In the early third millennium, the specification drive coupled with the globalization of services has made outsourcing one of the most popular employment models. Entrepreneurs all over the world realize that it is more cost-efficient to hire experts for one-off assignments than to train in-house employees and keep them on the regular payroll. Small companies benefit from outsourcing remarkably, 37% of which admit using this cooperation pattern at least for one of their business processes.
Outsourcing is remarkably relevant in the expertise domains removed from the core business activities, and the IT field is a vivid example of this truth. Wishing to keep abreast of competitors, modern companies in any industry (and 92% of them belong to the G2000 list!) increase their virtual footprint and introduce high-tech innovations into their workflow, employing onshore, nearshore, and offshore mavens to perform various digitally geared tasks.
Let’s have a look at telltale numbers that reflect the current state of the IT outsourcing realm and offer forecasts as to its development in the foreseeable future.
Reasons for Harnessing IT Outsourcing
Half of the small business owners confess that recruiting new employees is the greatest challenge for them. Evidently, big-time players face the same problem when they have to find staff with a high level of basic skills, train them to perform specific duties, cover related expenditures (not only salaries but also sick leaves, paid holidays, relocation costs, etc.), pay for office space, utilities, operating materials, equipment, etc.
When hiring an outsourcer, you forget about these expenditures and pay only for the work done. It is no wonder that entrepreneurs name cost as the major reason for outsourcing IT projects.
Besides, recruiting IT talent outside your organization lets you focus on your core activities, get access to the global expert pool, and reduce time-to-market radically. Such mouth-watering perks explain the robust development of the IT outsourcing niche.
IT Outsourcing Market Dissected
Two years ago, Grand View Research estimated the global IT services market to be worth almost $716 billion, with over three-fourths of it (around $556 billion) covered by outsourcers. Being very impressive numbers, they are likely even to grow. According to forecasts, the anticipated CAGR of the IT outsourcing market within the next three years will constitute 7.7%, which will bring the market value to a total of $806.63 billion.
Statista employs a different methodology of data collection and analysis, which yields a more modest figure of almost $505 billion by 2025 but predicts a greater CAGR of 8.26%.
However, both indices are quite solid to project a bright future for the industry. Despite the steady increment of the global number of programmers expected to approach 28.7 million in 2024, this robust spike in the sector has roots in the inadequate number of IT specialists, the demand for whoever surpasses the supply almost doubling since 2009.
Consequently, 87% of employers fail to find talents locally to form or replenish their IT teams and have to address outsourcers to implement software projects for them.
Being generally on the most wanted list, high-tech experts businesses require for their IT endeavors have different degrees of relevance.
Among software engineers working with cloud platforms, those having expertise in AWS, Microsoft Azure, and Google Cloud prevail.
Web frameworks and technologies that are most used currently include Node.js, React.js, jQuery, Express, and Angular.
All these specialists are sure to find their skills in great demand in such high-tech areas as quantum computing, networked technologies, fintech, and AI.
What IT-powered projects are commissioned by customers to vendors? No doubt, mobile applications.
Evidently, such a demand for apps is conditioned by the ubiquity of mobile devices, whose number exceeds the total population of the planet twice and will continue increasing at a tremendous pace.
Only in this use case, the global revenue reached $116 billion this year and is expected to top the exorbitant $145 billion within the next five years, manifesting a CAGR of 4.66%. Such promising vistas are boosted by companies making use of the outsourcing model. More than a third of them consider augmenting the share of outsourced app development projects, which is going to drive the overall growth trend to the spectacular 25 points.
Whatever IT-related services or products a company decides to commission, the scope of outsourcing involvement varies across industries. This involvement is most significant in finance and banking (72%), whereas healthcare organizations resort to third-party assistance in 31% of their digital efforts, making up for the average 60%.
If you decide to recruit an external IT vendor, it is important to select an outsourcing destination properly.
Zooming in on Outsourcing Geography
The most obvious criterion for searching outsourcing destinations would seem to be the number of programmers hailing from some country. In this aspect, Germany, the UK, and France dominate the European IT market, while the US and China are unquestionable global leaders in the realm.
However, going by simple numbers is outright delusive because even the huge quantity of competent workforce available somewhere can’t guarantee cost-saving, which is the ultimate purpose of IT outsourcing. Instead, you should rather look at the hourly rates vendors charge for their services. These numbers depend on the state of respective economies, namely such parameters as salary level, cost of living (aka purchasing power), taxation regime, office maintenance expenses, etc. According to them, there are several regions with similar rate ratios.
- Western Europe, Australia, and North America. In these highly-developed nations, the cost of software building is the greatest, with average hourly rates between $100 and $200. Such exorbitant price tags mean that customers from those places conventionally look for outsourcers elsewhere.
- Central and South America. Programmers from Latin America generally charge between $35 and $55 and, being in the same time zone, which makes this region the most suitable nearshore location for customers from the US and Canada.
- Africa and South Asia. Here, the rates are most affordable, so by paying the chump change of $15-25 per hour of work, you will be able to get a software product for your company. But trying to be penny-wise, you may end up becoming pound-foolish, obtaining a solution of substandard quality. So you will have to pay through the nose to doctor it and hope to finally get a software piece functioning up to the mark.
- Central and Eastern Europe. The hourly rates here are a notch higher ($30-50), but clients from Western Europe consider this outsourcing destination to be most convenient for them, what with the minimal time zone difference and the enormous pool of competent developers who are fluent in English and capable of delivering high-end software. Thus, by opting for vendors from Romania, Poland, Ukraine, Hungary, and the Czech Republic, you are sure to obtain the best price/quality ratio attainable in the IT outsourcing market.
Browsing about among the countries of the region, make sure you shun Russia and Belarus. Since these two aggressor states have launched a ruthless invasion against Ukraine, the international community imposed severe sanctions upon both, with many blue-chip ventures cutting ties with them. As a result, both nations are experiencing an overall degradation of major industries, and the high-tech domain is no exception. Moreover, the introduced limitations are boosting the “The Great Russian Tech Brain Drain,” causing software specialists to flee Russia and Belarus in droves.
Ukraine, on the contrary, is the unquestionable IT leader in this part of Europe despite the war. The lenient tax regime and 200,000-strong qualified workforce employed at over 1,600 developing companies propel the IT industry there, enabling it to manifest up to 20% of annual growth in 2016-2018.
The hourly rates of vendors are not the only factor conditioning the cost of the software product you outsource.
Coming to Grips with Outsourcing Costs
As a seasoned vendor with hundreds of accomplished projects under our belt, we at IDAP singled out nine major ingredients (with the location being the tenth) of the cost of the solution outsourcers create.
- Type of work to be done. You may want to build a solution from scratch, update a legacy one, integrate two or more existing products, or migrate a software piece to the cloud. Each of the assignments has its own price tag.
- Type of solution to build. The cheapest ones are e-stores and CMS (between $20,000 and $50,000), whereas apps, ERPs, and CRMs belong to big-ticket items (up to $600,000).
- Industry. As a rule, solutions in finance, banking, and healthcare are pricier ones, while logistics and retail software are typically cheaper to get.
- Project scope. Depending on the complexity of the solution and the number of features it contains, software products are classified into small, medium, large, and enterprise, each of which will cost you a different sum.
- Tech stack employed. Here belong platform (especially relevant for mobile apps), back-end elements, APIs, UI/UX design, etc. If the solution you commission relies on some state-of-the-art know-how (like AI, ML, blockchain, or IoT), you will have to splurge on that too.
- Testing applied. Naturally, the more high-profile testing will require greater expenditures.
- Project duration. The longer the project lasts, the more expensive it is bound to become.
- Team composition. The scope and urgency of the project largely condition the number of specialists needed to see it through. And a larger team working on your solution will cost you more.
- Engagement model. You can opt either for a time and material or a fixed price scheme with different payment calculation patterns. A totally different budget estimation must be applied if you hire a dedicated or extended team.
Generally, software creation is never a chicken-feed endeavor, but it will definitely cost you less when outsourced in comparison to the sum you will have to fork out paying salaries to the IT department every month and financing all related expenditures.
Software development outsourcing is a godsend for startups and small businesses which can’t afford to hire an IT department on a permanent basis. In this growing market, it is mission-critical to find a reliable vendor that will deliver a high-quality solution within time and (preferably moderate) budget. IDAP ticks all these boxes, possessing competent mavens who can successfully tackle a software project of any complexity.