IT Outsourcing – Definition, Process and Pros

IT outsourcing is an important strategy for companies looking to optimise their operations and drive innovation. By leveraging external service providers, businesses can deliver IT-enabled processes, application services, and infrastructure solutions more effectively.

This strategic approach, encompassing utility services, software as a service (SaaS), and cloud-enabled solutions, allows organisations to craft robust sourcing strategies and visions. It also aids in selecting the most suitable IT service providers, structuring optimal contracts, and managing sustainable, win-win relationships with these external partners.

Through IT outsourcing, enterprises can achieve significant cost reductions, accelerate their time to market, and tap into external providers’ specialised expertise, assets, and intellectual property. This enhances operational efficiency and positions companies to stay competitive in an ever-evolving market.

This article will cover all you need to know about IT outsourcing, its importance, benefits, and much more.

What is IT Outsourcing?

According to Gartner, IT outsourcing involves partnering with external service providers to deliver IT-enabled business processes, application services, and infrastructure solutions that drive business outcomes. This approach, which includes utility services, software as a service (SaaS), and cloud-enabled outsourcing, supports clients in crafting effective sourcing strategies, selecting the right IT service providers, structuring optimal contracts, and managing sustainable, win-win relationships with these external partners.

To sum up, IT outsourcing allows businesses to rely on third-party providers for their IT needs rather than sourcing talent in-house. This strategy not only simplifies operations but also leverages external expertise to enhance efficiency and innovation.

Why is there a need for IT Outsourcing?

The outsourcing business model is currently booming, driven by two main factors: the mass adoption of remote work and the talent shortage in the tech sector.

As some companies and industries push to bring employees back to the office, others are capitalising on remote work to tap into a broader talent pool. Remote work eliminates the need to hire within commuting distance, making outsourcing, especially IT outsourcing, an appealing option for companies seeking cost savings and access to increasingly scarce talent.

This brings us to the second point: the tech talent shortage. The reasons behind this shortage are varied, ranging from the retirement of experienced IT professionals to the growing complexity of the field. As a result, finding qualified talent has become a significant challenge.

In the current market, many companies struggle to find the IT talent they need. The combination of a talent shortage and the rise of remote work has made IT outsourcing more accessible and beneficial than ever. By leveraging external expertise, companies can fill critical roles and maintain their competitive edge.

Why Do You Need IT Outsourcing: Benefits of IT Outsourcing

The high costs and lengthy timelines associated with building software in-house have driven many companies to seek talent abroad, accelerating software delivery and reducing both cost and time.

Now that you understand the basic differences between various forms of outsourcing and why it’s set to dominate the market, let’s explore what IT outsourcing can do for your business and why it’s such an attractive option.

Cost Reduction 

You might wonder, “How can I reduce costs if I am hiring an additional service?”

The answer is straightforward: when you outsource IT, the outsourcing company takes on the responsibility of hiring, training, and compensating IT professionals. This eliminates the need to maintain an in-house IT department and the associated expenses for payroll, infrastructure, taxes, and training.

Additionally, outsourcing converts fixed IT costs into variable costs, allowing you to budget more effectively. You can increase your IT spending based on your monthly needs, providing financial flexibility.

Flexibility and Agility 

Technology professionals know that system bugs and operating errors are inevitable and can impact a company’s progress and productivity. Outsourcing provides your company with more flexible solutions. IT outsourcing companies can adapt quickly to internal needs and respond promptly to issues, minimising downtime and damage.

This responsiveness ensures that your business operations remain fluid and agile, allowing you to meet demands efficiently and maintain productivity.

Have a team that works only for you

For large, long-term projects, having dedicated teams is essential. This means employing exclusive service teams that adapt to project demands, delivering results with expertise and speed. Developers and other professionals are introduced to the project at the outset, ensuring continuity and avoiding constant team changes.

IT outsourcing teams often follow work methodologies derived from Agile culture, with the Scrum framework being a key organisational pillar. Continuous deliveries during sprints are timely and aimed at achieving expected results, ensuring efficient progress throughout the project lifecycle.

Quality and Efficiency

IT outsourcing enhances operational efficiency and process optimisation. Specialised providers are well-versed in identifying and resolving relevant issues quickly, thanks to their deep expertise and experience.

These providers invest in advanced tools, solutions, and training, further improving the quality of service for both the contracting company and the end customer. Their specialised 5. focus ensures that your business benefits from the latest innovations and best practices in IT service delivery.

Increased Productivity and Greater Focus on Core Business

The strategic use of IT outsourcing represents a competitive advantage that managers cannot ignore. By outsourcing complex IT tasks, your organisation can focus on its core business functions. It’s challenging to keep up with technological advances if your company isn’t specialised in the area.

When you hire an IT outsourcing provider, they handle these complex issues, freeing up your internal teams to concentrate on business strategy and competitiveness. This means your human capital isn’t bogged down with operational functions, allowing your business to thrive.

Security and Accountability

Maintaining the security of your company’s data is a delicate and crucial task. Information security requires continuous monitoring and investment to stay ahead of threats.

Outsourcing provides the guarantee of a specialized team that will implement the best data and information security policies available. This team is accountable for keeping your data secure, ensuring compliance with legal standards and reducing your risk.

Access to Global Resources

IT outsourcing expands your access to global resources, connecting you with top specialists from around the world. This is particularly valuable in addressing the tech talent shortage. Outsourcing provides access to specific expertise that may not be available in-house.

Even if you have an excellent internal IT department, there might be new technologies or challenges that your team hasn’t encountered. Outsourcing to a specialised company ensures you have experts who are up-to-date with the latest developments and ready to tackle any challenge.

Services Under IT Outsourcing

IT outsourcing encompasses a broad range of services that businesses can leverage to reduce costs and enhance efficiency. Here are some of the most commonly outsourced IT services:

1. Software Development Managing the development process of complex software across all phases of the Software Development Life Cycle (SDLC).
2. IT Consultancy Providing continuous guidance to help businesses manage their specific IT needs effectively.
3. IT Security Services Ensuring safety and protection from viruses, spam, and other online threats.
4. Managed IT Services Offering timely services for server hosting and application hosting.
5. IT Infrastructure Services Covering software, hardware, network installation, and other technical infrastructure services.
6. Data Center Activities Handling data management tasks, including data fetching, sorting, processing, and storage.
7. Strategic Planning and Association Supporting businesses from ideation to strategic planning, implementation, and collaboration.
8. Data Backup and Disaster Recovery Safeguarding data, which is critical for most business processes.

IT outsourcing has transformed businesses at a rapid pace, offering a wide range of services that meet diverse needs. Given the growing importance of IT, businesses must collaborate with IT outsourcing companies to progress and carve a successful path forward. Outsourcing not only provides a competitive edge but also enhances the performance of in-house teams. By engaging with specialized IT service providers, businesses can stay ahead of the curve and focus on their core functions.

Types of IT Outsourcing

Depending on their needs and goals, businesses choose different outsourcing models to achieve long-term or short-term objectives. The cross-border trade pattern has enabled companies to tap into a younger, more diverse talent pool. Outsourcing allows IT functions to quickly adapt to changing demands, and the outsourcing model is defined by three major factors: the location of the outsourcing company, the type of partnership, and the contract details.

Here are the three primary types of outsourcing models:

1. Offshore Outsourcing

Offshore outsourcing involves working with a service provider located in a different continent or geographic area far from the client’s location. This model is chosen for its ability to optimize overall business processes and budgets. Offshore outsourcing allows businesses to recruit talented resources from a global pool at competitive rates. Despite the distance, time zone overlaps during meetings and calls can be managed effectively. A project manager from the outsourced team is responsible for ensuring the quality and performance of the project.

2. Nearshore Outsourcing

Nearshore outsourcing refers to working with service providers in neighboring or nearby countries. This model offers the advantage of easier operations due to geographic proximity. Nearshore outsourcing facilitates easier travel and communication, and the cultural and working methods are often more aligned with the client’s. This proximity allows for frequent, in-person meetings if needed, enhancing collaboration and understanding.

3. Onshore Outsourcing

Onshore outsourcing involves partnering with service providers within the same country. This model is popular because it eliminates travel costs and time zone differences. Onshore outsourcing ensures that the businesses involved share the same cultural context, holidays, and working methods. This model is particularly appealing to global companies that prefer working within the same geographic region to reduce costs and enhance efficiency.

IT Outsourcing Costing and Finances

When engaging in IT outsourcing, companies can choose from various financial models to best fit their needs and goals. Here are the three primary financial engagement models:

1. Fixed Cost

The fixed-cost pricing model involves a strategic payment process where costs are fixed and charged based on specific deliverables. This model is not based on assumptions but on clearly defined requirements and outcomes. Companies’ changing needs are observed, recorded, and matched with service offerings, which can include custom software creation, smartphone application development, website development, or other cutting-edge software services. It is advisable to discuss and agree upon the norms and scope of the engagement before proceeding.

2. Dedicated Development Team

The dedicated development team model involves hiring a specialised team of software designers, developers, and other professionals for a specific time period and with particular technical expertise. In this model, the outsourcing vendor provides all the necessary staff to complete the project. The client pays based on the services provided, which are tailored to the project’s qualifications, knowledge, and competence requirements. A dedicated team is more engaged with the project compared to other models. The client manages the costs and may appoint an internal manager to oversee the project. Depending on the client’s preference, the team can work either at the client’s location or remotely.

3. Time and Material

The time and material model is a flexible pricing model suitable for projects with evolving requirements and no long-term targets. This pay-as-you-go model allows consumers to pay according to the assignments delivered. It is a natural fit for organisations with short-term priorities and dynamic needs. Payments are based on the time spent and materials used to complete specific tasks, providing flexibility and adaptability to changing project requirements.

What To Do and What Not To DO While IT Outsourcing

Having explored the types of IT outsourcing models and the importance of engaging with top-tier providers, it’s crucial to understand the best practices in IT outsourcing. Here are some essential Do’s and Don’ts to help businesses navigate the outsourcing process effectively.

Essential Do’s in IT Outsourcing

1. Discover the Best-Fit Method: Identify the outsourcing model that aligns seamlessly with your organisation’s goals and agendas. This foundational step ensures a strong start to the outsourcing process.
2. Clearly Define Project Specifications: Document detailed project specifications, implementation strategies, and forecasted outcomes. Clear communication of requirements is key to successful outsourcing.
3. Design an Achievable Plan: Create a realistic plan with a well-defined end product. This includes setting milestones and deadlines that are attainable within the project’s scope.
4. Thoroughly Vet Talent Sources: Ensure you have a clear understanding of the talent pool you’re collaborating with. Evaluate their expertise, experience, and cultural fit with your organisation.
5. Create a Shortlist of Potential Partners: Compile a list of companies that meet your criteria and needs. This helps streamline the selection process.
6. Communicate Effectively Engage in both personal and professional communication with the partnered team. Clear and consistent communication builds strong working relationships.
7. Monitor Work Regularly: Regularly check the progress of the project to ensure it stays on track. This includes status updates and record-keeping for accountability.
8. Sign Outsourcing Agreements: Ensure you sign detailed outsourcing agreements to mitigate security risks and outline responsibilities clearly.

Essential Don’ts in IT Outsourcing

1. Don’t Abdicate Responsibility: Even after outsourcing, remain actively involved in overseeing the tasks. Don’t place all the blame on the outsourcing company if issues arise.
2. Avoid One-Price-Fits-All Assumptions: Understand that software development has varying costs depending on the specific needs of the project. Don’t expect a fixed price for all services.
3. Don’t Expect Shortcuts: Software development requires effective management and constant monitoring. There are no shortcuts to quality and efficiency.
4. Don’t Force Culture Changes: Be mindful not to impose changes on the work culture of the partnered software development company. Respect their established processes and expertise.
5. Don’t Outsource Core Competencies: Avoid outsourcing tasks that your company is already proficient at. Focus on outsourcing areas where external expertise can add significant value.

Tips to Get the Most out of IT Outsourcing

Understanding the benefits of IT outsourcing is just the beginning. Implementing effective strategies is crucial for maximising these benefits. Here are some best practices to help you get started:

Determine the Right Project

Not all projects are suited for outsourcing. It’s most effective when your project has specific requirements that do not align with your core business functions or when you have a clear vision of the desired outcome from the start.

• Focus on Non-Core Activities: Outsource tasks that are not central to your core business. This allows your internal teams to concentrate on what they do best.
• Clarity of Outcome: If you know the exact outcome you want, outsourcing can speed up project delivery. However, if you’re unsure about the outcome, consider outsourcing the research phase of the project first.

Choose a Provider You Can Trust

Your outsourcing provider acts as an extension of your company, so it’s essential to choose one you can trust.

• Industry Understanding: Select a provider who understands your industry and is aligned with your objectives and business culture. This ensures a smoother project execution.
• Comfort and Confidentiality: You should feel comfortable sharing business and trade secrets with your provider. Confidentiality is key to a successful partnership.
• Test Project: If uncertain, start with a small test project. This allows you to evaluate the provider’s capabilities and compatibility without risking your main project.

Go Agile

Agile development is a leading method for software development and is preferred for its flexibility and efficiency.

• Short Iterations: Agile involves multiple short iterations, each lasting a few weeks. These iterations include creating, testing, and releasing new versions, allowing for continuous improvement and adaptability.
• Higher Success Rate: Agile projects are 28% more successful than traditional projects. They allow for quicker implementation of changes and better adaptability to new requirements.
• Fixed Cost Option: Despite its flexibility, many vendors offer agile development at a fixed cost, making it a viable option for budget-conscious projects.

Don’t Base Your Decision Just on Price

While cost savings are a significant benefit of outsourcing, they shouldn’t be your sole metric.

• Balanced Decision: Find a vendor that offers the same level of expertise and service as an in-house team, but at a lower cost. This balance is crucial for successful outsourcing.
• Evaluate Bids: Consider creating a list of bids and discarding the lowest and highest priced ones. Choose from the remaining options based on your budget, requirements, and expectations.

Outsource R&D

Outsourcing research and development can be a strategic move.

• Accelerate Time to Market: R&D is time-consuming and costly. Outsourcing it can provide the necessary tools, technologies, and expertise to expedite the process and bring your product to market faster.
• Maintain Control: While outsourcing R&D, ensure you have measures in place to protect your intellectual property.

Documentation is Control

Proper documentation is critical for managing outsourced projects effectively.

• Track Progress: Document each stage of your outsourcing venture, including deliverables, revisions, changes to the project plan, and updates. This helps you monitor progress and maintain control over the project.
• Comprehensive Records: Documentation can take many forms, including emails, meeting notes, manuals, bug tracker submissions, and code comments. The goal is to have a detailed record of the project’s progress.

Own Your Project

Even though an external company is working on the project, it remains your responsibility.

• Active Involvement: Constantly follow your outsourcing team’s progress. Use visibility tools like JIRA, Trello, and Slack to track changes, updates, objectives, and comments from the team.
• Regular Reviews: Frequently review deliverables and maintain open communication with your vendor. Address concerns promptly to keep the project on track.

In Conclusion

IT outsourcing has become an indispensable strategy for businesses aiming to reduce costs, enhance productivity, and stay competitive in an increasingly digital landscape. At Akal, we are dedicated to providing top-notch IT outsourcing services tailored to your business requirements. With our extensive experience and expertise, we ensure seamless integration with your team, delivering high-quality solutions on time and within budget. Our commitment to excellence and client satisfaction sets us apart as a trusted partner in your IT journey.

Partner with Akal for your IT outsourcing needs today!

FAQs about IT Outsourcing