IT Outsourcing vs. Insourcing: How to Choose the Right Strategy

IT Outsourcing vs. Insourcing: How to Choose the Right Strategy
N-iX
1970-01-01T10:06:48+00:00

When looking for IT professionals, companies often face the need to decide between outsourcing and insourcing and choose the most effective method of dispersing work. This strategic choice may greatly affect cost, quality and resource aspects of the organization. Thus more and more companies prefer ...

IT Outsourcing vs. Insourcing: How to Choose the Right Strategy
By Yustyna Velykholova June 06, 2017

When looking for IT professionals, companies often face the need to decide between outsourcing and insourcing and choose the most effective method of dispersing work. This strategic choice may greatly affect cost, quality and resource aspects of the organization. Thus more and more companies prefer traditional IT outsourcing models rather than looking for specialists in-house. Enhanced company focus, access to exceptional capabilities and reduced costs are some of the major factors driving the IT outsourcing market.

No wonder that the Global IT Outsourcing Market is expected to reach $481.37 billion by 2022 growing at a CAGR of 6.2% according to Stratistics MRC. Such industries as insurance, finance, healthcare, telecom, media, hospitality have contributed the most to the global IT outsourcing sector. Statista forecasts that IT healthcare outsourcing will grow from 2013-2018 with a CAGR of 7.6% and similar tendency is observed among other industries as well. Moreover, nearshoring to locations like Eastern Europe becomes a frequent choice for them due to the availability of IT professionals and expertise, great quality to price ratio and cultural proximity to Western countries.

However, the question remains: which method is more effective – IT outsourcing vs. insourcing? Let’s find out by analyzing the potential risks and benefits to help you choose the right strategy on your digital transformation journey.
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Market trends and dynamics

Such technologies as big data, data science, AI and blockchain along with other technological advancements are affecting the nature and complexity of service delivery. This shapes new opportunities and challenges for global companies. According to the Deloitte’s Global outsourcing survey, 2012 was marked by the major shift towards insourcing while the 2014-2016 showed a dramatic increase in outsourcing consumption. The surveyed company leaders from the different US, European, and Asian countries highlighted 3 major outsourcing trends which stimulated them to consider this option:

1) Outsourcing is now more than just a simple cost-cutting option

Companies are viewing IT outsourcing service providers as key business enablers, rather than just a simple cost-saving solution. Vendors enable digital transformation in industries ranging from banking to automotive. So innovation becomes a key component of the value derived from an outsourcing relationship.

2) Companies are redefining the ways they enter into outsourcing relationships and manage the ensuing risks

Many companies admit that they are actively tracking the incorporation of innovation into their outsourcing agreements. Nevertheless, survey results indicate that the majority of respondents still struggle to define, track, and motivate innovation from their service providers. Moreover, the legislative and cyber security risks are now a priority for respondents. In this respect, outsourcing has proven to be an effective option since respondents admit that service providers offer a path to mitigate these risks.

3) Companies are changing the way they are managing their relationships with outsourcing providers

While technologies continue to develop so are vendor management and relationship-management capabilities. Now they are incorporated into new agreements through enhanced service level agreements (SLAs), which enables companies to implement clear and mature escalation paths. This resolves vendor performance and disputes effectively without triggering termination rights. Also, survey findings indicate that there is a strong tendency for investing even more into outsourcing and improving the value of vendor management organizations (VMOs).

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Source: Deloitte Global outsourcing survey 2016

IT Outsourcing vs. Insourcing

Most Common Use Cases

Insourcing makes absolute sense for activities such as program finance, human resources, and core competencies or can act as a preview into how outsourcing can work. However, scaling a team might take more time and require more expenses than outsourcing.

With outsourcing, you create an infrastructure of efficiencies and greater understanding of the general corporate structure. Basically, outsourcing enables companies to change the size and scope of any IT activity and offers flexibility to cancel when it’s no longer needed.

Overhead Reduction

Insourcing is considered to be a more expensive option due to the necessity of implementation of new processes when launching new directions and integrating them with the existing processes. In-house specialists may require additional training as well as time on mastering new digital technologies. On the contrary, outsourcing may help you allocate a qualified team with a vast experience in different verticals ready to perform tasks. This may minimize the costs spent on facilitating development procedures within the company.

Availability of Resources and Expertise

When organizations are going through a digital change, oftentimes they realize that in-house teams do not have the level of expertise to implement that change and require additional resources to make things happen. Outsourcing opens a whole world of possibilities for implementing digital and cognitive technologies due to the vast availability of all kinds of IT resources. This enables outsourcing vendors to offer flexibility and provide a dedicated team with the right skill set quickly.

Risk Mitigation

Before choosing the right strategy, it’s important to evaluate service delivery models and locations, and determine how to manage risks, including cyber security and data privacy. Deloitte claims that cyber risk is no longer a concern with outsourcing vendors than it would be internally. Moreover, outsourcing may help mitigate these concerns because of the agreements established with the vendor including customer protections and risk sharing.

Control

Insourcing allows companies to manage and probe their teams easily rather than waiting on the schedule of a remote employee. Traditionally outsourcing is associated with a lack of control over performance and quality. Nevertheless, in today’s business climate, dedicated development teams are applying the most effective methodologies, such as Agile, to enable your company track progress and arrange regular progress reviews.

Wrap-up

All in all, the use of outsourcing is accelerating and numerous companies admit its effectiveness in the era of digitization. Insourcing proves to be a more expensive and less flexible option in terms of launching new directions and adopting revolutionary technologies. That is why the majority of businesses bring value through outsourcing while focusing on core competencies as it is a vibrant pathway for driving innovation. IT outsourcing vendors provide a diversity of qualified IT experts that keep pace with changing technologies and enable outcome based business services. This helps global companies stay ahead of the curve and offer more to their customer.

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N-iX is an Eastern European provider of software development services with 900+ expert software engineers onboard that power innovative technology businesses. Since 2002 we have formed strategic partnerships with a variety of global industry leaders including OpenText, Novell, Lebara, Currencycloud and over 50 other medium and large-scale businesses. With delivery centers in Ukraine, Poland, Bulgaria, and Belarus, we deliver excellence in software engineering and deep expertise in a range of verticals including finance, healthcare, hospitality, telecom, energy and enterprise content management helping our clients to innovate and implement technology transformations.

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