The Future of IT Outsourcing: Can the Boom Continue?

The Future of IT Outsourcing: Can the Boom Continue?

IT outsourcing was booming before the Covid-19 pandemic came along. What started in the early late 1980s as a way to drastically slash costs has, over time, become a powerful means of accessing the exceptional talent of remote marketplaces—and the pandemic has simply accelerated this expansion.

The difference is that 20-30 years ago, the pursuit of low costs also meant hemorrhaging quality. When western companies set up IT operations overseas, those teams were not nearly as qualified as the expensive western engineers. These profit-chasing ventures caused endless headaches for firms and their customers, and many ended in disaster.

In the last few years—and especially since the pandemic has normalized remote working—the tables have turned. The education and training infrastructure in places like Bangalore has improved exponentially and IT expertise there is comparable (and often superior to) the west.

IT outsourcing is still cost-effective for western businesses, but the real prize is the ability to hire virtually any skill set and scale extremely quickly—without compromising on quality. That’s where IT outsourcing sits today—but where is it heading?

Outsourcing will continue providing in-demand skills

One thing that isn’t likely to change anytime soon is the fact that outsourcing is becoming necessary in order to access niche and bleeding-edge skill sets.

The concern has been raised that the recent global acceptance of remote work might actually hurt IT outsourcing, since companies can recruit from much larger domestic pools. The unfortunate reality is that even the biggest western economies (like the USA, UK and Germany) are absolutely starved of engineering talent—and they have been for years.

As the CEO of Microsoft, Satya Nadella, put it, “all businesses are software businesses.” With virtually every company in every industry looking to create responsive websites, build digital products or collaborate remotely, IT skills have become the most desired in the world.

With Western schools and universities not producing enough IT graduates, companies have no choice but to go where supplies are more bountiful. Today that usually means going to India, but more and more countries are looking to capitalize on this talent shortage and become outsourcing destinations.

More countries will become outsourcing “hubs”

India is currently the #1 IT outsourcing destination in the world. Of the world’s 500 biggest companies, roughly 80% have dedicated IT teams based in India. As well as access to talent, there are many other attractions: low operational costs, flexibility, attractive IT policies, incredible infrastructure for future talent and great access to cutting-edge technology.

But while India (and Bangalore in particular) is the golden boy of IT outsourcing, other countries are catching up. Across Eastern Europe, Asia and South America, outsourcing and offshoring companies are taking root.

What we can’t predict is which of these emerging locations will rise fastest. For Western European companies, having a base of operations in Romania or Poland is significantly more convenient than India—the time difference and cultural similarities make working together easier. However, the costs and current infrastructure aren’t comparable to India—yet.

We expect many rivals to crop up in the coming years. This could be great news for companies since healthy competition is always good for controlling prices.

Increased emphasis on data security

Outsourcing your software development used to mean hiring some gung-ho contractor in India or the Philippines, giving them a decent idea of what you wanted, and leaving them to run with it. The questions about data and information security have always been there, but yesterday’s companies were able to more-or-less sweep them under the rug.

Tomorrow’s companies will not have that luxury.

Some companies are in desperate need of tech talent but are afraid of opening themselves up to data hacks, exposing their IP and the security of their customers and partners. As we move forward, we can expect outsourcing partners to have robust cybersecurity rules and frameworks in place.

This is inevitable because as soon as some outsourcing companies become more diligent and prepared, others will be forced to follow—their clients will demand it. In order to stay competitive going forward, everyone in the IT outsourcing industry needs to become more aware of, and committed to, data security.

Increased reliance on integrated project management tools

Something that all distributed teams now appreciate is the fundamental role of project management and communication tools to make things run smoothly. However, combining multiple disparate tools can make things even more complicated than using no tools at all.

As is happening domestically, we expect to see more and more outsourcing teams adopt full-scale tools that cover all of their needs—such as Teamly. The beauty of a platform like Teamly is that it provides everything you need to successfully run projects and manage your teams from anywhere: project management, task scheduling, instant messaging, employee monitoring, screen recording and much more. In time, Teamly will even offer effortless, integrated video conferencing.

Outsourcing adds a new level of complexity to your business. Keeping everything (and everyone) aligned through a single tool makes the process of onboarding and managing IT outsourcing significantly easier.

Rising costs

It is very reasonable to expect the cost of shipping software projects overseas to increase markedly. There are various reasons why:

• Quality — Engineers in Bangalore, for example, are every bit on par with their colleagues in the west. In the coming years we expect the cost of this elite labor to continue increasing.
• Economic factors — As IT operations contribute more and more to local economies, the costs of living may well increase. Employee salaries would increase in tandem.
• Incentives — There is a massive scarcity of IT workers in the west. When a company finds (or builds) a team overseas that works, they’ll want to hold onto them. It may be necessary to pay more-than-competitive wages or offer additional perks in order to retain their services.

But more simply, high-quality outsourcing is a growing industry and it holds the key to massive and sustainable development for tens of thousands of companies—and that will always come at a cost.

Offshoring will continue to replace outsourcing

Perhaps the biggest change in the future of IT outsourcing is the changing nature of outsourcing itself. In recent years, there has been a significant trend towards offshoring—that is, building your dedicated IT team abroad and integrating them with your domestic business. Companies like The Scalers have blazed this trail.

The primary difference is that while “outsourcing” is still largely driven by the pursuit of low costs, offshoring is about accessing the best talent in order to consistently deliver the best products and services to customers.

The other key difference is that with offshoring, it’s your employees working abroad—not freelancers or contractors for hire, who might drop your projects for another at the drop of a hat. Moving into 2022, IT offshoring will be the most reliable, cost-effective and strategically sound way to access world-class software development and IT talent—and the best way to retain it, too.