TechRepublic estimates that in 2020, 1 million programming jobs in the US went unfilled. Due to an ever growing shortage of qualified IT talent and global differences in salaries, more and more companies are turning to IT Outsourcing (ITO) for their IT needs. In the same year, Statista.net estimated the overall ITO market size at $92.5 billion.
Here at VARTEQ we have been on both sides of ITO. Before founding VARTEQ, our executive team has worked at large and medium U.S. companies: leading projects, working with ITO vendors, and observing factors that have led to ITO project successes, and often failures. VARTEQ was founded on these lessons learned, and we have since delivered over a hundred successful projects in a variety of industries leveraging this expertise.
In this series of articles we would like to share our experience and expertise in ITO. We hope that this will be useful to companies thinking about outsourcing, as well as companies who already outsource and would like to improve their ITO project delivery.
In this first article, we will discuss:
- Reasons why companies choose to outsource IT work.
- Top worldwide ITO destinations and the differences between them.
- Different types of ITO engagements and the risks/benefits associated with each one.
In a follow up article, we will cover the top reasons why ITO projects fail, and offer specific recommendations for what we as clients and vendors can do better.
Reasons for Outsourcing
Flexibility
Almost every company has IT expenditures that are part of its core operating budget. Companies maintain full-time staff to keep their core IT systems running. Occasionally, these systems need to be rewritten, upgraded, or large new features need to be added. Even product-focused companies have occasional spikes in their desired velocity that they cannot meet with their current headcount.
Rather than trying to hire additional full-time staff to meet these short-term demands, companies turn to ITO vendors to supplement their employees with contractors. These engagements typically last between several months and several years. They allow a company to scale their IT talent pool up and down based on their needs, without the overhead and expenses of the typical recruiting and HR processes.
Talent
Has your organization tried to hire an experienced front-end developer in the US recently? How long did it take to find the right candidate? What about an entire team of front-end developers?
It is a fact that some currently in-demand skills are more readily available in Ukraine than in the US. Some examples of these are:
- Front-end technologies: React, Angular, Vue
- Machine Learning, AI, and related technologies
- Java/JEE/Spring
- PHP and related frameworks
- eCommerce platforms and CMS’s
The 2020 COVID pandemic has given rise to fully remote teams, where team members are located in different states and even different countries. When building a global team, it is vital to consider factors such as fluency in English, a shared culture and product vision, and how to effectively collaborate across different time zones. We will offer concrete suggestions for these in a follow up article.
VARTEQ has helped companies to augment their full-time IT staff with offshore developers and testers, and helped integrate them into the client company’s processes and culture, creating seamless global teams.
Cost
This is the most-often cited factor in companies’ decisions to outsource their IT work, and for good reason. As you will see in the next section, the rates and salaries for some skills are drastically lower in other parts of the world than in the US.
Top IT Outsourcing Destinations
US and Western Europe
Outsourcing does not necessarily mean offshoring. There are plenty of companies in the US and Western Europe that specialize in providing IT and software development services using local talent.
The obvious advantages to using these vendors is a common language, culture, and time zone.
The biggest disadvantage is the cost, with rates for US-based consultants in the range of $100 to $200 an hour.
Eastern Europe
Eastern Europe is one of the world’s top outsourcing destinations. The region has a vast pool of qualified talent, world-leading universities producing STEM degrees, and a robust IT sector driven by innovation and startups. Ukraine, for example, is home to many world-renowned tech companies, such as Grammarly and GitLab.
Most candidates are fluent in English, and possess a culture that strongly resembles the Western one: rooted in collaboration, passion for craftsmanship, and a strong work ethic. Because of these factors, developers and testers from Eastern Europe are highly valued in North America, Western Europe, Australia, and Israel.
The hourly rates of developers in countries like Ukraine, Poland, Belarus, Bulgaria, and Romania range from $20 to $60, depending on their qualifications.
India
This region has the largest pool of STEM talent, as well as the worlds’ lowest hourly rates, ranging from $10 to $35. Yet outsourcing to India also involves a number of challenges, with the biggest ones being significant cultural differences and an inconsistent quality of technical talent.
Indian ITO vendors typically focus on process and up-front specifications, rather than a collaborative culture and a shared product vision. This poses challenges for large projects, inherently forcing a Waterfall model rather than an Agile one. We believe this to be one of the biggest risks for ITO projects and will discuss this in-depth in the next article. These cultural differences are further exacerbated by a large time difference, making effective collaboration even more difficult.
Latin America
Latin America is a relatively new ITO destination and is quickly growing. Because of its convenient location and near zero time difference, this region looks highly attractive to clients in North America. The hourly rates are similar to Eastern Europe and range from $20 to $50. However, because the IT sector in countries like Mexico, Peru, Colombia, and Argentina is still maturing, it experiences all the growing pains associated with the lack of expertise and established processes.
Different Types of ITO Engagements
Fixed Cost
In this model, the client and the vendor agree on the scope of the work and the price of completing this work upfront. Typically, the client company will create a Request for Proposal (RFP) that will contain the specifications and requirements for the work that needs to be performed. The client will then solicit proposals from multiple vendors that will contain the vendor’s price and timeline for delivering this work. The client then selects a vendor based on these proposals.
Since the vendor bids on very specific requirements, it is imperative for the client company to establish these prior to seeking bids. This often presents a challenge to organizations that do not have mature software processes. Good ITO vendors will use their expertise to help the client identify incomplete requirements and work with them to flesh these out, prioritize them, document them, and break them out into incremental deliverables.
One of the biggest challenges to this type of engagement is a tendency to request bids for very large deliverables, often for the development of an entire application from the ground up. This inherently forces a “Waterfall” approach, making course corrections difficult and expensive. Such projects often require dedicated project-manager positions just to manage, document, and negotiate the changes to the original requirements that will typically arise over the course of large projects.
In the next article, we will discuss how to apply Agile principles to Fixed Cost projects, by right-sizing deliverables, bids, and Statements of Work (SOW’s), allowing for continuous delivery of usable features, and for easier corrections to the project’s requirements.
Here at VARTEQ, our experienced project managers and business analysts have worked with organizations of all sizes, from helping them gather and prioritize requirements to the successful delivery of countless software projects, on time and on budget.
Time and Materials
In this model, the client pays the vendor for the time spent working on the clients’ deliverables. This is typically an agreed upon hourly rate for each developer, with the vendor sending invoices to the client weekly or monthly for all the work performed during that time.
One of the biggest perceived risks of such an engagement is the lack of cost transparency upfront. In contrast to a fixed cost model, here the client does not know the total cost before engaging with a vendor. This comparison, however, only holds true if we take a static view of the scope and requirements of a project at the time that the contract is signed. In reality, the scope and the feature set of almost any project will evolve over the course of development, requiring adjustments to timelines, features, and ultimately cost. Here again the application of Agile principles will help an organization prepare for the inevitable course corrections and to be able to better adjust to the changing business needs.
The Time and Materials model works well for organizations with established technical teams and mature software delivery processes, who are able to effectively manage outsourced teams, to integrate them with their own, and to measure their productivity.
VARTEQ has helped countless clients in US and Western Europe augment their local software development teams with Eastern Europeand developers, testers, and project managers. In the next article, we will share our advice to organizations on how to more effectively integrate offshore development teams into their own, how to build a shared culture across continents and time zones, and how to build truly global technical teams.