Changes in global markets and advances in technology have changed how businesses offshoring works. While the geographical location is an essential consideration in other industries, organizations in the IT industry are much more open to a multi-location structure. That means IT companies can capitalize on the strengths of each of its sites.
During its early years, companies considered IT offshoring to take advantage of lower overhead and potential growth. However, as technology took over the world, more and more organizations began to increase their investments in IT. Eventually, IT offshoring industry became a viable option.
The last decade brought significant changes to how businesses used and consumed IT products and resources. The advent of cloud technology improved global communication, and even the increased interconnection of global cultures have significantly changed IT offshoring work.
In this article, we will take a look at our findings on the current state of IT offshoring and outsourcing, including recent trends, driving forces, and what changed in the past years.
Outsourcing vs. offshoring work
You may be asking companies use offshoring in order to do what? Well back in the early years of offshoring and outsourcing, the two business processes are easily separated. However, as globalization and internationalization permeated practically every industry, various concepts have begun to float around that blurs the line between the two.
Traditionally, offshoring refers to the organization's movement of its activities abroad. On the other hand, outsourcing means the movement of activities to a third-party services provider, regardless of its location.
However, recent decades have changed these definitions drastically. Companies that use offshoring have combined all or parts of business offshoring and outsourcing processes that it becomes interchangeable. This gave way to concepts such as multi-sourcing, offshore outsourcing, nearshoring, offshore in-house sourcing, out-tasking, selective sourcing, and more.
To simplify, we define offshoring and outsourcing as the provision of organizational services in locations abroad, whether through an in-house department or third-party service provider. Companies often have teams across the world, usually combining internal teams working remotely and teams hired through outsourcing entities.
Hence, from this point, we will use offshoring to refer to the concepts described above.
The current state of the IT offshoring and related industries
Offshoring is not a modern phenomenon. However, each generation has different motives due to market demands, technological advancements, and cultural intermingling.
In the past, offshoring was centered on goods. Organizations take advantage of affordable production costs and efficient distribution networks. For example, Sweden has long been known to be a popular offshoring destination for organizations in the shipbuilding, textile, and manufacturing industries in Europe.
However, modern-day offshoring efforts are driven by services instead of goods. Due to this, there was a noticeable shift in the driving forces during the late '80s and early '90s, which continues to this day.
First, and obviously, so lower costs drive companies to consider overseas locations to maximize their profits. Second, countries outside the United States are beginning to develop their own IT industries. These budding markets are perfect grounds where established companies can take new roots before prices go up. Lastly, unique factors such as good yet affordable infrastructure, advanced technologies, similar culture, language, and other special competencies drive companies to relate some parts of their organization, specifically the IT sectors.
Global offshoring market
Closely related to IT services are business processes that are commonly outsourced to BPO's abroad. So much, so that entire BPO industries have developed in areas like India, the Philippines, and most of Eastern Europe. As such, global offshoring expenses have steadily increased throughout the years.
Since 2000, the influx of organizations entering new locations has pushed the offshoring industry to new heights.
However, 2016 recorded the worst market report with only $76.9 billion, the lowest in a decade. The primary motivation of the decreasing market was the effort to cut costs and focus on core business processes. This means more organizations are spending more on new solutions through IT services than hiring manpower.
The trends in the offshoring industry had interesting effects on the IT industry. In 2018, business process outsourcing had a much smaller share in the market compared to information technology offshoring. The BPO industry only contributed $23.6 billion compared to the IT industry's $62 billion offshoring revenue.
The 2017 report of the most outsourced and offshored services of IT leaders worldwide reflects this trend as well. Software application development took the top spot at 64 percent. Similarly, IT functions dominate the top offshored services in the last few years.
Interestingly, there is a rising trend in the IT offshoring business in recent years. Between 2017 and 2018, there is a slight drop in allotted budgets for IT services getting offshored. Even with large companies increasing their total expenditures, medium and small companies are turning to cloud technology, which is much more affordable.
Again, this recent trend seems to reflect the prediction during 2016 when cloud technology is taking off rapidly and set to disrupt the global market.
Offshoring training, opportunities, and talent
With the move from exclusively outsourcing from the labor force to offshoring IT services, talent, and skills in information technology has become the top export of most outsourcing countries. In the above graph, access to intellectual capital is one of the driving forces of IT offshoring.
The skill level and prices are top priorities in hiring offshore teams. Eastern Europe and the surrounding regions are known to be excellent sources of top IT skills in the West. Russia, Ukraine, and Poland are leading the pack with exceptional programming and development skills, not to mention business knowledge and communication.
Additionally, Latin America is a favorable region for companies that do not want to deal with severe time differences. Brazil is becoming a leading country for Ruby on Rails programmers, which is always in demand.
Finally, Asia has always been a hotbed of IT talent with BPO's and offshore IT organizations targeting countries like India and China even during the early years of outsourcing. Even with significant language barriers, more and more businesses are considering relocation in this region due to affordable business operation costs. Also, more and more countries are emerging in the IT sector and offshoring markets such as Pakistan, the Philippines, Thailand, and more.
As with recent innovations in communication, cloud technology, and infrastructure, we do not see IT offshoring slowing down any time soon. As more areas become viable talent pools of IT skills, companies are beginning to look at countries beyond the outsourcing giants.
Organizations are beginning to realize the advantages of hiring experts abroad. Even small and medium-sized companies are looking at IT solutions developed by talented developers and IT professionals outside their location.
Just like the difference between offshoring and outsourcing, geographical limitations are blurred, allowing organizations to set-up teams across the world. Let's take a look at one of the rising IT talent sources in Europe: Ukraine.
Offshoring spotlight - Ukraine
In recent years, Ukraine has been one of the top countries as primary destinations of IT offshoring companies. The country is poised to compete with India and China in both talent and training in information technology.
Our observation in the last five years showed an increase of about 20 percent in human capital in the Ukrainian IT industry. Since 2011, the IT sector has doubled with more fresh talents coming in every year.
Nowadays, more and more companies have teams across Europe, just like NCube. With offices in both London and Kyiv, the company is able to take advantage of the top-quality talent and high-profile clients across the region. The organization is composed of senior engineers and Master's degree holders, with 70% of them certified senior developers. This reflects the country's top-notch training in IT and related professional consultants.
Along with expertise in software development, the company is also delving into emerging industries like blockchain and Internet-of-Things. As exemplified by NCube, Ukrainian talents are becoming leaders in bleeding-edge technology.
IT offshoring will continue to shift as new technologies emerge. Regardless of the current trends, we see an ever-expanding industry ripe with many opportunities for both businesses and the workforce. Organizations are no longer limited by their locations. In the future, we expect to see a further redefinition of offshoring and outsourcing processes as the industry continues to snowball.