A Comprehensive Guide on IT Outsourcing: Types, Models, and Costs

IT outsourcing has become an effective solution for established giant companies and young startups. An increasing number of businesses entrust their software development to local or overseas specialists, experiencing multiple benefits of outsourcing. A Deloitte survey confirms that the recent pandemic has banished one of the long-existing preconceptions that physical co-location of resources is crucial for building a trusting relationship in the workplace. Thus, we can expect a constantly rising demand for outsourcing business and development tasks.

If you feel your business requires assistance from trained experts, you may want to reach for outsourcing, too. In this article, we provide the outsourcing definition and discuss its types, models, advantages & risks. Learn these details so that you know how to use this collaboration model successfully.

What Is Outsourcing?

IT (information technology) outsourcing is entrusting IT processes to professionals from other companies outside your team. Basically, a business hands over task implementation to a partner and controls the entire process. Such a practice allows for getting quicker results, saving money, and taking advantage of easy access to a large number of specialists worldwide.

Flexibility is the key benefit of outsourcing: you can entrust only some processes to external experts or hand over the entire bulk of the development process to an outsourcing company. In this situation, an outsourcing vendor is responsible for all stages of work on a particular project. Still, there are different outsourcing models we’ll cover later in this article.

What IT Services Do Companies Outsource?

Businesses can entrust various tasks to an outsourсed company. The major services that are commonly outsourced are as follows:

  • IT development, or software development services;
  • IT testing;
  • IT consultancy;
  • IT security services (protection from hackers, personal data protection, etc.);
  • Managed services (server hosting);
  • IT infrastructure (software, hardware, network installation, etc.);
  • Data center activities (sorting, processing, storage);
  • Strategic planning;
  • Data backup and recovery.

In a nutshell, outsourcing enables companies to rely on external specialists with almost any type of service. It gives a competitive advantage and enhances the performance of the in-house team by allowing it to concentrate on the core business goals. Reliable outsourcing services can significantly save you time and budget spent on any kind of IT processes.

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Reasons to Use IT Outsourcing and Its Benefits

After discussing the forms of outsourcing, we want to cover the reasons for using such business services. Here are several key situations when the outsourcing process can be the most beneficial. 

Who Needs OutsourcingWhy
A Domain Expert with an Original IdeaHaving a brilliant idea for the solution of a current problem on the market but lacking development skills is definitely a reason for an industry expert to seek outsourcing. This allows you to enter the market and test your product quickly. An outsourced team will help you validate the idea and go through all the stages of product development.
An Early-Stage Startup with a Limited BudgetYoung startups often spend money faster than they get a perfect team and a flawlessly completed project. Financial shortages are one of the main reasons for startups to fail. Therefore, cutting costs by collaborating with an outsourced company is a beneficial solution. Working with outsourced professionals for an entire cycle of your product creation will cover all the blind spots and ensure the best results.
A Company With a Need for Minor Development ServicesYou may have an idea for a small change in the application but lack technically skilled professionals to implement it, meaning there is no need to hire an in-house team just for that. Or you may simply need a specific specialist for minor improvements in the UX/UI design, integrations with business apps, small changes in the site structure, etc.

Advantages of IT Outsourcing

You probably already have an understanding of some ​​outsourcing advantages. But to make things even clearer, here are the key benefits of delegating some business processes to a partner.

  • Cost savings. This cooperation model enables companies to reduce labor costs, as well as operational and maintenance costs, leading to an overall cost reduction.
  • Time-effectiveness. The work scope can be done much faster compared to finding separate specialists, training them, and waiting for them to get the work done.
  • Access to the best talent. The outsourcing market allows you to work with the most talented local or offshore experts, integrating external expertise with your internal resources. You can allocate as many specialists as needed in a matter of days.
  • Scalable resources. Developing businesses often struggle with managing an internal IT department and finding employees who can scale with them. Outsourcing enables flexible cooperation models, from hiring a dedicated team to staff augmentation. Thus, you can choose the most appropriate option for you, adapting to the current business situation. 

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Types of IT Outsourcing: Onshore, Nearshore, and Offshore

There are 3 main types of outsourcing based on where the service is provided:

  • Onshore/domestic;
  • Nearshore;
  • Offshore.

Now, let’s explore each of them a bit deeper. 

Onshore Outsourcing 

It means the business hands over some or all of the processes to an external company within the same country. The advantages of this option include working in the same time zone, using the same language, and the lack of cultural misunderstandings. However, it may be rather costly for businesses from the US or Canada, for example, due to the high hourly rates, taxes, and living costs.

Nearshore Outsourcing

It implies entrusting IT processes to a company that is located near the client’s region. Nearshoring’s benefits are quite similar to those of onshoring since the culture and working method are still similar. Add this to lower hourly rates, and you’ll get a great option for outsourcing. An example can be a German company outsourcing its IT processes to Polish specialists.

Offshore Outsourcing

This means that a customer transfers the workflow to the service provider far away from the customer’s location. Typically, it is chosen to minimize the total budget by recruiting specialists from different regions for lower costs. While the time difference may seem an obstacle, experienced teams know how to maintain perfect work quality and performance with customers abroad. An Australian-based business outsourcing its IT development to a Ukrainian company is a good example.

Which Outsourcing Model to Choose?

To transfer specific tasks to an external team, you must know which outsourcing model suits you the most. With types of outsourcing IT services mainly referring to the location, models define the way of collaboration and its final goals. There are three models of outsourcing: project-based, dedicated team, and outstaffing.

Project-Based Model

This model implies hiring a team to implement an already set scope of work. The outsourced project manager is 100% responsible for the project’s quality and performance. This model is perfect for projects that are not very complex and have predictable functionality. 

Its benefits include clear deadlines, time-saving for an in-house team, and full responsibility lying on PM. On the other hand, you have less control over the project, and there is less flexibility.

Dedicated Team Model

In this case, you engage an entire team that will work on your project. Such cooperation requires more engagement of an outsourced service provider in the project. The team members become your advisors and implementers in the development processes. This model is most suitable for early-stage startups, complicated long-term projects, and projects with many vague requirements. 

The main advantages of such an outsourcing cooperation model are:

  • higher control;
  • cooperation with experienced specialists in a particular field;
  • the guarantee that a final product meets industry standards;
  • more flexibility.

However, there are also cons, which may include a long hiring process and a higher responsibility for the project for you.

Outstaffing Model

This outsourcing model implies inviting separate outstaffed specialists from a partner company to your team rather than hiring a whole team. They cooperate with you for the time of implementing the project. Such a form of cooperation is a good choice for short-term projects or businesses that lack specific knowledge and require extra professionals for faster growth.

The pros of an outstaffing model are that you don’t need to hire an entire team, and you can fill the gaps in your project faster. The drawbacks may include a longer search and recruiting process.

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Challenges of Turning to Outsourcing Companies and Ways to Avoid Them

Along with multiple opportunities come some risks. We’ve described the most typical risks of turning to a software outsourcing company and ways to avoid them. 

Finding a Reliable Vendor

This task is the first challenge you may face. You should come up with a list of potential partners and visit their websites and social media, noticing every little detail. Check their portfolio and customer reviews at resources like Clutch. At the step of a video or a face-to-face interview, describe all your business needs, and don’t hesitate to ask any question that is important to you. These may be company workflow details (methodologies and instruments, QA techniques, etc.), communication organization (tools for staying in contact, the team’s English level, etc.), and other details.

Communication Issues

The contacts between you and the rest of the team may be limited, especially if you delegate the work to experts overseas. However, this problem can be easily resolved by planning the meeting schedule in advance. Consider arranging a meeting calendar to stay in touch with your outsourced team.

Security Issues

To prevent data breaches, you have to secure your company’s private and commercial data. The key thing that helps companies in this aspect is signing a Non-Disclosure Agreement (NDA). Besides, it’s worth discussing whether their solutions comply with personal data protection legislation. Finally, clarify if your potential partner uses data encryption technologies, user privacy policies, and other approaches to secure entrusted data.

Product Quality Control

You should monitor the entire development process and establish frequent checks of the accomplished work scope against the agreed metrics and benchmarks. This will allow you to identify any gaps and issues to take action in time. Besides, consider reviewing and rewarding the performance of an outsourced team from time to time. This will motivate the team to deliver high-quality work.

How to Get the Most of Outsourcing: Dos and Don’ts

To ensure the most efficient collaboration, it’s important to learn the top outsourcing practices. To help you further prepare for a positive experience, we’ve prepared a few essential Dos and Don’ts of outsourcing. Check them out below.

Dos in Outsourcing

  • Choose the most suitable type and model for outsourcing.
  • Explore different payment models: fixed price for the whole project, price per service, hourly rate, etc.
  • List your project specifications and the results you expect to achieve from collaboration.
  • Make careful research when looking for a partner.
  • Take care of security issues when signing the necessary documentation.
  • Ensure clear and constant communication with a picked partner by having frequent meetings.
  • Monitor the progress by making regular checks.

Don’ts in Outsourcing

  • Don’t hire a company that doesn’t seem to work on your project with full dedication.
  • Don’t expect software development to have any shortcuts. The process requires effective project management and constant monitoring.

Best Practices: More Tips on Outsourcing

Here are several more detailed tips to consider for the most efficient outsourcing collaboration.

  • Sign an NDA for security reasons. You should be able to manage the number of people having access to your concept and protect it from unexpected shares. The NDA sets up all the possible conditions of data exchange, discusses how this data can be used, and what the exclusions are.
  • Plan your cooperation. Decide on the communication channels (Zoom, Google Meet, Slack, WhatsApp, Skype, etc.) you’ll use to stay in touch with your team. Besides, you should discuss the ways you can reach the project manager, who is typically available during working hours to answer all your questions and keep you informed about any progress. 
  • Work on communication. Please keep in mind that the effectiveness of the entire process depends not only on the team but on you, as well. Close connection with your development team guarantees quick improvement realization and bug fixing. Therefore, be sure to establish effective communication. Furthermore, the company working on your project can offer the most appropriate solutions to the problems arising. For this reason, consider long-term cooperation with the chosen partner.

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How Much Will It Cost to Outsource Software Development?

By reaching for outsourcing web development and other IT services, you can significantly reduce the costs spent on these processes without losing on quality. The price range varies depending on the hourly rates of the team members and the size of the team involved. In fact, the hourly rate of specialists drastically varies depending on the region. For this reason, you should perform market analysis and price comparison before choosing a partner, whether overseas, nearshore, or local.

The most popular destinations for outsourcing are Eastern Europe, Western Europe, and India. Let’s look at them closer.

  • Eastern Europe. Experts from this region are known for their professional skills and expertise and are considered among the most sought-after specialists on the market. Furthermore, they have quite an affordable hourly rate ranging from $25 to $50.
  • Western Europe. Western European developers also have a great reputation. However, due to the high cost of living, their hourly rates are higher than those of Eastern European experts – around $50-$60.
  • India. Quite low hourly rates ($25-$30) make this destination very attractive to many businesses. However, it must be noted that the quality of services of developers from India can vary.

When calculating the price for your mobile app or website development, consider also the minimum number of outsourced experts. Therefore, you should multiply the hourly rate by that number and the average general time required for the project implementation to get a clearer understanding of the overall outsourcing cost.

Summary: Should You Hire Outsourcing Specialists?

Businesses are extremely dependent on experts responsible for their internal operations. In this guide, we’ve covered all the ins and outs of outsourcing software development and other IT processes to help you make more informed decisions. Weigh the pros and cons, consider the risks, and pick a reliable partner who will be 100% engaged in your project. We at QArea always work on tasks entrusted to us with dedication so that our customers get the most satisfying experience. You can expect the highest quality of delivered products while taking advantage of affordable rates and fast resource availability.

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