By Cassandra Balentine
Many organizations look to outsourcing for software development needs. While the primary driver to IT outsourcing (ITO) is traditionally and currently cost savings, additional market trends also make the option attractive, including speed to market and leveraging external expertise to stay ahead of the latest technology advancements.
According to the Global IT Outsourcing Market 2015-2019 report from Research and Markets, the global IT outsourcing market is expected to grow at a compound annual growth rate of 5.84 percent over the 2015 to 2019 period.
David Blackwood, VP/CTO, global infrastructure services, Capgemini, lists primary drivers to ITO today as leveraging the power of the machine, focusing on the customer, enabling an agile state, levering the cloud, and managing complexity. “Without a doubt it provides instant access to a wealth of knowledge. No one will understand their business better than a client, though an effective service provider can introduce new technologies, capabilities, solutions, and other ways of thinking that may never surface in house.”
“The unfortunate reality for most organizations that depend on technology to underpin their business in part or in whole, is there simply isn’t enough technical talent to fulfill the demand for skilled engineering resources. Especially as you get into less operational areas where perhaps the requirement is less around maintaining existing operations and more about helping to build digital platforms,” says Sergey Yezhkov, VP of technical services, EPAM Systems.
The state of the IT market is driven by the latest industry demands as well as the attitude towards offshoring. This article looks at drivers, benefits, and challenges, as well as the state of the industry and the latest trends.
ITO Drivers, Benefits, and Challenges
The potential benefits of ITO include reduced development costs, scalability, flexibility, available resources, enablement of the latest application development processes, commitment to continuous innovation, and faster time to market.
Steve Hilton, EVP/GM, CSC Global Infrastructure Services, suggests there is no single reason for companies to outsource, but reasons typically fall into two categories. The first include businesses that experience escalating IT infrastructure costs that need to obtain a level of control by engaging in an outsourcing contract. The other consists of business leaders that would rather focus their attention on core competencies.
Hilton notes that in the past, businesses were driven to ITO services for three main reasons, cost quality, innovation with more concentration on cost reduction, and consistency of services with less concentration on innovation. While today’s key drivers still center around cost savings, there is a shift where businesses need to adopt new delivery models that contribute significantly to reducing costs while providing agility to enable them to open up new application architectures. “This is a material change to a bimodal shift to operationalize IT where low unit cost and repeatability consistency is important versus visual IT where it was a much more investments-driven delivery model.”
Mihail Romanovsky, head of marketing, Oxagile, believes a primary driver is fierce competition for businesses to focus delivery processes on their way to market leadership. “Hot, fast-growing markets force companies to be flexible so they can quickly respond to change and outperform the competition. The best managers see the value of outsourcing ancillary, non-critical processes—including IT, which enables organizations to focus on key business goals, gain a competitive edge, and achieve better results.”
“ITO providers work under price pressure and they can only survive when providing the best possible services and solutions for the minimum price. As a result, their business processes are highly optimized,” explains Krill Degtiarenko, director, IBA Business Development Center.
Brad Rucker, CTO, NTT Data, says that organizations benefit from ITO by freeing up internal resources, saving both time and money. He adds that employees working on outsourcing projects receive the benefit of being employed by an IT company instead of being locked into a specific industry such as healthcare or retail. “The company also receives an outside perspective from a consulting expert that can provide a different point of view.”
Cost optimization is a significant driver. Salary requirements differ greatly by country, so the costs of software development can be substantially lower based on the provider’s location. Romanovsky says that for example, Belarusian tech salaries and fringe benefits are significantly lower than those in the U.S. or Europe. “In addition, customers do not incur recruitment and operational costs, which leads to more savings,” he notes, adding that a recent market study conducted by Oxagile found that outsourcing to Belarus can cut overall costs by an average of 30 to 50 percent.
Along with benefits come challenges. “In my experience, the main challenge companies face is managing an external team. This challenge is often exacerbated by time zones and cultural differences,” says Romanosky.
Maintaining control over core expertise can be a challenge, and is particularly important for product-based companies. To make an offshore collaboration project both effective and profitable, Romanosky says companies need to ensure development partners have low risk, transparent delivery processes in place, and can guarantee protection of intellectual property rights.
Rucker notes that many concepts play into the challenges associated with ITO. One is the balance between controlling what versus how. “Companies often want to focus on how things are getting done, but without outsourcing it is more important to focus on what is being accomplished, not how it is happening.”
Finding the right match can also be a challenge. Degtiarenko says the buyer needs to take into account many factors, including expertise, client references, reputation, innovation, quality, and price of an ITO provider.
Yezhkov sees a significant market shift, pointing to a different dynamic in the way organizations choose their partners. “The demand for providers that bring a range of expertise and can really engage directly with the business in a more holistic and integrated fashion is rising,” he explains. This shift requires less traditional on-press expertise and more overall understanding and orchestration and integration capabilities.
Another issue is the changes needed in structure and business processes. Degtiarenko points out that it is especially painful if employees are let go.
State of the Market
As the IT industry continues to evolve, new buyers and demands enter the market. IT developers need to stay on top of technology developments for software savvy and mobile businesses. New trends such as artificial intelligence, robotics, automatically precise manufacturing, and the Internet of everything require organizations to think ahead when it comes to their IT development.
“We’ve seen a return to more affluent economic times in some geographics and the customer is now more confident in making IT investment decisions. The cloud has also grown the need for managed services, with outsourced proportions more focused towards the orchestration and management of hybrid IT solutions,” says Blackwood.
Romanovsky also believes the ITO market is currently increasing and will continue to show growth in the long run. “We’re happy to say that companies are placing more trust in outsourcing and are increasingly ready to outsource an entire project rather than part of it.”
He explains that the same trend is true for non-IT companies that are becoming more open to offshoring compared to previous years when they preferred local vendors.
Rucker sees a push for nearshore—not just offshore—ITO. “Instead of paying people in the lowest possible cost geographies, organizations are realizing the benefit to employing a lower cost area with time zone proximities close to their core business.”
Alexander Lipanov, CEO, Softarex Technologies, Inc., sees a tendency to move outsourcing back to home countries, but he doesn’t think this trend will stick and companies will start to offshore their development again. “It’s not easy to meet the demand in IT staff as the capacity of this market in any given country is quite limited. There are two ways out of these circumstances—to outsource or to refuse to develop a product because of the lack of resources. The second option means the death of the business and is unacceptable.”
If you look at the broad reach of ITO, including as-a-service and cloud environments, Hilton says the market is seemingly increasing. “However, this can be misleading. I think if you look under the surface, the mix of spend and the types of deals are changing significantly. The traditional long term, “your mess for less lift and shift” of an existing enterprise infrastructure, those large deals, and the revenue for that type of business is a cyclical decline.”
Hilton sees a large compound growth in cloud services, big data, and cyber security. “What I think is interesting is that in many cases, the traditional IT outsourcing market has confused volume with scale. Large vendors, like CSC, have significant band volume but we work to get a huge amount of consistency across our clients. We are seeing our modern offerings to be much more repeatable versus 50 percent custom, 50 percent standard. We are now seeing between 80 and 90 standard offerings and we can leverage and sell those pre-engineered, pre-available offerings to multiple clients. In turn, these clients get faster time to market, a transformed evergreen environment, and significant lower unit costs. But we are also starting to see the benefits of cyclical scale in that is actually a sustainable business.”
Yezhkov sees a change in the way customers want to engage outsourcing providers. “While there is still a lot of fragmentation in the marketplace with niche players as well as established, large Indian ITO companies taking a significant portion of the market share, we see opportunities for this sort of hybrid company to emerge as a leader, especially industries where digital transformation is driving the business agenda.”
Rucker adds that the demand for automation is increasing and that it is important for companies to realize that automation requires codification. “Too many customers are seeking automation without all of the work that goes into it,” he says.
ITO Option Spotlight
For those looking to outsource IT, there is a solution for every need. Many ITO providers offer expertise in specific areas, such as healthcare or insurance. Here, we highlight several ITO providers and their expertise.
CSC offers a strong go-to market model for ITO by industry and has tailored its solutions to meet customer demands. The company particularly focuses in healthcare, life sciences, banking, insurance, manufacturing, and defense. These are industries where the company says it has built up a significant amount of intellectual knowledge on how to deliver to these specific industries.
CSC is also invested in service management and process integration.
EPAM provides product and platform development services. According to the company, its entire growth story is about making commercial-grade software products and platforms for large software makers as well as enterprises that believe that software drives the value of their brands. The company provides ITO services in four key areas, digital engagement, intelligent enterprise, advanced technology, and core engineering and productivity.
Hewlett Packard Enterprise offers a variety of IT services including advice, transformation, and management; IT support services, financial partnership, and capacity planning; and education and training services.
IBA Group provides software solutions and services. The company focuses on software services on mainframe systems, enterprise and mobile applications, SAP solutions, business analtyics, and big data. Development and maintenance of enterprise applications is the leading revenue contributor in the software outsourcing sector of IBA Group.
Creation of vast pools of business data gave momentum to the demand for improved business analytics and big data solutions. IBA offers business analytics based on proven platforms from IBA, SAP, Oracle, and other IT leaders. The company also focuses on mobile solutions including adding native mobile capabilities to corporate information systems.
IBM IT Services delivers an entire stack of sourcing needs, from infrastructure and applications to business processes delivered through a spectrum of implementation approaches—including managed services and cloud—selected, tailored, and integrated to meet a range of business needs.
Infosys offers Application Outsourcing Services with solutions in key technology paradigms such as cloud computing, application modernization, and agility, and strives to reshape its clients’ IT environments to leverage next-generation technologies across their businesses.
NTT Data provides a range of tailored solutions for its customers, including everything from Web-based applications to mainframe managements. Whatever a particular client needs, whether it is improving a digital business environment or transitioning into the world of postmodern enterprise resource planning, the company says it meets them where they currently stand to enable mutual success.
Belarus-based Oxagile offers a range of professional services, including complex video streaming solutions, custom LMS development, and full cycle IT consulting services for start ups and new product companies.
Softarex focuses on the Internet of Things, as well as healthcare, industry 4.0, and eLearning. With more than ten years of solid experience in these areas, the company says it is positioned as experts in these fields.
The value of ITO is defined by cost and expertise. Although many businesses would like to handle all processes in house, the speed of technology advancements and the continued reliance on IT improves the appeal of ITO services.
“Due to globalization, computerization, and the Internet, the rhythm of life has increased dramatically, which resulted in intensified competition in all business segments. To my mind, today businesses are more concerned about being ahead of their competitors and getting advantage on the market through launching new products faster than others. Time has become a new valuable currency. Besides cost and time savings, companies now use ITO services to focus other core competences by relying on a global network of external service providers contracts to perform less strategic functions,” says Lipanov.
With the help of ITO, businesses can focus on core functions and leave IT to the experts. SW
Apr2016, Software Magazine