

  • Time difference. This can be a curse as much as a blessing, and in the worst cases it can significantly hamper the communication flow between you and your outsourcing partner.
  • Language barriers can result in miscommunication and wasted effort unless you and the vendor you partner with have at least one language in common.
  • Different work habits, which can be the result of different cultural environments, can interrupt your established workflow and will definitely need getting used to.
  • Long distances between you and the outsourcing vendor can turn business trips into an expensive and tiresome experience.

Forms of Outsourcing

Forms of outsourcing

Outsourcing is an umbrella term that encompasses a few more specific definitions. Offshoring, for one, often comes up as a synonym for outsourcing, even though the two terms are not exactly interchangeable. So what is offshoring?

Offshoring (offshore outsourcing) means outsourcing IT services to a distant location to benefit from lower labor costs, more favorable economic conditions, time zones, or a larger talent pool. Time differences we are talking about here are at least 5 or 6 hours.

Extreme time differences can definitely come in handy for companies that need to provide uninterrupted tech or customer support, and for those who run constant updates and maintenance work.

Example: a US business outsources web development to an Indian company.

Nearshoring (nearshore outsourcing) is very similar to offshoring, albeit with one important difference: this is that nearshoring means outsourcing software development or other IT functions to a location that is much closer to your home — usually in the same time zone or one within a couple of hours of it.

Nearshoring enables much smoother communication compared to offshoring. What’s more, countries that are located close to each other share cultural crossovers that can simplify communication.

Example: a startup based in Norway hires an Android developer from Ukraine for nearshore software development services.

Onshoring (homeshoring) refers to delegating a number of business processes to a different location within national borders. Usually the chosen location has lower labor and operational costs.

While cost savings are the main reason to onshore, skill shortages can also drive businesses to look for talent in alternative locations.

Occasionally, the term “homeshoring” is also used to describe a situation in which employees work from home.

Example: a company based in Washington engages IT security experts from Texas.

Multisourcing is a term that describes outsourcing business processes to multiple vendors, thus diversifying the risk in vendor operations.

Example: the main development capacities of a German software development firm are located in Munich. Occasionally, the company works on projects that also require design services, and when this happens, they contract a small design agency in Hamburg. Later, the company lands a major long-term project that requires skills the Munich team doesn’t have, which is when they partner with a development company in Ukraine to help them complete it. A few years later, the company releases its own product which they want to market in China, and for this purpose they engage a Chinese marketing agency with a much better knowledge of the local market.

Time Differences Between the US and Popular Outsourcing Destinations

  California (West Coast) New York (East Coast)
Mexico 2 hours ahead 1 hour behind
Costa Rica 2 hours ahead 1 hour behind
Colombia 3 hours ahead
Argentina 5 hours ahead 2 hours ahead
Brazil 6 hours ahead 3 hours ahead
Poland 9 hours ahead 6 hours ahead
Ukraine 10 hours ahead 7 hours ahead
Romania 10 hours ahead 7 hours ahead
Bulgaria 10 hours ahead 7 hours ahead
India 13 hours 30 min ahead 10 hours 30 min ahead
China 16 hours ahead 13 hours ahead
Phillipines 16 hours ahead 13 hours ahead

Time Differences Between the UK, the Netherlands, Germany, Switzerland, Denmark, Norway, Sweden, Finland and Popular Outsourcing Destinations

  UK Netherlands, Germany, Switzerland, Denmark, Norway, Sweden Finland
Poland 1 hour ahead 1 hour behind
Ukraine 2 hours ahead 1 hour ahead
Romania 2 hours ahead 1 hour ahead
Bulgaria 2 hours ahead 1 hour ahead
Egypt 2 hours ahead 1 hour ahead
South Africa 2 hours ahead 1 hour ahead
India 5 hours 30 min ahead 4 hours 30 min ahead 3 hours 30 min ahead
China 8 hours ahead 7 hours ahead 6 hours ahead
Phillipines 8 hours ahead 7 hours ahead 6 hours ahead

IT Outsourcing Models

Apart from outsourcing types based on the location of the outsourcing company, there are also a few outsourcing models that can describe the relationships between the client and the IT outsourcing vendor.

Workforce augmentation (staff augmentation) is a strategy for filling skill gaps that allows businesses to hire top-level specialists for short- or long-term projects while also being able to avoid the costs of hiring new full-time workers.

Workers added through the staff augmentation model are employed by the staff augmentation vendor, which means you don’t have to worry about infrastructure and other costs related to having full-time workers, nor do you have to spend time on recruitment. However, the new staff members act like your employees, meaning you’re the one supervising, leading, and managing them.

Example: an Israeli app development firm lands a large project that requires more developers than they currently have. They need to get started fast, and don’t have time to look for, interview, and train new people. As such, they outsource software development to a staff augmentation company in Ukraine, who provide them with an iOS developer and an Android developer for the duration of the project. These employees remain on the staff augmentation company’s payroll, but still function as full-time employees of the Israeli company.

Project-based outsourcing is a strategy that allows businesses to partner with vendors that have exclusive expertise that is lacking in-house.

Project-based outsourcing works best if the type of work you are outsourcing isn’t the core function of your company. It is also a good solution if your project’s requirements aren’t likely to change during the development process.

Example: a Dutch food delivery service partners with an app development company in Macedonia to have their app developed. The food delivery service provides the requirements, but doesn’t manage the development process directly.

Dedicated development center (DDC) is an outsourcing model in which a company locates its dedicated resources in a different country in order to gain access to larger talent pools and benefit from lower labor costs and/or taxes, while maintaining full control over the work process.

It is possible to open a dedicated development center on your own, but this has obvious disadvantages. For one, you’ll have to do the recruitment in a largely unfamiliar locale and also learn the ins and outs of local labor laws and taxes. The alternative lies in partnering with a company that provides recruitment services, office facilities, and keeps your developers on their payroll for a fixed fee.

Because of all the risks involved, opening a dedicated development center on your own is only worthwhile if you are going to hire at least 40 new people at the outsourcing location. Otherwise, partnering with an outstaffing vendor makes a lot more sense. Another less risky option lies in partnering with a vendor who assembles the workforce, then buying out the team and opening your own office.

Example: a Swedish company partners with an outstaffing vendor in Estonia that recruits and hires 20 software developers for the client. The developers work directly with their Swedish management while being on the Estonian vendor’s payroll.

How to Choose the Right Outsourcing Model

Each software outsourcing model has its own strengths and weaknesses, and the choice you make will depend on a number of key factors. The following questions may help you figure out which model works best for you:

Do you have an in-house specialist with the requisite technical background to supervise and manage the development process?
Yes — Staff augmentation/DDC No — Project-based outsourcing
Is the project long-term?
Yes — Staff augmentation/DDC No — Project-based outsourcing
Are project requirements likely to change significantly during the development process?
Yes — Staff augmentation/DDC No — Project-based outsourcing

About Daxx

Daxx offers a hybrid of the staff augmentation and dedicated development center models. We connect businesses in search of top engineering talent with skilled software developers from Ukraine, and organize their workspaces in our fully-equipped offices located in the country’s largest tech hubs — Kyiv, Dnipro, and Kharkiv.

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Whether you’re interested in hiring just one developer, or if you want to set up a fully-fledged development team, we’re ready to help.

Learn more about our services, or head over straight to the contact form below to tell us what skills you’re looking for.

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