IT Services: What is The Top Reason for Global Outsourcing?

Companies have transitioned their traditional operations and functions to digital, albeit completely or partially. And those with non-technical expertise find support from IT outsourcing vendors instead of in-house hiring. What drives their higher demand for global sourcing of IT services? 

The Top Reason for Global Outsourcing of IT Services

Global IT outsourcing had a market capitalization of US$318.5 billion in 2020. This figure is predicted to increase with a CAGR of 4.5% from 2021 to 2026. These results come from the increasing reliance on innovative software and IT extensions. Playing a critical role during the digital transformation of multiple companies, IT products are mostly outsourced for some reasons:

• Diverse Pool of Specialists: External recruitment is an ideal alternative when in-house workers cannot meet the technical requirements of a company. This way, the company can access a global cohort of qualified experts who provide different resources, technologies, and skills to build creative and appropriate IT solutions.

• Budget: Companies outsource IT operations to decrease overheads, labor costs, and incurred expenses from inefficient deliverables or faulty development processes. Cost reduction possibly results in lower prices for end-users but still ensures the products’ high quality.

• Focus on Core Business: Statista’s 2018 survey showed that 35% of surveyed companies chose third-party IT providers to free themselves from what they don’t specialize in and then put more energy into strategic functions. 

• Flexibility: Outsourcing IT services make your companies more flexible in using a wide range of available resources from outsourcing agencies. For this reason, the company has a more productive measure for its existing problems instead of only depending on in-house specialists with limited expertise.

• Dedicated Team: A devoted outsourcing team builds up solutions based on the characteristics of the company and the respective industry. To do so, the team will establish a well-managed process that fits your company’s objectives and keep all stakeholders engaged to ensure everything goes seamlessly.

• Improved Satisfaction Among End-Users: The dominance of online activities among customers has pushed companies to digitize their operations. The assistance of outsourcing IT teams will help companies produce better solutions. 

Shortage of Qualified Professionals in IT Services

Over the past decade, more than half of global CEOs raised their concern about the availability of qualified professionals in IT. 

Indeed, the tech talent shortage has got no end over time. In one recent study by McKinsey, 87% of institutional respondents affirm that they either are undergoing skill gaps or expect such bad situations within the next few years. Of which, the largest shortfall of tech professionals comes from two sub-segments including data analytics and mobile/web development. This trend, however, seemingly shows no sign of fading away in the future.

Tech talent gaps here should be clarified as the scarcity of skilled IT workers to perform specialized projects of a company. For example, if your business requires an expert team to work on Joomla web development, it doesn’t mean there’s no relevant developer out there. The fact is the company has no in-house employees to handle Joomla-based tasks. 

According to Mondo, an Addison Group staffing agency, companies themselves should be blamed for this common problem. Some fail to develop entry-level internal employees through appropriate training and education. Meanwhile, others are criticized for their inability to procure talent, especially beyond the boundaries of their native country. 

Multiple actions are taken to address the issue. McKinsey reports the vast majority of organizations have invested in new recruitments and skills building for existing staff. Still, when onboarding and internal training prove expensive, choosing external staff who is proficient in new technologies is encouraged. This contributes to the rapid development of outsourcing IT services in recent years. 

Recommended reading: 10 Best Countries for Outsourcing Software Development in 2022

Reasons for Global Outsourcing IT Services

The global economy is struggling on the upturn, although new Covid-19 waves are coming back and posing more serious threats. Following the pre-pandemic trend of global outsourcing, firms continue handing non-core business functions over to professional vendors. 

By using external available expertise, creativity, and experience, companies may save megabucks on operations and labor. They often zero in on low-cost overseas markets, especially in Asia Pacific which is projected to record the highest CAGR during the forecast period (2021-2028). Professional teams there offer reasonably-priced services but guarantee the best business productivity to fit their client’s goals. Further, the regional market is driven by the increased investments of governments in infrastructure.

North America still leads the global outsourcing market (more than 36% in a 2020 revenue share). This dominance is believed to proceed because of a growing need for business process outsourcing (BPO). Tailored services, coupled with the growing acceptance of cloud computing and digital products, drive regional growth. 

Benefits of Global Outsourcing to the Organizations

Outsourcing is a prevailing practice used by organizations of all kinds, even before the outbreak of the pandemic. Companies may allocate either front-office or back-office business tasks to domestic, nearshore or offshore contractors. More specifically, the outsourcing decision hinges on whether your business receives the following benefits:

• Improves cash flows through a reduction in spending and personnel whereas productivity is still increased. 
• Handles a lack of internal expertise by flexibly accessing a myriad of external resources.
• Enables the company to pursue new technologies and procedures.
• Lets the company brainstorm proper ideas that meet its ends. 
• More time on strategic activities to strengthen a business.
• Simplifies managerial work.
• Facilitates business transformation.
• Boosts the competitive edge of the company.

The Impact of Outsourcing on IT Service Providers

The global IT outsourcing market isn’t the only playground for multinational companies and SMBs. Noticeably, even startups and smaller firms start expressing deep interest in outsourced IT services. Irrespective of their ultimate outsourcing goals, the market’s perpetual evolution is undoubted. tech providers are accordingly under the remarkable impacts of outsourcing. 

• Staffing: The increased competition in the outsourcing market, together with unique tech specs, propels contractors to constantly advance the expertise of tech workers and improve their communications. Moreover, exposing assorted projects to a tech workforce will bring them a wealth of experience. 

• Procedures: Apart from personnel, a vendor’s working process will be well-structured to instantly meet outsourcing requirements. Today, IT service suppliers go through the agile process to keep stakeholders involved in each stage of projects. Also, project management and communication tools are used to track work progress and curb misunderstandings. Therefore, much time and cost will be saved while deliverables are still high quality and launched on time.

Events that keep the working process in check aren’t impossible, especially when the outsourcing market becomes complicated. Accompanying those problems are unanticipated costs. Instead of playing the “blame game”, companies and vendors jointly craft a transparent vendor contract, advisably including Service-Level Agreement (SLA), which prescribes their obligations and even penalties for incomplete tasks.

• Products and/or Services: Outsourcing is a decent opportunity for hired agencies to work in different industries. To understand clients’ unique requests, the provider needs to have industrial and organizational knowledge. 

• Company Profile: Outsourcing helps vendors build a positive image internationally and regionally, thereby forging a long-term relationship, attracting potential clients and increasing incomes. 

Is the Current State of the IT Market Quite Healthy?

During the pandemic, the tech market outperformed other industries and received fewer influences from world turbulence. Having said that, the crisis sent more than 1,000 UK tech startups to insolvency shortly after lockdowns. Besides, IT services and sales of technological merchandise were partially restricted due to the disruption of supply chains and financial difficulties. 

Looking at the big picture of IT companies now, you’ll see positive signals from a whole industry’s attempts at economic recovery. This is an inevitable result of firms reorganizing their operations and successful vaccine rollover. 

ReportLinker’s forecast describes a remarkable CAGR of 6.6% with market revenue of US$8370.95 billion this year. North America constituted 34% of the market share, followed by the Asia Pacific with 32%. Of which, China has increasingly positioned itself as a major participant in the global IT market. 

The past five years are the heyday of low-cost open-source solutions. But the global tech market now is expected to feature cloud computing. Accordingly, as-a-service offerings based on the cloud are predicted to hop over. These trends result from two major driving forces: security and data protection, and data modernization, as surveyed by Deloitte in 2019. 

To accelerate digital transformation and reorient the workforce, such emerging sub-segments as AI technologies, RPA, data analytics and cybersecurity will be harnessed to renew business models and enhance efficiency.

Conclusion

Multiple organizations increasingly revel in using IT services from external contractors to execute part of business-related operations. The most common reasons include diminished costs, internal expertise shortage, and improved performance. However, this prevalent trend also comes with perceived shortcomings. Conducting the SWOT analysis of IT outsourcing is a must before your company reaches any conclusion.