What is outsourcing and why is it a business imperative in 2021? 61% of US recruiters report hiring developers as their biggest challenge, everyone embraced remote work and outsourcing provides the most convenient solution to meet the talent demand. Let’s look closer at the benefits of outsourcing, the most common outsourcing types and models, cost/value balance in most popular outsourcing locations and more.
IT outsourcing is the business practice of using external providers to handle information technology functions, i.e. software development, infrastructure solutions, software support.
Popular reasons to outsource being access to better skills, price to quality ratio, ease of upscaling. Companies also often outsource data storage because it is cheaper to contract a third party than to buy and maintain their own data storage devices and facilities.
What is IT Outsourcing
5 Main Advantages of Outsourcing
- Reduced Expenses
- Access to Global Talent Pool
- Significant Time Savings
- Ability to Upscale Fast
- Uninterrupted workflow
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 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. You can only improve the qualifications of your employees and give various materials, such as on Studocu.com for further study.
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.
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
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
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.
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.
Extremely long distances between you and the outsourcing vendor can turn business trips into an expensive and tiresome experience.
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.
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.
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
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.
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."
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.
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.
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)|
|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 Pricing Models
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.
Cost+ means that you pay your developers’ monthly salaries and a fixed fee for the vendor’s services. These include payroll, taxes, office infrastructure, workstations, and support staff for your extended team.
- None of the members in an extended team are people from the vendor’s bench. The vendor pre-screens developers based on your specific needs, after which you can personally interview them and choose the best ones.
- You, your CTO, tech lead, or someone else you choose will manage the extended team directly, with no middlemen involved. This direct communication often results in higher team commitment, which in turn leads to better team performance and outcomes.
- When you work with an extended team, the responsibility for time, cost, and quality is entirely yours. You’re the one who picks the team members, and you’re the one who manages them. If something goes wrong, you won’t be able to blame the vendor and get your money back.
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.
Within the time and materials (T&M) cooperation model, the client pays only for the hours developers actually spend working on the project. T&M is the most common contract type used in project outsourcing.
- The biggest advantage of the T&M model is its flexibility. You’re free to adjust requirements, shift goals, replace features, and even stop the development process altogether at any moment.
- Low budgeting control. With this cooperation model, you can’t accurately predict how much money you’ll end up spending.
- Charging for “idle time”. An ‘idle time’ is a period when developers are unable to work on a project as they’re waiting for client feedback. So despite being very cost-efficient, a T&M contract might require you to pay for the time the developers are essentially doing nothing.
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.
Fixed-price contracts are a single-sum agreement. The development company is fully responsible for completing the project and meeting all the client’s requirements within the agreed timeframe.
- Fixed price cooperation models are very predictable in terms of budget and timing. However, this only works when your project’s requirements and specifications are easy to predict, and if you’re able to clearly explain your vision of the desired outcomes to developers.
- A landing page or a corporate website are both good examples of projects that work well with a fixed price arrangement.
- Even if the development ends up taking longer than expected, the extra time developers have to spend on your project comes at no cost to you (provided the initial scope of work hasn’t changed).
- Not so flexible. Any changes to the project scope you want to initialize after the contract has been signed will trigger additional charge. More often than not, these changes will shift the deadline, which also becomes your responsibility.
- The fixed price cooperation model often turns out to be the most expensive for the client, without them realizing it. This is because vendors are aware of the fact that project development can take longer than initially planned, so they add an extra 30 percent to the project’s real cost to cover the risks.
- Developers who work within this model usually juggle several projects at the same time. As a result, they aren’t fully committed to any of the projects, which can hurt the end result.
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.
By Rate Card agreement, the vendor gives you a list of monthly rates for the developers who will be involved in your project, and bills you on a monthly basis.
- You don’t overpay because the offshore development company doesn’t need to add any risks to the total cost — you pay for a full month of work anyway.
- You also get a team of full-time developers that work exclusively on your project, so they’re much more involved than they would be in standard project outsourcing projects. And you don’t have to spend time and money on recruitment — the developers are already employed by the vendor.
- You don’t have much say in deciding which developers are assigned to your project, so it’s hard to judge how well they actually fit your needs. Usually, the dedicated team model doesn’t allow you to communicate with the development team directly. Instead, you get to talk to a project manager, who then passes your requirements on to the team.
- This isn’t a disadvantage if you have little interest in personally managing the development process in the first place. If you do, however, having a middleman between you and the team can lead to miscommunication and significantly slow down the team’s progress. If this is the case, you may want to consider the next cooperation model.
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. Staff 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.
The most common pricing model used for opening an offshore development center is Cost+.
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-Based 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.
The most common pricing model used for opening an offshore development center are Time and Materials or Rate Card.
3. Dedicated Team
The dedicated team cooperation model works for clients who are interested in long-term cooperation because their projects require a significant volume of work. Within the dedicated team model, the vendor provides you with all the staff required to complete your project, and they work on it full time.
The most common pricing model used for opening an offshore development center is Rate Card.
4. Offshore Development Center (ODC)
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.
The most common pricing model used for opening an offshore development center are Rate Card or Cost+.
"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 Grid Dynamics team is really dedicated to our project. They don’t have multiple projects in progress, so they don’t need to prioritize."
The Most Commonly IT Outsourcing Services
- Web development
- Software and application development
- Website/application maintenance or management
- Technical support
- Database development and management
Best Outsourcing Locations by Region in 2021
Eastern Europe with its perfect working day alignment and best-fit advantages remains the hotbed of growth. Eastern Europe is the best outsourcing location for those companies that want to get high-end service at considerable cost without compromising the quality of the product.
The best outsourcing locations in Eastern Europe are:
China and India are the main Asian tech hubs with a large number of software engineers — there are nearly 5 million of overseas developers in each country. Other countries in Asia, such as Vietnam, Malaysia and Indonesia, are also gaining ground and offer similar software development services.
Low offshore software development rates in Asian countries often come at the cost of poorer project quality. Adverse work conditions, cultural differences, and disparities in time zones have a negative cumulative effect on the correspondence and result in decreased quality.
Asia boasts a vast tech talent pool — more than 10 million developers.
The best outsourcing locations in Asia are:
Latin America is the most popular overseas software development destination for North American tech companies. US companies primarily outsource software development due to considerably lower software developer rates that cut the cost of product development.
The negligible time difference is another good reason why American businesses seek cooperation with Latin American software development companies.
Also, Latin American countries are the most geographically close to American clients, which makes Puerto Rico, Brazil, Argentina, and Mexico very convenient outsourcing destinations.
The best outsourcing locations in Latin America are:
There are an estimated 690,000 professional software programmers in Africa. More than half of these are from South Africa, Egypt and Nigeria.
The best outsourcing locations in Africa are:
- South Africa
Frequently asked questions about IT Outsourcing
What is IT outsourcing?
IT outsourcing is the business practice of using external providers to handle information technology functions, i.e. software development, infrastructure solutions, software support. Popular reasons to outsource being access to better skills, price to quality ratio, ease of upscaling.
Where best to outsource your IT?
IT outsourcing to Ukraine (Reasons to Hire Ukrainian Developers) is getting more popular:
- Ukraine is becoming a leading IT outsourcing destination in Europe due to its booming tech ecosystem
- Ukraine Tech is predicted to reach US$8.4 billion of industry export volume in 2025
- A large talent pool of 200,000 IT professionals
- strong tech education.
Why choose Ukraine as your Outsource Country?
IT outsourcing to Ukraine is getting more popular: Ukraine is becoming a leading IT outsourcing destination in Europe due to its booming tech ecosystem, which is predicted to reach US$8.4 billion of industry export volume in 2025, a large talent pool of 200,000 IT professionals, and strong tech education.
IT Outsourcing Cost
In 2020, outsourcing costs went high by 8-12% in all popular tech hubs. The main reasons were the high demand for tech professionals and leveraging of outsourcing after the pandemic.
Offshore development rates in Latin America range from $35–$70, in Eastern Europe average outsourcing rates are $30–$65, in Asia and Africa offshore developers charge $20–$45 $25–$45 accordingly.
Offshore Software Development Rates by Region
Future of IT Outsourcing: Disruptive Technologies
To date, the acceleration of technologies has embraced all industries. Widely used technologies such as big data, cloud computing andothers are complemented by the disruptive ones, such as robotics, encryption and artificial intelligence. Thus, the future of IT outsourcing is also evolving. Automation is taking the lead with the aim to substitute at least some parts of operations. Robotics and cloud computing are replacing humans
According to Deloitte, 93% of companies have already implemented (or are going to do it) cloud computing within their organizations. And these companies are also expecting their outsourcing providers to embrace disruptive technologies as well. Disruptive outsourcing is expected in all business functions: IT, HR, Accounting, etc. as they provide flexibility and are scalable enough in comparison to more commonl outsourcing strategies.
Jan 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 Grid Dynamics
We offer team augmentation & agile pods to make your development and digital transformation process easier. We connect businesses in search of top engineering talent with skilled software developers in Ukraine, Eastern Europe, Central Europe and Latin America and organize their workspaces either offline or in the cloud.
Throughout 15+ years of commercial experience, Grid Dynamics has developed an efficient services system, which ensures support on each stage of the development lifecycle.
Ir you’re interested in hiring remote team to get the best performance via a Fortune-1000 tech provider, we’re ready to help.
Head over straight to the contact form below to tell us what skills you’re looking for.