What exactly is outsourcing in business, and specifically in the tech industry? We list the pros and cons of delegating tech development to remote software engineers and take a look at the most common outsourcing types and models.
What Is Outsourcing?
Outsourcing is the process of engaging a third party individual or organization outside of your company, either locally or internationally, to handle certain business activities for you. It is a common business practice that allows companies of all sizes to grow as and when they need it, without major risk or investment.
What Is IT Outsourcing?
IT outsourcing is the practice of hiring resources outside of an organization to handle certain information technology functions. Companies 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.
Outsourcing types
The most commonly outsourced IT functions are:
- Web development
- Hosting
- Software and application development
- Website/application maintenance or management
- Technical support
- Database development and management
- Telecommunications
- Infrastructure
IT Outsourcing Examples
The individual or company that becomes your outsourcing partner can be located anywhere in the world — one block away from your office or on another continent.
A Bay Area-based startup partnering with an app development team in Utah and a call center in the Philippines, or a UK-based digital marketing agency hiring a Magento developer from Ukraine are both examples of outsourcing.
Reasons for Outsourcing
Why do companies outsource? Here are a few common reasons that can help explain the trend:
- 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.
- 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.
- 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.
- 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 guide to Nearshore Software Development in Eastern Europe
The Benefits of Outsourcing
- Reduced expenses. 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 a 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.
- 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.
- Uninterrupted workflow. 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
- Time difference. 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
- 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, which can be the result of different cultural environments, can interrupt your established workflow and will definitely need getting used to.
- Long distances between you and the outsourcing vendor can turn business trips into an expensive and tiresome experience.
Forms 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?
Offshoring (offshore outsourcing) 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.
Nearshoring (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.
Onshoring (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.
Multisourcing is a term that 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.
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