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ResearchAndMarkets predicts that the global information technology (IT) outsourcing market will grow at a 6.68% compound annual growth rate (CAGR) and be worth more than $610 billion by 2027. This aligns with Deloitte’s findings in its 2022 Global Outsourcing Survey.
According to the Deloitte report, organizations rely on third-party service delivery models – e.g., outsourcing in the Philippines – for their IT services. Their findings reveal that whereas organizations tend to outsource fewer business functions and are particularly reluctant to delegate core business operations to external service providers, they are a lot more willing to outsource IT services.
What IT Functions Companies Outsource
In the Deloitte survey, 76% of the executives reported they outsource their IT functions.
Cybersecurity is the top outsourced IT function at 81%, while app/software development ranks second at 79%. The other commonly outsourced IT functions include:
- IT infrastructure services: 77%
- Next-gen tech: 78%
- Data and analytics: 75%
- App support: 73%
- Helpdesk and user computing: 68%
Third-Party IT Service Delivery Models
Deloitte identifies three third-party service delivery models organizations use to outsource business functions, including IT services.
1. Traditional Outsourcing: A Transactional Approach
Traditional outsourcing is a strategy for streamlining routine, basic tasks to ensure cost efficiency. Its emphasis is on automating repetitive and recurring tasks, like payroll management or network administration.
The outsourcing client and vendor have a transactional, typically short-term, and limited-scope relationship. It is anchored on delivering isolated business functions or specific, predefined processes.
2. Managed Services: Enhanced Value Through Expertise
A step beyond traditional outsourcing, the managed services paradigm marries the benefits of conventional outsourcing with the value added by an outsourcing vendor that can support complex business functions, processes, and applications. It is ideal for outsourcing complicated but well-defined processes, such as cloud hosting and infrastructure support.
The vendor-client relationship in this model is more nuanced, reliant on performance service levels documented in a service-level agreement (SLA). The outsourcing service pricing is a function of service volume consumptions and outcomes.
3. Operations Services: Innovation and Outcomes
Operations services is a modern and cutting-edge outsourcing model that emphasizes results and the strategic application of technology for cost optimization. It places technology-driven innovation and measurable outcomes at its core and is a good outsourcing model for innovation-driven functions like managed detection and response cybersecurity, foundry, and analytics-as-a-service.
In operations services, clients get on-demand access to a wealth of industry-specific talent, unparalleled expertise, advanced skills, and state-of-the-art technology. The third-party vendor provides dynamic and expansive services, collaborating extensively with the client and serving as an integral extension of the client’s organization.
Why Organizations Are Outsourcing IT Functions
There are many reasons organizations are turning to third-party vendors for their business processes, including their IT functions. The following are some of the reasons cited by the executives in the Deloitte survey.
1. Cutting Costs
The need to cut costs prompts many organizations to resort to outsourcing. In particular, it is the primary driver of traditional outsourcing.
The lower salaries paid to outsourced staff, especially those in offshore destinations like the Philippines and Vietnam, are the main source of cost savings. Global outsourcing services provider Emapta says outsourcing roles to the Philippines can help a company cut its operating expenses down by as much as 72%.
2. Shifting Operating Models
The dynamics of the business environment often necessitate shifts in both strategy and operating models. In the face of such changes, outsourcing provides an adaptable solution, enabling businesses to navigate transitions with agility and efficiency.
As a case in point, a plastic pipes company can focus on its core processes, particularly designing, prototyping, and manufacturing of plastic pipes, so it can become stronger, enhance its product offerings, and boost its revenues.
To accomplish this, it can outsource other functions, freeing its human resources from non-core processes, including its back-office and IT functions.
3. Accessing New Capabilities
Outsourcing is a robust strategy that can be used to augment company capabilities. It can provide access to new technology, skills, and innovative practices that would otherwise be inaccessible or costly to develop in-house.
Gaining access to new capabilities is one of the major factors driving the evolution of the operate services outsourcing model.
By leveraging the proficiency and resources of external vendors, an organization can have access to software development, data analysis, and other necessary IT skills. Likewise, a company can store and maintain customer databases even when it doesn’t have physical servers and database engineers on site.
4. Transitioning From CAPEX to OPEX Spend
Operational expenditure (OpEx) pertains to expenses that directly contribute to a company’s production and revenues. Meanwhile, capital expenditure (CapEx) refers to investments that can help companies build value in the long term.
OpEx is often less expensive and more flexible than CapEx. CapEx is also less easily reallocated or realigned, and it takes a while before an organization can realize its value. To boost their organization’s financial flexibility and operational efficiency, companies are actively reallocating capital expenditure to operational expenditure.
Outsourcing facilitates this CapEx to OpEx switch. For instance, a company can outsource its database functions, negating the need to build in-house servers, establish enterprise-grade security protocols, and hire database management, network security and other IT personnel.
Outsourcing, thus, enables companies to convert fixed costs into variable costs. This leads to a more predictable, manageable and flexible expenditure structure.
5. Mitigating Cybersecurity Threats
As cybersecurity threats grow and become more complex, companies outsource their IT security needs to specialists. While they can beef up their cybersecurity in-house, finding the personnel, building the infrastructure, and establishing the processes to accomplish this will take time.
IT outsourcing is a shortcut that allows organizations to benefit from enterprise-grade security in less the time it will take to do everything in-house. It can provide robust data and digital asset protection out of the gate.
6. Responding to the Changing Talent Landscape
With the evolution of the job market and changes in workforce demographics, companies find value in outsourcing. It’s a viable solution to talent shortages as it allows organizations to tap into skilled talent that might not be available locally or cost a company a lot of resources to hire or develop in-house.
7. Adapting to Digital Transformation
Given the accelerating pace of technology and digital transformation, outsourcing is an effective strategy for staying up-to-date with current tech trends and innovations without bearing the full cost and complexity of maintaining these capabilities in-house.
Accelerate Growth With IT Outsourcing
The majority of organizations are now outsourcing IT processes.
This trend is expected to continue as companies face the need to shift operational models, respond to the changing talent landscape, cut costs, access new capacities, transition CapEx to OpEx, mitigate cybersecurity risks, and adapt to digital transformation.
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