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article imageTop 6 IT Outsourcing Trends and Market Overview for Business

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By Andrew Volchek     May 14, 2020 in Business
Andrew Volchek is a Co-founder and CEO at Arateg Custom Software Development Company.
Andrew Volchek is a Co-founder and CEO at Arateg Custom Software Development Company.
Photo courtesy Arateg
This article was written by Andrew Volchek, a Co-founder and CEO at Arateg Custom Software Development Company. Arateg Custom Software Development Company focuses on helping SMEs and startups work smarter, grow and increase productivity with the help of modern technologies. Contact him via email at a.volchek@arateg.com to discuss how to develop your IT project or solve a business challenge.
According to the Statista report, spending on IT services is anticipated to reach a record $1.1 trillion in 2020. With a view of reducing development costs, assembling a professional team, and improving time-to-market, companies are delegating software-related tasks to third-party contractors. Since this approach offers many advantages, it is gaining high popularity.
Statista forecasts that the worldwide IT-application outsourcing market will grow to $96.7 billion in 2021 from $89 billion in 2018. Technavio’s analysts revealed that business process optimization is one of the main reasons for such rapid market growth.

Why do businesses outsource software development tasks?

Clutch, the leading B2B ratings and reviews platform, surveyed 529 small business owners and managers in the United States to learn why they outsource. They found that:
  • Companies generally delegate more technical operations that involve accounting (37%), IT-related services (37%), digital marketing (34%), and development (28%) tasks.
  • The key reasons for outsourcing are to achieve better efficiency (24%), increase expertise (18%), raise flexibility (16%), relieve employees’ time for other activities (15%), and grow available resources (12%).
  • Reducing operating costs is only the 6th reason for hiring a third-party IT service vendor (12%). In 2016, this was the primary cause for outsourcing software development (in accordance with Deloitte's 2016 Global Outsourcing Survey).
  • Firms that employ 50 or fewer specialists (29%) are less willing to outsource compared to organizations with over 50 specialists (66%).
    Since an IT outsourcing (ITO) market comprises various regions, you can access talents in different fields and technologies. There are no limitations to the region, therefore it’s easier to find a custom software development company that perfectly fits your project including costs, time zone, culture, technology stack, and experience.

    Top 6 IT outsourcing trends 2020

    1. New priorities: Value over price

    If previously companies were outsourcing software engineering mainly because of lower costs, now they are looking for improved efficiency, optimized processes, and high-qualified professionals. As long as the competition between IT service vendors from different regions is increasing, most of them are working hard to deliver quality solutions.

    2. Eastern Europe is one of the most popular outsourcing destinations

    According to the report "Software Development in Ukraine, Poland, Belarus and Romania in 2019", today 70% of the demand for IT outsourcing services comes from the USA and Western Europe. India, China, Brazil, South Africa, and Eastern Europe are the top 5 regions that fulfil this demand.
    Providing high expertise and deep knowledge, Eastern Europe is becoming a very popular destination. The above-mentioned countries demonstrate a rapidly increasing, highly competitive, and attractive source of IT talents.
    The annual revenue generated by them exceeds $13 billion, by 477 companies analyzed in the study—$5 billion. Analysts also found that the market here is growing 4-5 times faster than globally, with the USA and EU being the main customers. One of the main reasons for that is that European countries offer favorable conditions for the IT industry. Some of them are also strongly supported by the government.
    A great example is Belarus. Founded in 2005, Hi-Tech Park is recognized as an analogue of Silicon Valley. Representing one of the leading clusters in Central and Eastern Europe, HTP fosters hi-end software engineering by creating a special business and tax environment. Here at Arateg, we are proud to be a resident of HTP.
    On December 21, 2017, Alexander Lukashenko, the president of Belarus, signed an “On the Development of a Digital Economy” decree that legalized blockchain-based businesses. In accordance with the law, both individuals and legal entities are entitled to carry out cryptocurrency-related operations.

    3. Small businesses are outsourcing more

    As IT outsourcing enables to reduce costs, hire a professional team, and not to worry about recruitment hassle, startups and small businesses are increasingly cooperating with third-party contractors.
    However, large companies and even corporations are also delegating their projects to outside IT service providers. Taking into account a growing need for complex innovative solutions associated with AI, blockchain, IoT, this option is becoming especially preferable for many organizations across the globe.

    4. Higher demand for nearshore outsourcing

    Now clients more often are delegating software-related tasks to IT service vendors located not far from their company. For example, a UK-based digital marketing agency firm hires a team of experts from Belarus. Since the time difference is about 2-3 hours, both sides are taking advantage of smoother communication and more convenient workflow.
    Offshore software development outsourcing continues to be popular in the United States and Australia, while the cooperation with onshore houses is decreasing. Furthermore, businesses located in these countries are choosing Eastern Europe more frequently as specialists there have high expertise, deep technical knowledge, and speak English well. In addition, most of them are ready to adhere to the working schedule of the customer’s.

    5. New contract models and shared responsibility

    Analysts at the National Outsourcing Association revealed that the creation of new contract models is one of the main ITO trends for 2020-2021. This year, agreements between customers and software development companies will focus more on project outputs. All KPIs will be discussed, approved, and written in the contract.
    In addition, notice periods are expected to be shorter. Sharing responsibility for product success, IT service providers will become real strategic partners. As clients will be able to choose the vendor offering the best results or undertaking more risks, competition between IT companies will increase.

    6. A growing number of outsourced IoT, AI, and blockchain projects

    Today businesses of all sizes are investing huge resources in IoT, AI, and blockchain initiatives. Analysts at Statista forecast that the worldwide Internet of Things market revenue will amount nearly $1.6 trillion by 2025.
    MarketsandMarkets anticipates that the global Artificial Intelligence market will increase to $190.61 billion by 2025 from $21.46 billion in 2018. According to IDC predictions, blockchain spending will reach $12.4 billion in 2022.
    As the demand for AI, IoT, and blockchain solutions is rapidly growing, customers are hiring third-party contractors to access the necessary talents and address their challenges. There are many industrial use cases of these technologies.
    For instance, blockchain is widely employed to enable the highest data security level. It also allows removing any intermediaries from transactions while providing trust between autonomous parties.
    Furthermore, blockchain can help logistics companies ensure full supply chain traceability. Learn more about blockchain applications in our article “Does My Business Actually Need to Adopt Blockchain Technology?”.
    If the client lacks in-house engineering talents, it becomes one of the main reasons to outsource. To fulfil the need for highly specialized skills, it is reasonable to hire an offshore company, which has a dedicated development team tailored to your project.

    What tasks do business sectors outsource the most?

    With the aim of solving various business-specific challenges, customers from all over the world turn to third-party software development companies. In accordance with the “Outsourcing in 2020” report conducted by the National Outsourcing Association, 70% of firms said they are going to outsource in the future.
    According to the “IT Outsourcing Statistics 2019/2020” report provided by Computer Economics, the following sectors are outsourcing software development tasks the most:
  • The financial industry is the leading client (73%)
  • Manufacturers are the second who delegate application development work to third-party contractors (71%)
  • With a rate of 50%, retail and wholesale distribution firms are on the third place on the list.
  • The healthcare sector, at 33%, closes the list of top sectors that outsource software engineering and maintenance activities.
    IT service vendors help businesses achieve a range of goals, for instance, optimize enterprise resource planning with an ERP system, automate sales activities using CRM, ensure data security with blockchain, or migrate from the outdated technology stack to reduce infrastructure costs and increase scalability. The number of examples is unlimited, so let’s take a look at 6 functions mainly outsourced at the moment.

    Top 6 functions outsourced today

    1. Application development

    Application development and enhancement is the most frequently outsourced function: nearly 50% of organizations worldwide delegate it to outside IT service providers (“IT Outsourcing Statistics 2019/2020”). As long as the creation of a new product is quite expensive, companies are looking to reduce their expenditures while receiving high quality.
    In addition, many businesses want to improve existing solutions, for example, migrate to the cloud to extend data storage, add several features to meet customer needs, redesign a mobile app to deliver an amazing user experience, or decompose the monolithic architecture into microservices to increase the system scalability and ensure ease of maintenance.

    2. IT security

    Security is a top-priority issue for many companies, especially for those dealing with personal customer data, sensitive business information, financial and payment data. As there are numerous threats—malware, hacker attacks, data distortion, ransomware viruses, etc.—they do need to protect against them.
    Organizations outsource various tasks like security improvement (e.g., integration of two-step authentication, hashing), management of security services, and penetration testing (checking the system for security vulnerabilities that can be exploited by an attacker).
    Today businesses are increasingly delegating such operations to outside software development firms. In accordance with the “IT Outsourcing Statistics 2019/2020”, 48% of companies are planning to increase the amount of outsourced work.

    3. Application management

    Assigning activities of this kind to an IT outsourcing company, you relieve employees from constant system management and operation. Although this function is very important, it’s gradually losing popularity as some businesses are using SaaS (software as a service) for this purpose: in 2019, 33% of firms outsourced some activities of this kind in comparison with 36% recorded in 2018.

    4. Network operations

    Network-related operations include data network operations, continuous network monitoring, resolution of potential network issues, as well as installation, repair, and maintenance of network equipment. As of 2019, nearly 34% of organizations were delegating at least some of these activities to a third-party contractor, compared to 30% in 2018.
    Focusing on efficient network management, businesses reduce its infrastructure burden. This often helps them not only cut costs but also improve system resilience and performance.

    5. Web operations

    This is another function largely outsourced by organizations across the globe. Here a custom software development company is responsible for hosting, managing, or/and maintaining a website, web application, or an e-commerce solution.

    6. System implementation and integration

    The creation of a tailor-made software system requires a lot of time and effort. This often includes its integration with the customer’s existing applications and ensuring seamless interaction between them.
    Say, you want to build a CRM solution for tracking leads, contacts, payments, sales and marketing activities. In order not to invest resources in implementing task planning functionality, you connect CRM with a task management system used in your organization.

    Conclusion

    With an increasing demand for building top-notch digital products, the IT outsourcing industry is quickly growing. Clients are looking for trusted software development partners that can offer not only technical support but also highly specialized skills and knowledge.
    If you have questions about the topic, need a consultation, or want to create a website or application, feel free to contact our team.
    Here at Arateg, we have delivered 50+ solutions helping businesses automate internal operations, improve customer service, increase the system performance, enable information security, boost sales, reduce operating/labor/infrastructure costs. Visit our “Case studies” page to take a look at our featured projects.
    This article was written by Andrew Volchek, a Co-founder and CEO at Arateg Custom Software Development Company. Arateg Custom Software Development Company focuses on helping SMEs and startups work smarter, grow and increase productivity with the help of modern technologies. Contact him via email at a.volchek@arateg.com to discuss how to develop your IT project or solve a business challenge.
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