IT Outsourcing: What are the possibilities, advantages and disadvantages?

What is outsourcing, and how can you benefit from it within the IT industry? In this post we explain the benefits of outsourcing, what to look out for when working with an outsourcing partner, and the most common types of outsourcing.

What is outsourcing?

Outsourcing is the practice of delegating certain work to a third party, usually to another company that specializes in the field in question. For example, a large part of the IT activities of Dutch companies is outsourced to other companies every year. There are several ways in which IT outsourcing can take place today. Read which ones they are, and which model could be most beneficial for your company.

What is IT-outsourcing?

IT is a business area that lends itself ideally to outsourcing, in part because most of the necessities (infrastructure, software) for a functioning IT team can be easily shared online. IT outsourcing has been around for decades, and every year there are new developments within this industry.

Which parts of IT can be outsourced varies from company to company. For example, it may be application management (a CRM or ERP system). Technical management (the maintenance and security of the IT infrastructure) can also be outsourced to a third party. Finally, it may involve functional management (keeping the information provision going).

A well-known reason for IT outsourcing is the possibility of cost savings. Dutch wages are high, and leaving all IT activities to a Dutch team can be very costly. Outsourcing all or part of these activities to IT professionals in low-wage countries can save a large portion of the budget. But there are more reasons than justification for companies to choose a form of outsourcing.

Examples of IT-outsourcing

We see, for example, that the main reason for outsourcing at the moment is not lower costs or quality of service, but the ability to scale up and down quickly. Corona has considerable uncertainty in the labor market, and thus brought with it both risks and opportunities. Being able to expand or downsize quickly was the main reason for IT outsourcing in 2021 for 61% of the organizations asked, according to the ‘IT Sourcing Study’ of Quint en Whitelane in 2021.

Another development is the collaboration between certain Dutch companies and software developers in countries such as Spain. This happens because the level of IT education in Spain is high and so is unemployment: Spanish computer professionals and the overheated Dutch labor market are a match made in heaven. Several companies place their work via IT outsourcing with companies in Valencia, a city known for its knowledge economy. Madrid and Barcelona are also popular choices for IT outsourcing.

Benefits and disadvantages of outsourcing

IT outsourcing can be an excellent solution to take care of your company’s computer business and has advantages over managing it yourself. On the other hand, there are risks and drawbacks to this business practice.

Benefits

• Flexibility. IT outsourcing is available in any size and at any time. You pay by the month if you want and can quickly scale up or down your projects. You don’t have to invest in expensive equipment or hire new employees on temporary contracts.
• Specialty. IT remains one of the most complex types of services available. IT outsourcing gives you direct access to highly trained professionals in this field, who continuously update their years of experience within their field with the latest innovations.
• Cost savings. It can be costly to bring in employees with the proper training and expertise on your own. A specialized IT outsourcing company already has that knowledge and offers its services at a favorable price.
• Focus. By outsourcing (part of) a company’s IT, your own employees can focus on their actual task, whether that’s management, marketing or logistics. This increases the production of your own company and you make maximum use of the talents of your staff. Your own IT people also get their hands free for their core business.

Disadvantages

• Risk of reduced control. The lines of communication with an external IT company are longer than with an internal department, which means less control is possible and a gap can open up between expectations and results. This is why it is important to first sit down with the external party and draw up an SLA (service level agreement) together.
• Substantial hourly rates. Dutch IT companies offering outsourcing services have a high level of knowledge and quality. The rates for their services can therefore be considerable.

Types of outsourcing

Are you thinking about outsourcing part of your IT to a specialized company? Then you should know that there are several models for this. The most notable difference between each form of IT outsourcing is the country where the IT workers perform their duties. As you’ll see, that brings some notable differences, which means that one form of IT outsourcing may be (much) more suitable for your business than another.

Offshoring

As we mentioned, Dutch IT companies charge high hourly rates. It can therefore be attractive to outsource the work to a company in a distant foreign country, where hourly and production wages are lower. India and China, where knowledge of information technology is relatively high, are popular choices.

Benefits of offshoring

• Cheapest option. Often, offshoring is the most affordable way for a company to get its IT work done by an outside party. You can get great service for a very low cost.
• Rapid growth possible. Many offshoring companies have a large pool of specialists, which allows for rapid scaling.

Disadvantages of offshoring

• Higher risks. It may happen that the external party delivers work that does not meet the agreements. If that happens, it can be difficult to get redress, and the risk of a strop is also present. It’s smart to do a good risk analysis in advance if you’re considering this model.
• Loss of intellectual property. Also, it is not always clear whether the intellectual property rights of business information is respected by a distant provider.

Nearshoring

With nearshoring, you also outsource your company’s IT work abroad, but this time to countries that are relatively close. This often involves companies such as Spain, Poland, Romania and Bulgaria. This form of outsourcing brings its own pluses and minuses.

Benefits of nearshoring

• Cheaper. Again, the cost of the work is lower than in the Netherlands, although not as low as in a distant foreign country.
• Easier communication. The cultural differences with Eastern and Southern European countries are smaller than with Asia, and the time zones are more or less the same. This often makes it easier to consult and make arrangements.

Disadvantages of nearshoring

• Language barriers. Where the Dutch are known to have an excellent command of the English language, this can sometimes be disappointing when making contacts in some European countries.
• More expensive than offshoring. The hourly wages and production costs of nearshoring are not as low as the costs of offshoring to an Asian country.

Onshoring

A trend in recent years is not to outsource IT projects to foreign companies, but to retain them in the home country in order to maintain the knowledge economy. More and more foreign employees are being brought to the Netherlands and incorporated into Dutch IT companies. You can therefore make use of foreign specialists working for a Dutch company via a staffing construction, for example, a system known as ‘onshoring‘.

Benefits of onshoring

• Faster scaling. Outsourcing companies that use foreign workers can bring over more specialists for each project. This allows them to scale up or down quickly and flexibly in a tight labor market compared to Dutch companies.
• Short lines of communication. Consultation with an onshore company involves minimal communication problems. If immediate consultation is required, the company can be visited within a half day to set out a new strategy or planning. This allows for quick turnaround and maximizes the speed of the desired service.

Disadvantages of onshoring

• Cost. Hourly wages in the Netherlands are among the highest in the world, and additional costs are also considerable. This remains the main argument for not choosing the premium service of a Dutch IT outsourcing company, even if foreign employees are used.

How do you choose the right outsourcing model?

So as a company, you have three ways to outsource your IT: nearshoring, offshoring and onshoring. For each company, there is a model that best fits their specific needs and desires, and ultimately it’s up to you to make the decision. To make an informed decision on where your company will get the best results, you can look at the following six factors, among others.

1. Cost. This is where offshoring generally wins out, as hourly wages in Asia are lower than those in any European country.

2. Language. In the Netherlands, almost every IT employee has a good basic knowledge of the English language. In non-Anglophone countries in Europe, this is not so obvious, and this can impact communication lines.

3. Staffing supply. How large the pool of workers with a particular education is varies from country to country. One type of IT worker can be found mainly in China, and another specialist can be found in Spain.

4. Distance. An important advantage of nearshoring is that European countries are in (approximately) the same time zone, so their working hours largely overlap with those of your company. Also, you can be in Spain or Poland by plane within a few hours; flying to India or China for a meeting means a substantial investment of time.

5. Cultural differences. The mentality and work ethic of employees differs per country, and the differences with the Dutch mindset are always so complex that no simple summary is possible. Your own experience and talking to experts can provide insight into what a suitable choice is for you.

More and more Dutch companies are now opting for nearshoring instead of outsourcing to Asia. The reasons they mention are the drive and service attitude of European IT professionals, the shorter distance and the smaller cultural differences, which make it easier to make agreements. The supply of personnel is also increasing: following Eastern European countries and Spain, Turkey and Morocco are now also starting IT projects that specialize in providing services to the Netherlands.

A final trend in IT outsourcing is working with hybrid teams, which are connected online and work in different places around the world. This form of outsourcing, called multi-sourcing, can combine some of the benefits of each outsourcing model.

How does Provide help?

Provide takes the concerns about nearshoring completely out of your hands. We do this by focusing on the culture and personality of both parties during the matching processes and by providing all our projects with a dedicated Dutch project manager. With over 10 years of experience and our tailored approach, we can ensure the success of all our clients.

An outsourcing partner who understands your organization is in our opinion an important condition for success. And that is what we are committed to. Are you curious about the possibilities for your organization? Please contact us via +31 (0)30 6669600 , email nearshoring@provide.nl or use the contact options below.