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What is Outsourcing? Benefits of IT Outsourcing in 2020

Posted Jul 14, 2020 Trends

The Most Commonly Outsourced Services

  1. Web development
  2. Hosting
  3. Software and application development
  4. Website/application maintenance or management
  5. Technical support
  6. Database development and management
  7. Telecommunications
  8. Infrastructure

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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.

Examples of Сompanies That Outsource

IT outsourcing is a strategy that helps even the world-class companies grow faster without losing the quality of development. Here are some good examples of companies that benefit from outsourcing:

  1. BaseCamp
  2. Curiosity Stream
  3. Google
  4. Pricena
  5. Slack

BaseCamp

BaseCamp is one of the most popular project management tools known across the world. When the product was only becoming popular, it was being developed by four in-house programmers. Things were going great for the company but in a while, the influx of new clients has caused a great mess in development processes for the very BaseCamp. 

It was then that the company decided to expand the development department by outsourcing a part of tech functions to foreign vendors. After they hired several more remote developers, the team could both fix bugs and implement new functionality faster which, eventually, brought worldwide fame to the product.

Curiosity Stream

Curiosity Stream is a rising star in the streaming services arena. The company focuses on the distribution of documentary films for the audience all around the world. The primary functionality of the streaming platform has been developed by the core development team located in the US. 

At some point, the development team was no longer capable of fixing bugs and the speed issues were negatively impacting the user experience. To power-up the team, the company started by hiring four software engineers from an outstaffing vendor and gradually grew an entire remote dedicated development team.

Google

Speaking about good examples of outsourcing, it's worth mentioning Google — the most renowned tech companies in the world. Interestingly, Google is also known as a good example of outsourcing software development functions and virtual assistant work. In 2011, the company had at least a thousand remotely working employees from 60 different countries. In 2020, the company is very likely to reinforce its business and optimizing IT costs by outsourcing.

Pricena

Another example of companies that outsourced successfully is Pricena. Prior to outsourcing software development, the business was using a mobile app as the main revenue generator. After the customer database started growing, the product founder Haneen Dabain decided to improve the functionality of the mobile app and construct the web platform with the help of remote developers hired through an outsourcing vendor. As a result, the rebuilt Android and iOS apps have gained great popularity and got more than 50K downloads on Apple Store and Play Market.

Slack

Widely used in our day-to-day communication, Slack is one of the brightest outsourcing business examples. Back in 2013, the core tech team of four engineers developed the first version of their communication platform. Yet, before the product was released to the public eye, its design was delegated to the outsourcing design vendor. The Beta versions of the design and copy were tested outside their company and that's how they received important feedback from users. As a result, the company launched a tool that has outdone the market several times over.

Guide to Nearshore Software Development in Eastern Europe

Software development market statistics of the tech countries — Poland, Ukraine, Romania, Czech Republic, Hungary, Bulgaria, Belarus, and Croatia.

nearshore-software-development-ukraine

Reasons for Outsourcing

Reasons for Outsourcing

Reasons for Outsourcing

1. To Reduce Cost

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.

2. To Access 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.

3. To Better Use 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.

4. To Accelerate 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.

5. To Share Risks

When you delegate a part of non-focus functionality by outsourcing it to a third-party vendor, you give away the responsibility and related risks.

Why Do Companies Outsource in 2020?

The unprecedented economic recession in Q2 caused by the spread of coronavirus has stimulated businesses to seek new tech talents outside their countries. Not only companies continue outsourcing software development function to optimize costs but also to grow through the recession. Many businesses embrace outsourcing because it helps them work with vetted specialists for a perfect quality-cost ratio.

The downfall is leaving a footprint on many small and middle-sized businesses across all industries. Curiously, those companies that have undergone digitizing report lighter impact from an economic recession. So do the tech education, pharmaceutics, and medicare are gaining momentum and even growing their businesses by outsourcing software development. Meanwhile, tech travel and many other businesses choose to work in a safe mode. 

The Advantages and Disadvantages of Outsourcing

The Benefits of Outsourcing

1. 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.

2. Access to Global Talent Pool

Outsourcing allows you to reach professionals that may be in short supply or unavailable locally.

3. 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.

4. 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.

5. 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

1. 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

2. Language Barriers

The language barriers can result in miscommunication and wasted effort unless you and the vendor you partner with have at least one language in common.

3. Different Work Habits

Different Work habits can be the result of different cultural environments, can interrupt your established workflow, and will definitely need getting used to.

4. Long Distances

Extremely long distances between you and the outsourcing vendor can turn business trips into an expensive and tiresome experience.

 

nitsam lamina technologiesNitsan Elmalam, 
the CIO at Lamina Technologies

"When evaluating a country for outsourcing, I will first consider the ability to communicate well with the remote team. This is related to mentality issues and the ability to understand each other well."

Types 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?

Types of Outsourcing

Types of Outsourcing

1. Offshoring

Also known as offshore outsourcing, it 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-based Interactive Marketing Agency outsources web development to a Ukrainian company.

drew dorganDrew Dorgan, 
globalHMA/Workhorse Development Owner

"When we come to the office in the morning, we check on what Tetiana has done. It’s really very efficient because it gives her solid time to work on her own. It also gives us some time to sort through everything that she’s done and see if we have any questions. There’s no interfering in each other’s work or getting in each other’s way."

2. 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 the Netherlands hires a development team in Ukraine.

3. Onshoring

Also called 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.

4. Multisourcing

This term 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)
Mexico2 hours ahead1 hour behind
Costa Rica2 hours ahead1 hour behind
Colombia3 hours ahead
Argentina5 hours ahead2 hours ahead
Brazil6 hours ahead3 hours ahead
Poland9 hours ahead6 hours ahead
Ukraine10 hours ahead7 hours ahead
Romania10 hours ahead7 hours ahead
Bulgaria10 hours ahead7 hours ahead
India13 hours 30 min ahead10 hours 30 min ahead
China16 hours ahead13 hours ahead
Phillipines16 hours ahead13 hours ahead

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

 UKNetherlands, Germany, Switzerland, Denmark, Norway, SwedenFinland
Poland1 hour ahead1 hour behind
Ukraine2 hours ahead1 hour ahead
Romania2 hours ahead1 hour ahead
Bulgaria2 hours ahead1 hour ahead
Egypt2 hours ahead1 hour ahead
South Africa2 hours ahead1 hour ahead
India5 hours 30 min ahead4 hours 30 min ahead3 hours 30 min ahead
China8 hours ahead7 hours ahead6 hours ahead
Phillipines8 hours ahead7 hours ahead6 hours ahead

 

IT Outsourcing Pricing Models

Cost Plus

Within the Cost Plus pricing model, you pay the developer's monthly salary as well as a fixed fee for your vendor. The vendor's fee includes payroll, office infrastructure, fees, support staff, and workstations. 

Time and Materials

T&M, short for Time and Materials, is a pricing model in which the client only covers the hours that developers spend working on the project. This pricing model is very popular in IT outsourcing practice because it grants the client flexibility and ease of adjusting requirements without paying additional fees.

Fixed Price

According to the Fixed Price contract, the vendor has to complete a project within fixed time and budget. The client makes a one-time payment and cannot change any specifications and requirements unless paying additional fees.

Rate Card

Billed each month, the rate card payment model allows clients to cover the monthly rates for developers involved in the project. Using this model, you save up time on recruiting necessary developers and go with the ones pre-hired by the vendor.

IT Outsourcing Models

The most popular  IT Outsourcing models of cooperation between the client and IT outsourcing vendor are workforce augmentation, project outsourcing, and opening a dedicated development center.

1. Workforce Augmentation

Also known as 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 Social Media Management Platform lands a project that requires more developers than they currently have. They experience a lack of local tech talent, so they decide to outsource software development to a staff augmentation company in Ukraine, who provide them with JavaScript and PHP developers 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.

liad guezLiad Guez, 
Oktopost Co-Founder and VP Product

"By creating a development hub remotely we get exposed to a much larger pool of quality talent. Nowadays, I can either search the Israel or Ukrainian market as I have functional teams in both. This way, remote cooperation brings flexibility to business owners."

2. Project Outsourcing

Clients refer to project outsourcing meaning that they would like to partner with vendors that have exclusive expertise that is lacking in-house and delegate a part of functions to them.

Project 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.

3. Dedicated Development Center (DDC)

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 Dutch company partners with an outstaffing vendor in Ukraine that recruits and hires an Agile software development team for the client. The developers work directly with their Dutch management while being on the Ukrainian vendor’s payroll.

marcel tenderappMarcel Hazeleger, 
TenderApp Co-Owner

"If we see that something is wrong or want to change the direction, we can do it easily and quickly. We don’t have to explain it, negotiate new prices, etc. If we decide to go “left”– we go “left”. I also like that our Daxx team is really dedicated to our project. They don’t have multiple projects in progress, so they don’t need to prioritize."

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/DDCNo — Project outsourcing

 

Is the project long-term?

Yes — Staff augmentation/DDCNo — Project outsourcing

 

Are project requirements likely to change significantly during the development process?

Yes — Staff augmentation/DDCNo — Project outsourcing

 

Versatility of Modern Outsourcing

As you can see from this article, modern outsourcing comes in all shapes trying to meet the needs of businesses all around the world. Modern outsourcing is a set of flexible approaches that allow even a short-term collaboration between businesses in different locations. The worldwide shutdown in 2020 has proven that not only we can put entire companies on remote but also, we can easily handle work with teams located in different countries and all this is possible only thanks to the achievements of modern outsourcing.

jan willemJan Willem Bergsma, 
Managing Partner at Xuntos

"After cooperating with an offshore developer, I learned that our onshore developers are more emotionally attached to the team. Because of the distance, it’s harder to communicate about simple everyday topics. To promote better emotional attachment, employers could invite remote developers to work at their offices at least for a week." 

About Daxx

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

Throughout 20+ years of commercial experience, Daxx has developed an efficient services system, which ensures support on each stage of the development lifecycle.

These include: 

Whether you’re interested in hiring just one developer, or 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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Daxx Team

Daxx Team is a team of passionate creative writers, content marketers, designers who vigorously research internet as well as cooperate with developers and Managing Director at Daxx to provide you with the top-notch material about tech, salary trends, development team hiring and management tips as well as up-to-date information about Ukrainian IT outsourcing market.

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