Smart outsourcing strategies: When to consider outsourcing to gain a competitive advantage

In a recent survey of over 1,000 U.S.-based c-suite executives, 86% of CIO’s said they were likely to outsource technology related functions and work within the next 6 months. However, IT outsourcing isn’t simple; pockets of IT outsourcing excellence exist all over the world. CIOs looking to outsource digital initiatives must choose between onshore, offshore, nearshore and even rural-sourced talent.

There is no one-size-fits-all solution. And finding the right outsourcing mix for your initiatives can make the difference between delivering on your critical digital milestones and falling behind your competitors. Whether you are just getting started with your outsourcing journey, or are hoping to bolster your existing efforts, this thoughtful guide provides valuable insights you can leverage.

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The outsourcing fable

Before deciding on the distributed outsourcing model that will realize all of your digital dreams, it’s important to set expectations. Try googling “save money by outsourcing IT,” and you’ll get no shortage of advertisements claiming you can save 50, 60 and even 70% while introducing zero risk to you and your organization.

The truth is, if that were the case, there would be no market for onshore software developers in the U.S. In fact, tech jobs in the U.S. are booming — up 69% from 2021 not because CIOs have unlimited budgets but because many businesses are choosing to not outsource their IT work.

SEE: Find high-paying cybersecurity and IT support jobs in these U.S. cities.

What’s more, for outsourcing to work well, you’ll likely need to change how you and your teams work. While offshore IT talent can offer labor savings as high as 70% when compared with their U.S. onshore counterparts, the majority of organizations who are successful with their offshore and nearshore outsourcing efforts typically report their overall savings in the 10–25% range.

Understanding TCE

When it comes to outsourcing software development, rate cards only tell part of the story. The table below gives you an idea of the dramatic differences in labor cost between some of the major IT outsourcing markets.

Table source: A Guide to Offshore Developer Rates: Where to Hire Offshore Developers?

If IT engagements were measured strictly on labor costs, choosing an outsourcing partner would be a no brainer. But, there are hidden costs associated with outsourcing that impact the bottom line.

That’s where TCE comes in. Understanding the TCE, or total cost of an engagement, breaks the overhead associated with utilizing outsourced talent into five categories: Evaluation costs, cultural costs, transition costs, internal workforce costs and contract management costs.

Evaluation costs

When working with an outsourcing firm, dedicated effort has to be made up front to select that partner. Initially this effort can be substantial, and as you might imagine, making this evaluation halfway across the globe can be even more time intensive.

With a long-term relationship, you can gradually write off the evaluation cost, but it will never go away entirely. Each engagement is potentially unique, so you’ll have to periodically examine the outsourced team’s technology strengths and weaknesses to see if they remain a good fit.

Additionally, in-house technical leads familiar with the initiative will often need to interview the individuals getting assigned to the project as team members come and go.

Cultural costs

Offshore and nearshore outsourcing specifically involves the delicate blending of cultural, language and organizational differences. This is an often underappreciated nuance for U.S.-based teams engaging with an offshore or nearshore partner for the first time.

It’s important to be in it for the long haul. Some studies suggest on average, an IT organization can experience as much as a 20% decline in application development efficiency during the first two years of a contract due to time spent overcoming environmental and cultural differences and experience levels.

Transition costs

The transition period is likely the most expensive stage of an outsourcing endeavor.  Ideally you will have members from your in-house team working side-by-side with your new development partner. Until you are through the transition period, stakeholders should not anticipate any cost savings.

Setting these expectations within your organization is important when getting buy-in for an outsourcing strategy, especially with a partner that is in a different time zone. It is not uncommon for it to take 90 days or more for a technical outsourced partner to reach their development stride.

Internal workforce costs

More outsourced talent frequently means less internal technology employees. While layoffs are seen as a cost-cutting activity, typically workforce reduction necessitates other costs.

For example, you may have to pay severance and retention bonuses to many of your employees — even those needed just long enough to train the outsourced staff who will replace them.

Contract management costs

Last but not least, remember that outsourced talent are, in effect, vendors of a service. As such, they require additional management overhead. Your internal staff must correctly manage invoices, time sheets and contracts to make the process work.

When working with offshore and nearshore talent in particular, best practices often involve an in-house project manager to bridge time zone differences. These costs add up and can be a surprise if you don’t enter into your outsourcing strategy with realistic expectations.

Outsourcing considerations

Once you understand TCE, you understand you won’t be saving 70% by outsourcing your next IT project. That doesn’t negate the savings that can be had, though — provided your organization is committed to making the changes necessary to be successful with your outsourcing efforts.

In today’s competitive market, even incremental cost reduction can be a competitive advantage. So, how do you decide which initiatives to outsource and which to keep in-house? While just guidelines, if you can answer yes to all or most of the following questions, outsourcing may be worth your consideration.

• Is the problem domain well understood?
• Is the technology stack established and mature?
• Is there a focus on operations over innovation?
• Do you expect to need the project team for at least six months?
• Is the expectation for real time collaboration between stakeholders and the development team low?

A hybrid outsourcing approach

Sometimes, a hybrid approach can bring you the best of both worlds. It’s possible and common to structure a technical delivery team with both in-house and outsourced resources working on the same codebase.

Determining the proper mix of in-house and outsourced talent is often an extension of how your organization balances risk tolerance with cost savings (Figure A). Those organizations with a higher tolerance for risk are better suited to staff projects with less in-house headcount and lean more heavily on lower-cost outsourced IT resources.

Figure A

Determining the perfect outsourcing model for your IT organization

There is no silver bullet for determining the perfect outsourcing model for your organization. It can take even well-established IT organizations months or years to get it right.

Be committed as well as realistic about the TCE and understand that the best outcomes are realized when your outsourced staff become an extension of your internal team. Given time, you may find your outsourcing strategy enables you to reach your goals faster and at a reduced cost.