IT Outsourcing Guide: Types, Models, and More

Outsourcing is the new normal, and it’s here to stay. The global outsourcing market was valued at $92.5 billion in 2019, and the number shot up to $261.9 billion in 2022. Information technology outsourcing makes up the largest portion of the total outsourcing market, intending to save costs cited as the primary driving factor for outsourcing certain business operations.   

 

If you’re considering working with an IT outsourcing partner to lower your operational costs, improve efficiency, and enjoy other outsourcing benefits, this guide’s the right place to start. In it, we’ll look into the specifics of IT outsourcing, the different types and models you can choose from, and a few tips on how to find a vendor with world-class capabilities. 

 

What Is IT Outsourcing?

 

IT outsourcing is the business practice of contracting third-party vendors or IT service providers and delegating certain IT functions to them. Instead of hiring and maintaining a full in-house IT team, businesses outsource these tasks to external providers with the necessary skills, resources, and infrastructure to deliver the required IT services.

 

IT outsourcing can involve various operations. This may include software development, infrastructure management, network support, database development and maintenance, data center operations, help desk services, cybersecurity, or cloud computing. 

 

The Benefits and Risks of IT Outsourcing

 

Benefits of Outsourcing IT Services

 

1. Lower IT Costs

 

Information technology outsourcing can result in a significant reduction in operational costs and cheaper infrastructure. Companies can avoid the expenses associated with hiring, onboarding, and training an in-house IT team, as well as investing in their infrastructure, equipment, and software. 

 

Reputable outsourcing providers typically offer technical support for a fixed price based on the work delivered. Instead of the fixed costs that come with paying regular full-time salaries, companies only pay for the work performed. There are no additional maintenance costs, such as for cloud services or similar, that the business needs to cover. Because of that, businesses have more predictable IT expenses.

 

Additionally, outsourcing allows organizations to access skilled talent from other countries and continents. As a result, they can contract an outsourced team at a considerably lower cost in regions with a favorable labor market.

 

2. Access to Global Talent

 

When partnering with an IT outsourcing service company, organizations can collaborate with experts with specialized knowledge, diverse perspectives, and a broad range of experience. This allows them to build a highly skilled and diverse IT team while remaining cost-effective. 

 

Businesses can contract professionals with the exact skill sets required for their IT projects or ongoing support needs. Access to global talent can also bring fresh ideas, innovative approaches, and a wider range of technical expertise, ultimately enhancing the quality of IT services delivered and software products developed.

 

3. Filling Expertise Gaps 

 

When working with in-house employees, you operate with limited knowledge of one person or a small team. Your IT manager may do their best to keep up with the latest technological advancements. 

 

Nonetheless, it’s difficult and even impossible for any single IT mind to specialize in each and every IT-related field. Or, your project may require specialized skills that are out of your internal team’s realm of expertise. 

 

In contrast, IT outsourcing companies will have a team of multiple experts experienced in hardware, software, networks, servers, technical support, as well as different tools and technologies. 

 

Reputable external service providers continuously stay up-to-date on the latest tools and technologies, trends, security risks, compliance mandates, and other details. Typically, when outsourcing IT functions, businesses benefit from increased expertise at a considerably lower price point and usually a predetermined fixed price.

 

4. Faster Software Development Life Cycle

 

An outsourced team from a reputable outsourcing vendor facilitates prompt project initiation. Unlike hiring full-time employees, external resources usually require minimal training and onboarding. Therefore, your dedicated resources can commence working on your software development project almost immediately after they gain access to relevant project information, collaboration, and project management tools. 

 

Moreover, talent from an established outsourcing company usually has worked on multiple projects and has experience in project management, agile methodology, and similar. This can lead to a more streamlined development process and fewer issues that may cause delays and disruptions. 

 

5. Ability to Focus on Other Business Processes

 

Limited time, resources, and staff can hinder a company’s ability to service its clients and achieve its revenue goals effectively. Moreover, handling intricate IT issues outside your and your in-house IT team’s expertise can be burdensome and distract you from pursuing your primary goals. External tech support can free up your time and resources, allowing you to focus on more important business functions. 

 

6. Improved Competitive Edge

 

An experienced IT outsourcing provider can help you build a dedicated team and provide a project manager who oversees the project execution process and ensures that your in-house IT team and your external talent continuously remain on time and budget. 

 

This facilitates faster time-to-market, enabling your software solution to reach end users much faster. This can give your business a unique competitive advantage in the highly saturated tech space. 

 

7. Compliance and Security

 

Small businesses and startups have plenty to worry about regarding compliance and security, from firewall updates and DMZ to server audits and security standards. Moreover, with user information privacy becoming increasingly more sensitive, ensuring that you’re fully compliant and have a contingency plan ready for potential data breaches and other disasters is vital. 

 

You can minimize security and compliance risks by partnering with a reliable IT outsourcing vendor. Not only do their developers follow ethical business practices, but they will also ensure that your infrastructure is adequately set up and potential vulnerabilities are adequately set up. This can help you safeguard safeguarding client data, credit card information, and confidential data.

 

Furthermore, outsourcing services can also provide secure data backup solutions to protect critical information in case of a disaster.

 

8. Improved Scalability and Flexibility

 

For most small businesses, it’s impossible to maintain the production pace and speed that large global companies with bigger budgets can maintain. Often, they require venture capital investments to be able to keep pace. However, that’s not possible for all small businesses and startups. 

 

Information technology outsourcing can offer businesses improved scalability and flexibility. They can scale their team up and down according to demand without needing to seek or fire any full-time employees. 

 

Potential IT Outsourcing Risks

 

1. Limited Control

 

When you outsource IT functions to a third party, a certain loss of direct control over the operations and decision-making processes occurs. This can lead to challenges in aligning IT strategies with business objectives, lack of transparency, and potential conflicts in priorities. 

 

To prevent that, your company needs well establish workflow processes, an effective method of communicating them to your new staff, and regular communication between you and your external resources. 

 

2. Poor Quality Work

 

While reputable IT outsourcing companies work with expert talent, not all outsourcing vendors provide high-quality services. It’s possible that the quality and performance of your dedicated team may not meet your expectations or align with internal standards. 

 

This can lead to delayed projects, subpar deliverables, poor customer satisfaction, financial losses, and damaged company reputation. To mitigate that, you must establish clear service-level agreements (SLAs) and regularly monitor the performance of your outsourcing partner.

 

3. Communication Issues and Cultural Differences

 

If you outsource IT operations to outsourcing vendors in other countries, you need to consider potential problems arising from language barriers, time zone differences, and cultural nuances. Effective communication channels and strategies and cultural sensitivity are necessary to ensure smooth collaboration and understanding. However, to maximize the chances of a successful partnership and project outcome, prioritize hiring cultural fit in the first place. 

 

4. In-House Team Morale

 

Your team is a symbiotic unit. Therefore, changes to it may affect the emotional well-being of individual employees. Your full-time employees may feel threatened by the more cost-effective external employees and fear losing their jobs. This can impact their morale and performance, lead to internal conflicts, and lower quality final product. 

 

5. Security Risks

 

IT outsourcing services may require you to share sensitive data and information with external talent. This can potentially increase the risk of data breaches, unauthorized access, or data leaks, especially if you pick a questionable provider. 

 

It is crucial to establish robust security measures and confidentiality agreements and ensure compliance with data protection regulations. To mitigate security risks, make sure to thoroughly vet outsourcing providers and discuss security and compliance policies and intellectual property protection during introductory calls. 

 

6. Hidden Costs

 

While IT outsourcing can help you reduce costs, there may be hidden costs involved. These may be additional fees, contract renegotiations, or unforeseen expenses. To avoid any unexpected surprises, conduct a thorough cost analysis and establish clear financial terms to mitigate risks. In addition, make sure that you thoroughly read outsourcing contracts and don’t miss any small script.

 

The Three Types of IT Outsourcing

 

There are three different types of IT outsourcing based on the geographic location of the IT service provider:

 

1. Onshore Outsourcing

 

In onshore outsourcing, companies outsource their business processes or IT services to an outsourcing provider within the same country or geographic region. For example, a company based in the United States may outsource its IT services to another company within the country. 

 

Onshore outsourcing offers benefits such as language and cultural compatibility, similar or the same time zone, and easier collaboration due to geographic proximity. However, it may be relatively more expensive than other outsourcing models due to higher labor costs in the same country.

 

2. Nearshore Outsourcing

 

It involves delegating services to a provider in a neighboring country or a nearby geographic region. For instance, a company in the United States may outsource its software development needs to a company in Mexico or Canada. Meanwhile, a company in Germany may outsource to a company in Ukraine or Turkey. 

 

Due to the proximity of the outsourcing location, nearshore outsourcing offers various advantages, such as cost savings compared to onshore outsourcing and reduced cultural and language barriers. Relatively close time zones enable better real-time collaboration. Nearshore outsourcing is often preferred when companies seek cost-effective solutions while maintaining some level of geographic proximity.

 

3. Offshore Outsourcing

 

Offshore outsourcing occurs when a company contracts out services to a vendor in a different country, usually in a geographically distant region. For example, a company in the United States may outsource its IT operations to a company in India or the Philippines. 

 

Offshore outsourcing offers significant savings due to lower labor costs in certain regions. Due to time zone differences, it also provides access to a large talent pool and round-the-clock service availability. Nonetheless, outsourcing may introduce challenges related to language barriers, cultural differences, and potential communication or coordination issues due to geographic distance.

 

Consider your business’s needs and preferences to decide whether onshore, nearshore, or offshore outsourcing works best for you. Weigh in factors such as cost considerations, required skill sets, language requirements, cultural compatibility, and time zone preferences.

 

Common IT Outsourcing Models

 

When seeking external expertise, you can choose between four common IT outsourcing models:

 

Project-Based Model

 

In this model, organizations outsource specific projects or tasks to a 3rd party. The outsourcing relationship is usually short-term and focused on achieving specific project goals within a defined scope, budget, and timeline. 

 

The IT outsourcing company is responsible for delivering the project deliverables and meeting the agreed-upon requirements. This model is beneficial when companies require a specific project or software development but don’t require long-term IT support.

 

Staff Augmentation Model

 

The staff augmentation model involves outsourcing IT professionals to supplement an organization’s internal resources. In this model, the service provider provides skilled talents, such as software developers, testers, DevOps engineers, or database administrators, who work alongside the internal team. 

 

The client retains complete control over the project and directly manages the outsourced staff. The staff augmentation model is beneficial when there is a temporary need for additional resources, specific expertise, or specialized skills to support ongoing projects or address skill gaps within the existing team.

 

Dedicated Team Model

 

In the dedicated team model, an outsourced team assembles to work exclusively on a client’s projects or tasks. The dedicated team becomes an extension of the client’s internal team, usually for an extended period. 

 

The client retains full control over the team’s composition, tasks, and project management. Meanwhile, the service provider oversees administrative matters, infrastructure, and support. Dedicated teams are beneficial for long-term collaborations, complex projects that require ongoing development and maintenance, or when clients seek to scale their teams quickly.

 

Outstaffing Model

 

Also known as the remote team or extended team model, it involves hiring dedicated professionals who become a part of the client’s team. They work remotely from the service provider’s location. 

 

The client has direct control and management of the outstaffed team, while the service provider handles administrative and logistical aspects. This model allows companies to access specialized skills or resources in different locations, benefit from cost savings, and maintain control over the work process.

 

Which IT outsourcing model is best for your business? It depends on your project requirements, duration, desired level of control and involvement, and budget.

 

6 Factors to Consider When Choosing an IT Outsourcing Service Provider

 

Before you sign an outsourcing contract, you should consider several factors to ensure successful business outcomes: 

 

Prior Experience and Portfolio

 

Assess the provider’s expertise and prior experience in the relevant technologies and domains. Review their track record, portfolio of past projects, client testimonials, and case studies. Look for a provider with a proven track record and experience in delivering similar projects or services, preferably in your industry.

 

The Quality of Outsourced Talent

 

The IT outsourcing business model typically guarantees that the individual developers are thoroughly vetted upon joining the vendor’s roster. However, if it’s your first time considering multiple providers, don’t stop at simply assessing their collective portfolios. 

 

Assess the technical skills and portfolios of individual developers, as skills and the level of expertise can vary from one professional to another. 

 

Team Dynamics

 

If you opt for the dedicated team outsourcing model or aim to onboard multiple developers, look into the communication dynamics between the team. Do they get along? What is the communication between them like? How do they handle conflicts and disagreements? How do they approach problems? Picking a team that has well-established chemistry will prevent petty conflicts and disagreements. 

 

As you schedule your initial interviews with the vendor, inquire about the possibility of having a group interview with the individual developers, too. This will help you gauge their team dynamics, communication skills, problem-solving abilities, and overall compatibility. 

 

Infrastructure and Tech Stack

 

Evaluate the IT service vendor’s technical capabilities, including their infrastructure, tech stack, software development methodologies, and quality assurance processes. Ensure that they have the necessary technical expertise, skills, and tools to meet your requirements.

 

Values and Culture Fit

 

Consider the cultural compatibility, values, and communication capabilities of the outsourcing provider. Effective communication and collaboration are vital for successful outsourcing, whereas aligning personal values will reduce potential problems and misunderstandings. 

 

Language Proficiency

 

Ensure that there are no significant language barriers and that the individual talent joining your team can communicate freely in English, both verbally and via chat. Moreover, the provider’s communication style should align with yours to maximize the chances of efficient collaboration. 

 

Meet Your IT Needs with Datrick’s Dedicated Development Team

 

Ready to meet your business goals with information technology outsourcing? Datrick can help. From software developers and DevOps engineers to data engineers and database development professionals, our dedicated team has the talent and expertise necessary to help you achieve your goals in the rapidly changing business environment. 

 

Schedule an intro call to explore your possibilities.