european it outsourcing intelligence report 2010: western and northern europe

European IT

Outsourcing

Intelligence Report

2010.

Part 2: Western and

Northern Europe

IT Sourcing Europe Limited

Coventry, West Midlands

The United Kingdom

2010

Nearshore IT Outsourcing

Market Research &

Consultancy

Table of Contents

Executive Summary .......................................................................................................................................................................................................................... 3

Study Goals and Objectives.......................................................................................................................................................................................................... 4

Study Methodology ...................................................................................................................................................................................................................... 4

Study Sample ............................................................................................................................................................................................................................... 5

Outsourcing Activity & Categories Surveyed ............................................................................................................................................................................... 6

Key Study Findings ....................................................................................................................................................................................................................... 7

Part I: Software Development Outsourcing Trends & Challenges in Western and Northern Europe ........................................................................................... 11

Trends Analysis .......................................................................................................................................................................................................................... 11

Analysis of Challenges & Solutions ............................................................................................................................................................................................ 21

Part II: Findings’ Discussion ............................................................................................................................................................................................................ 22

Part III: Forecast on the Future Adoption of the Outsourced Software Development by Western European & Nordic Companies ........................................... 27

Findings’ Discussion ................................................................................................................................................................................................................... 29

Part IV: Conclusions and Recommendations ................................................................................................................................................................................. 32

Executive Summary

The recent economic crisis has proven to be the major force driving

Western European and Nordic countries to look for ‘survival strategies’.

Since in-house software/web development, deployment and

maintenance involve tremendous costs, more European companies have

turned to IT Outsourcing (ITO) as a way to reduce operating costs. While

being considered as the strategy most frequently adopted by large

companies in the pre-crisis times, today’s ITO practices find more and

more supporters among the mid-sized and small companies, for whom

cost efficiency is as important as an opportunity to have access to skills

and services that can generally improve their online presence and

business performance.

However, engagement in ITO relationships has proven to be the most

impactful and culture-changing experience that does not always result in

success. For some companies the outsourced software development can

be a ruining rather than an improving practice. It mainly happens because

companies begin to adopt ITO as a reaction to short-term economic

pressures and are not focused on the benefits they may gain in a longer-

term perspective. Other reasons of the failure of the ITO relationships

include, but are not limited to the wrong choice of an outsourcing

destination, partnering with a wrong ITO services supplier,

underestimation of the outsourced project scope etc.

However, as the global economies slowly stabilize, more European

companies begin to realize the true value they can gain from the right ITO

engagement and start transforming their business plans to source new

avenues for generating revenue, and increase productivity and

effectiveness of their outsourcing endeavors. This is how the Western

European and global ITO landscapes look like today.

IT Sourcing Europe has surveyed 5 Western European countries (United

Kingdom, Germany, Austria, Netherlands and Switzerland) and 3

Scandinavian countries (Sweden, Denmark and Norway) between April

and October 2010 in order to identify the most obvious similarities and

differences in behaviors, trends and challenges among the two types of

companies – those that outsource their software development to a 3d

party nearshore, offshore or within own country and those that develop

corporate software projects within own house using domestic IT

resources.

The study is comprised of 4 Parts:

� Part I: Software Development Outsourcing Trends & Challenges

in Western and Northern Europe

This Part provides a detailed analysis of the key trends and challenges

among software development outsourcers identified in the course of the

country-specific ITO surveys 2010. The trends and challenges are

compared and contrasted by countries surveyed.

� Part II: Findings’ Discussion

This Part discusses the major findings of IT Sourcing Europe’s ITO research

2010.

European IT Outsourcing Intelligence Report. Part 2: Western & Northern Europe

Copyright IT Sourcing Europe Ltd. 2010. All Rights Reserved.

4

� Part III: Forecast on the Future Adoption of the Outsourced

Software Development by Western European and Nordic

Companies

This Part provides some forecasts on the future adoption of software

development outsourcing practices in Europe based on the results of IT

Sourcing Europe’s In-House Software Development Survey 2010. The Part

benchmarks future destinations for the outsourced software

development, factors that will most likely drive today’s non-outsourcers

to adopt the outsourced development, future vendor selection criteria

etc.

� Part IV: Conclusions and Recommendations

This Part provides a general summary of the major trends and challenges

identified and predictions made in the course of the All-European ITO and

In-House Software Development Research 2010. Additionally, this Part

contains some recommendations on how to improve current ITO

partnerships and make the right outsourcing decisions in the future.

Study Goals and Objectives

IT Sourcing Europe’s ITO and In-House Software Development Research

2010 aims to:

� Explore factors that drive companies to outsource their software

development function, challenges associated with

offshore/nearshore outsourcing and problem solving strategies;

� Find out which practice works best with the outsourced software

development and how;

� Explore the major trends, challenges and problem solving

strategies related to the in-house software/web development;

� Explore key factors that keep companies away from outsourcing

their software development to the 3d party;

� Find out in what circumstances today’s non-outsourcing

companies will consider outsourcing their software development

and how

The Study has the following objectives:

� Help Western European and Nordic companies increase

awareness of how their market competitors act with regards to

software development costs optimization and reduction;

� Help companies determine the best practices used to overcome

challenges of the outsourced software development;

� Benchmark prospective destinations for the future software

development outsourcing;

� Identify the key criteria to be used by future outsourcers in

determining the most effective engagement models, selecting ITO

services providers and gaining the long-term benefits from the

outsourcing practices;

� Protect future software development outsourcers from the

pitfalls and failures facing today’s outsourcers in Europe

Study Methodology

This study is based solely on the results of two online surveys conducted

by IT Sourcing Europe between April and October 2010:



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1. Survey of companies with any type of software development

outsourcing experience, and

2. Survey of companies with no software development outsourcing

experience.

Both surveys were available online and were hosted by GoDaddy.Com,

the flagship company of The Go Daddy Group, Inc, one of the world’s

leading resellers of domain name and domain-related products and

services.

In order to reach as many companies as possible, IT Sourcing Europe used

its own database of business contacts in respective countries and sent out

a survey invitation letter to each company’s decision makers (C-level

executives, IT managers, directors, heads of software development etc).

Additionally, outbound marketing initiatives were launched in order to

attract more companies to participate in the respective surveys. In the

frames of this initiative the following steps were taken:

� Online press release distribution;

� Close interaction with social media such as survey

announcement and advertising in respective business and

country-specific groups on LinkedIn, XING, Facebook, Twitter,

Blogged.Com etc;

� Survey invitation campaigns in event management systems such

as Amiando.Com;

� Reaching companies using contact forms on such B2B and B2C

web portals as Europages.Com, Norge Online etc.

All data obtained were analyzed in the form of industry aggregates. The

answers to open-end questions received were organized by their

relativity to the study goals, treated as the option “other” at the graphic

level (charts and pictures) and cited and elaborated on at the findings’

discussion level.

Study Sample

The following number of companies took part in IT Sourcing Europe’s

surveys in each country surveyed:

Country # of outsourcers # of non-

outsourcers

Total # of

participants

United Kingdom 250 222 472

Germany 258 286 544

Switzerland 112 136 248

Austria 157 201 358

Netherlands 167 289 456

Denmark 331 225 556

Sweden 148 232 380

Norway 134 186 320

Overall, 3,334 Western European and Nordic companies provided an

input to IT Sourcing Europe’s research, of them 1,557 companies that



6

outsource their software development function and 1,777 companies

that develop applications within own house.

Industry verticals targeted were:

IT/Telecommunications/High-tech

Software/Web development

Insurance

Banking and Finance

Tourism/Hospitality/Travel

Media/Entertainment

However, IT Sourcing Europe did not make a respondents’ selection by

type of industry they represent, as such selection did not match the study

goals.

All participating companies were divided into 3 main categories by their

headcount:

1. Small – companies with less than 50 employees in all locations;

2. Mid-sized – companies with 50 to 499 employees in all locations;

3. Large – companies with 500 and more employees in all locations.

Outsourcing Activity & Categories Surveyed

In this year’s study we refer to the following ‘outsourcing activity’:

� Software Development (SD) Outsourcing is the process of transferring

part of/entire software development function to the execution by

the external IT services provider

The following categories fall under this activity:

� Application development and maintenance;

� Website / ecommerce systems;

� Data warehousing;

� IT security;

� Data / voice network operations

These categories further fall under the five key areas of expertise:

� Web 2.0 (Web 2.0, Microsoft ASP.NET, Java, EpiServer, open

source etc);

� Enterprise 2.0 (J2EE, J2SE, C#, MySQL etc);

� Mobile development (J2ME etc);

� Embedded development;

� Software as a service (SaaS) and Cloud Computing



7

Key Study Findings

United Kingdom

• Although most of the UK companies still outsource their

software/web development offshore (at least 3 time zones away

from home country), the number of companies outsourcing

nearshore (maximum 2 time zones away from) is very close to

and is likely to double the number of offshore outsourcers by the

end of 2010.

• The Top three reasons why UK companies outsource their

software/web development are: to reduce operating costs, to

accelerate time to market via flexibility and scalability and to

free in-house resources for other business purposes.

• Web and Enterprise solutions remain the most outsourced ones

among the UK companies.

• Low costs remain the key factor impacting the UK companies’

choice of the outsourcing destination and vendor.

• Delays in delivery schedules is the most frequently cited

challenge facing the UK outsourcing companies, followed by poor

communication with vendor’s project management.

• The majority of the surveyed companies report 40%-59% actual

savings from the outsourced development.

Germany

• In Germany, companies that outsource their software/web

development nearshore are almost double the number of those

that transfer their software development function offshore by

almost twice.

• The Top Three reasons why German companies choose to

outsource their software/web development are: to reduce

operating costs; to accelerate time to market and difficulty

finding necessary resources within home country.

• Enterprise 2.0 and Web 2.0 solutions remain the most

outsourced ones among the German companies.

• Low costs, available IT talent pool and positive references are

the Top Three factors impacting the choice of the outsourcing

destination and vendor by the German companies.

• The Top Three challenges of the outsourced software/web

development among the German outsourcers are: delayed

delivery, poor project management quality from the vendor’s

side and hidden costs.

• The majority of the German companies report 10%-24% actual


Switzerland

• In Switzerland, companies that outsource their software/web

development nearshore are double the number of those that

transfer their software development function offshore by almost

twice.

• The Top Three reasons why Swiss companies choose to


operating costs; difficulty finding necessary resources within



8

home country and pressure from investors/executive

management to cut costs.

• Web 2.0 and Enterprise 2.0 solutions remain the most

outsourced ones among the Swiss companies.


The Top Three factors impacting the choice of the Outsourcing

destination and vendor by the Swiss companies.


development among the Swiss outsourcers are: delayed delivery,

poor project management quality from the vendor’s side and

cultural difference.

• The majority of the Swiss companies report 10%-24% actual


Austria

• In Austria, the number of nearshore software development

outsourcers is double the number of offshore outsourcers.

• The Top Three reasons why Austrian companies choose to


operating costs, to get access to qualified/specific IT talent and

resources and to respond to the pressure from

investors/executive management to cut down IT budgets.

• Most of the outsourced projects in Austria belong to Web 2.0

(Web 2.0, Microsoft ASP.NET, Java, EpiServer, open source etc)

and mobile development domains.

• The Top Three factors driving the choice of the outsourcing

destination in Austria are: geographical/cultural proximity,

available resource pool and low costs.


partner are: references and reputation, specific skills and

innovative business models.


development among the Austrian outsourcers are: poor

communication with vendor’s project management, delays in

delivery schedules and/or missed project milestones, and


• The majority of the Austrian companies report saving 10%-24% of

operating costs from the outsourced development.

Netherlands

• In the Netherlands, the number of companies that outsource

their software/web development offshore is slightly bigger than

the number of nearshore outsourcers.

• The Top Three reasons why Dutch companies choose to




• Most of the outsourced projects in the Netherlands belong to

Web 2.0 (Web 2.0, Microsoft ASP.NET, Java, EpiServer, open

source etc) and Enterprise 2.0 (J2EE, J2SE, C#, MySQL etc)

domains.


destination in Holland are: low costs, available IT talent pool and

geographical proximity.

• The Top Three factors driving the choice of the outsourcing are:

references and reputation, low rates, and specific skills.



9


development among the Dutch outsourcers are: poor




• The majority of the Dutch companies report saving 10%-24% of

operating costs from the outsourced development.

Sweden

• In Sweden, the number of companies that outsource their

software/web development nearshore is slightly bigger than the

number of offshore outsourcers.

• The Top Three reasons why Swedish companies choose to





outsourced ones among the Swedish companies.


the Top Three factors impacting the choice of the Outsourcing

destination and vendor by the Swedish companies.


development among the Swedish outsourcers are: delayed

delivery, poor communication with vendor’s project

management and cultural difference.

• The majority of the Swedish companies report 40%-59% actual


• The majority of the Swedish companies believe it is important to

have the supplier's team working within or close to the same

time zone.

Denmark

• In Denmark, companies that outsource their software/web

development nearshore outnumber those that transfer their

software development function offshore.

• The Top Three reasons why Danish companies choose to


operating costs; to accelerate time to market via flexibility and

scalability and difficulty finding necessary resources within

home country.


outsourced ones among the Danish companies.

• Most Danish outsourcing companies partner with only one IT

services provider.

• Low costs and vendor’s reputation remain the key factors

impacting the Danish companies’ choice of the Outsourcing

destination and vendor.

• Delays in delivery schedules is the most frequently cited

challenge facing the Danish outsourcers, followed by poor

communication with / poor quality of the vendor’s project

management.

• The majority of the surveyed companies report 40%-59% actual




10

Norway

• In Norway, the number of companies that outsource their

software/web development nearshore is greater than the

number of offshore outsourcers.

• The Top Three reasons why Norwegian companies choose to

outsource their software/web development are: difficulty finding

necessary resources within home country, to reduce operating

costs and to improve business development strategy.

• Most of the outsourced projects in Norway belong to Web 2.0

(Web 2.0, Microsoft ASP.NET, Java, EpiServer, open source etc)

and Enterprise 2.0 (J2EE, J2SE, C#, MySQL etc) domains.


destination in Norway are: low costs, available IT talent pool and

geographical/cultural proximity.


partner are: references and reputation, low rates and specific

skills.


development among the Norwegian outsourcers are: poor




• The majority of the Norwegian companies report saving 10%-24%

of operating costs from the outsourced development.

All Countries Surveyed

• The majority of the Western and Northern European companies

polled believe that outsourcing their software/web development

has been the right decision.

• Most of the Western and Northern European outsourcers do not

know the exact salaries of each of their team members on the

outsourced development team and, thus, do not have 100%

managerial control of project teams and costs associated with

outsourcing.



11

Part I: Software Development Outsourcing Trends and

Challenges in Western and Northern Europe

Trends Analysis

The following country-specific data are presented in the form of industry

aggregates.

Figure 1: Size of outsourcing companies

Figure 2: Revenue expectations of outsourcing companies in 2010

(in €)

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

35%51%

72%

46% 53% 56%50%

67%

42%

36%

19%

41%36% 31%

32%

28%

23%13% 9%

13% 11% 13%18%

5%

small mid-sized large

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

28%

12%

51%

29%38%

18%

37% 41%

45%

57%

42%

27%

40%

49%

38%26%

11%

0

0

31%

9%

0

10%

16%

10%

31%

7%

10% 8%

33%

9%7%

6%0 0

3% 4% 06%

10%

less than 1M 1M-49M 50M-99M 100M-499M 500M+



12

Figure 3: Revenue growth expectations of outsourcing companies

in 2010

Figure 4: Overall software development outsourcing experience

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

4%0 0

11%10%

011% 16%

34%

59%

47%35% 41%

43%

39%

44%

38%

22%39%

27%

29%

24%

33%21%

13%0

022% 11%

0

8% 13%

11%

19% 14%5%

8%

33%

9% 6%

0% or less 1%-9% 10%-19% 20%-49% 50%+

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10%3% 12%

51%

16%27%

12% 13%

38%

29%

49%

37%

33%22%

33%

48%

52%

68%

39%

12%

51% 51%55%

39%

less than 12 months 1 to 3 years more than 3 years



13

Figure 5: Key outsourcing destinations in 2010

Figure 6: Number of ITO providers that companies partner with

Figure 7: Size of providers that companies outsource to

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

35%

23%22%

16%29%

25%19% 27%

23%37% 41%

32%23%

27%34%

32%

20% 17% 11%

5%

19% 20% 18% 5%

13%8%

9%

13%

12% 7% 11%19%

6%

5% 7%

11%

10%11% 10%

5%

3%10% 10%

17%

7% 10% 8%11%

0 0 06% 1% 0 0 1%

offshore + nearshore + within own country

nearshore + within own country

offshore + within own country

nearshore + offshore

within own country

nearshore

offshore

0%20%

40%

60%

80%

100%

60% 81%72% 87%

52%79%

52%79%

40% 19% 28% 13%

48%21%

48%21%

single provider more than 1 providers

0%20%40%60%80%

100%

39%75%

62% 57% 55% 65%55% 65%

46%19%

21% 31% 31% 30%28%

29%

15% 6%17% 12% 15% 5%

17% 4%

small mid-sized large



14

Figure 8: Key pressures that impact corporate decisions to

outsource software/web development

Figure 9: Most popular actions companies take prior to engaging

in ITO partnerships

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

30% 39%32%

30%29% 29% 29%

23%

16%

23%

00

14% 18%16%

0

12%

0

00

0 00

0

0%

20%

27%24%

14%17%

13%

31%

0

0

26%

22%

00

00

0

0 0

0

00

0 15%

improve business strategy

pressure to cut down IT budgets

difficulty finding resources within homeland

free in-house resources

accelerate time to market

reduce operating costs

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

30% 33%27% 31% 34% 34% 35%

28%

0%

24%

00

14%

0

20%

18%

22%

22%

29%19%

25%

29%

23%

26%0

0

21%

18%

0 19%0

016%

00

00

0

0

0

do in-house assessment of IT needs hire/promote an ITO manager

ask others for references hire a consultancy

seek domestic providers



15

Figure 10: Volume of the outsourced software development

Figure 11: Most outsourced areas of expertise

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

4% 7% 11%

2%

22%

2%

16%

6%

20%24%

41%

26%

29%

19%

22%

21%

23%21%

23%

28%

14%

21%

18% 39%

23%

37%

14%

25%

18%

27%

25%

20%

30%

11% 11%

19% 16%

31%

20%14%

less than 10% 10%-39% 40%-59% 60%-89% 90%-100%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

32% 32%26%

42% 43%

34% 35% 37%

30%29%

25%

34%26%

29% 25%21%

16% 21%

19%

14%

14%20%

16%

19%

11%10%

17%

7%

8% 11%

10%

8%

11% 8%13%

3%9% 6%

10%15%

Web 2.0 Enterprise 2.0 Mobile Embedded dev SaaS/Cloud



16

Figure 12: Key drivers of the choice of the outsourcing destination

Figure 13: Key drivers of the choice of the outsourcing partner

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

28% 25%14%

12% 8%

1% 5%7%

0

38%26%

18%

8%2%

1%3%

5%

0

29%27% 19%

12% 4%

2% 2% 5%

0

18%19%

3%

25%6%

0

11%11%

7%

23% 23%

16% 16%

6%

0

6%

7%3%

21% 17%15% 14%

9%

8%

5%

9%2%

24% 23%15% 15%

4%

2%

4%

9% 4%

27% 20% 15% 14%7%

0

5%10% 2%

United Kingdom Germany Switzerland Austria

Netherlands Sweden Denmark Norway

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

18%13% 13% 12%

10%

10%

9%7%

8%

0 0

16%22% 20% 13%

19%

7%

2%

1%0

0 0

9% 23% 13% 11% 19%

0

21%

2%2%

0 0

17%

26%12%

11%13% 0

11% 5%

5%

0 0

15%

17%

15%

10% 7% 6%

13%5%

4%

7%

1%

31%21%

20%10%

7%

6%

3%

1%0

1%

0

16% 16% 15% 10%15%

2%

14%

4%

5%

3%

0

17% 20% 16% 9% 13%

0

15%3%

0

5%

2%





17

Figure 14: How actual incurred annual costs of the outsourced

development compare to the expected (contracted) ones

Figure 15: Actual savings from the outsourced software

development

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

about

the

same

up to

25%

higher

25% to

49%

higher

50% to

74%

higher

up to

25%

lower

25% to

49%

lower

50% to

74%

lower

75%+

lower

51%

28% 19%

1% 1%0

00

19%

26%20%

14%10% 8%

0

2%

18%25%

24% 13%11%

8%

0

1%30% 32%

22%

10%

3%

2%

0

1%

26%

50%

10%

3%

5%

3%

0

1%

54%

28%11% 0 7%

0

0

0

53%26%

10%

1%

3% 4%

2%

028%40% 19%

11%

2% 0 0 0



0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

10%21%

10%5%

21%

2%

16%

9%

33%

38%

35%

33%

28%

20%

25%37%

14%

22%

20%29%

19%

21%

19%17%

36%

11%

21% 17% 21%

49%26% 25%

7% 8%14%

16% 12% 8%14% 12%

less than 10% 10%-24% 25%-39% 40%-59% 60%+



18

Figure 16: Companies’ assessment of their ITO providers on a 5-

point scale, where 1 is least satisfied and 5 is most satisfied with

the received services, project execution quality, attitude, prices etc

Figure 17: Do Western European & Nordic clients know exact

salary of each of the team members on the outsourced

development team?

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2% 9%3% 5%

4%4%

2%11%

4%

41%

10%

31%

12% 13%

7%

13%

23%

28%

25%

30%

42%

26% 47%

46%

48%

12%

43%

26%

25%

40%

25%

21%

23%

10%

19%8%

16% 18% 19%9%

1 2 3 4 5

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

42%

32% 37%

21%

39%

29%40%

29%

58%

68% 63%

75%

60%

71%60%

57%

0 0 04% 1% 0 0

14%

yes no partially



19

Figure 18: Companies’ overall impressions of SD outsourcing

0%5%

10%15%

20%25%

30%

costs are higher than expected

provider’s work is of higher quality compared to in-house capabilities

provider’s work is of lower quality compared to in-house capabilities

our IP is at risk

it's important to have the supplier's team located nearshore

providers have more disciplined methodologies, which can lower costs

further in a longer-term perspective

it's critical to have backup providers available in case the primary provider is

unable to meet deadlines and/or commitments

we are very dissatisfied with the decision to outsource our software

development

outsourcing our software development has been the right decision

providers are unreliable and not focused on mid- and long-term cooperation

outsourcing lowers operating costs, but increases PM costs

Norway

Denmark

Sweden

Netherlands

Austria

Switzerland

Germany

United Kingdom

Figure 19: Factors keeping companies away from SD outsourcing

0% 20% 40% 60% 80% 100% 120% 140% 160% 180%

we want to have 100% control of project

we're afraid of hidden agenda

we don't want to create shared environments

we're satisfied with in-house development

we're afraid of putting IP at risk

we don't want to cope with change management

we don’t get any pressure to cut costs

we don’t believe that low-cost countries are able to provide qualified

resources and skills

we believe that outsourced software development will result in poorer

quality, compared to in-house work

we think that outsourcing and vendor management will eventually cost

more money and “headaches”

we think we're too small and immature

we think outsourcing is unethical and work should be kept within own

house

we had negative outsourcing experience in the past

United Kingdom

Germany

Switzerland

Austria

Netherlands

Sweden

Denmark

Norway

Analysis of Challenges & Solutions

Figure 20: Challenges of the outsourced software development

Figure 21: Actions companies take to respond to challenges of the

outsourced development

0%

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0%

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8%

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17% 23%21%

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15%26%

20%

14%

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15%

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0

0

08%

0 9% 0

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11%0 1%

9%

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6% 5%

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3% 1%5% 4%

7%10% 4%

10%

revise ITO partnerships increase communication

extend deadlines dedicate more managerial resources

dedicate more IT resources redesign vendor management

bring in outside assistance do backsourcing



22

Part II: Findings’ Discussion

The European IT Outsourcing Survey 2010 allows us to observe certain trends

and challenges among the Western European and Nordic companies that

outsource their software/web development function to a 3d party offshore,

nearshore and/or within own countries.

The study results show obvious similarities and differences in the ways how

outsourcing companies from different countries behave in terms of software

development outsourcing management, maintenance and improvement, how

they respond to their most critical challenges and what best practices they use to

squeeze as much value from the outsourcing transactions as possible. These

results help better understand the level of ITO maturity and grasp of innovation

of every European country surveyed and predict to the future trends and

challenges that will most likely influence the further evolution of the ITO

practices in Western Europe and Scandinavia.

IT Sourcing Europe believes that the study sample generally shapes the actual

state of affairs at both country-specific and All-European ITO markets in 2010,

which makes the given research findings demonstrative of the actual trends and

challenges facing software development outsourcing companies in every country

surveyed.

To begin with, it is important to know the ratio of small, mid-sized and large

companies that act at each surveyed country’s ITO market. As seen from Fig. 1, in

2010 small companies appear to be the most active users of the outsourced

software development in the following countries: Germany, Switzerland, Austria,

Netherlands, Sweden, Denmark and Norway. United Kingdom is the only country

surveyed in which mid-sized companies remain the most active adopters of SD

outsourcing. This finding allows assuming that the overall outsourcers’ profile in

Europe began to change in the post-crisis years, bringing more small companies

(start-ups, early-stage, venture capital backed etc) to the foreground. It suggests

that in the upcoming years the stereotype that outsourcing is for large and

mature companies only will be absolutely busted and more small companies will

be sourcing IT resources and talents outside their own countries in order to grow

at a faster pace and with long-term benefits.

Regarding the annual revenue expectations among the outsourcing companies in

2010, most of Swiss and Norwegian companies anticipate to earn less than € 1

million, most of German, Dutch and Swedish outsourcers expect to earn € 1 to 49

million in annual revenue, while most of Austrian companies plan to gain € 50 to

99 million in annual revenue. Additionally, a rather high percentage of

Norwegian software development outsourcers (10%) claims they expect to earn

more than € 500 million in annual revenue in 2010 (Fig. 2). As seen from Fig. 3,

outsourcing helps most of German, Swiss, Austrian, Dutch, Swedish, Danish and

Norwegian companies increase their annual revenue by 1% to 9% and most of

the UK companies – by 10% to 19% in 2010.

These findings generally demonstrate that United Kingdom has the most mature

SD outsourcing market compared to other Western European and Nordic

countries surveyed in the course of this research. The UK companies, especially

the mid-sized ones, traditionally adopt the outsourced SD in order to leverage

operating costs and increase annual revenue via faster time to market and

sustainability while cutting down corporate IT budgets. In terms of maturity and

readiness to adopt SD outsourcing, the UK companies are followed by the

German outsourcers.

Regarding the overall SD outsourcing experience, the leading countries, most of

which companies have been outsourcing their SD function for more than 3 years

now, are again United Kingdom and Germany, followed by Netherlands, Sweden

and Denmark. Austria has the smallest number of companies outsourcing for

more than 3 years and the greatest number of companies who first outsourced

their development only less than 12 months ago. It suggests that Austria has the

“youngest” SD outsourcing market among the all countries surveyed (See Fig. 4).



23

Quite interesting findings were made with regards to the most popular

destinations for the outsourced SD in 2010. As seen from Fig. 5,, most of the

German, Swiss, Austrian, Dutch, Swedish, Danish and Norwegian companies

place their SD nearshore, while only the United Kingdom has the greatest

percentage of companies that outsource their SD offshore. It proves the thesis

that the UK companies still prefer offshore outsourcing because of their historic

close links with India and Pakistan. From this viewpoint, the UK appears to be the

most conservative country whose business development is driven by tradition

rather than common sense and strive for more effective client-vendor

communication and grasp of innovation which are easier to achieve in

geographically closer environments (this statement will be proven further in the

Report).

The following findings relate to the major factors driving corporate decisions to

outsource entire or part of SD function to execution by the 3d party in 2010. As

seen from Fig. 8, reduction of operating costs remains the most powerful driver

of outsourcing decisions in all 8 countries surveyed. Among the other most

frequently cited factors are: acceleration of time to market (UK, Germany,

Netherlands, Sweden and Denmark), difficulty finding required IT resources and

specific skills within own country (all surveyed countries except the UK), pressure

from investor(s) and/or executive management to cut down IT/SD budgets

(Switzerland and Austria) and business development strategy improvement by

focusing on company’s core competences (product/service marketing, customer

relationships management etc) (Norway) and freeing in-house resources for

other critical tasks (the UK). Thus, cost efficiency and optimization and time to

market acceleration are the top 2 pressures that pump up corporate decisions to

outsource SD in the UK, Germany and all Nordic countries surveyed; while cost

efficiency and optimization and willingness to get access to more expanded and

qualified IT resource and talent pools are the top 2 outsourcing drivers in

Switzerland and Austria.

Prior to engaging in ITO partnerships, most of companies in all countries

surveyed conduct an in-house assessment of the SD elements/areas to be

outsourced to the 3d party (Fig. 9). Swiss, Austrian and Swedish companies rely

on external assistance such as ITO consultancies in their decisions to outsource

more often than their fellow companies in the UK, Germany, Netherlands,

Denmark and Norway. On the other hand, UK is the country whose companies

seek domestic low-cost IT services providers to outsource their SD to more often

than companies in other countries surveyed. Another most popular action (after

in-house SD needs assessment) is asking other companies for positive vendor

references and sending corporate RFPs/RFQs straight to the suggested vendors.

As seen from Fig. 16,, besides the UK that demonstrates the highest level of

satisfaction with the quality of services and project deliverables received (71% of

respondents issued 4 and 5 points to their current ITO providers), Switzerland

and Sweden are two other countries whose companies are quite satisfied with

their current providers (62% of Swiss respondents issued 4 and 5 points to their

providers versus 58% of Swedish outsourcers). This tendency may be explained

by the fact that Swiss and Swedish companies proactively use professional

consultancy services to help define the highest priority areas/elements to be

outsourced as well as the entire short- and long-term corporate outsourcing

strategy. Companies that try to avoid using professional help are more likely to

overestimate own outsourcing needs assessment and, thus, establish the wrong

partnerships, use the wrong SD methodology or the wrong destination. All of

these factors inevitably lead to the outsourced projects’ failures and high levels

of dissatisfaction with the outsourcing outcomes (See Fig. 16).

Regarding the volume of the outsourced SD in each country surveyed, the

research comes up with the following findings: UK and Sweden are the two

countries whose companies outsource most of their SD function (90% to 100%).

On the contrary, Netherlands is the only country with the greatest number of

companies outsourcing less than 10% of their SD volume (Fig. 10). Additionally,

most of German and Danish companies outsource 60%-89%, most of Swiss and



24

Dutch companies outsource 10%-39%, while most of Austrian and Norwegian

companies – 40%-59% of their SD volume.

Regarding the most outsourced areas of SD expertise, all of the surveyed

countries have the same or nearly the same indicators: Web 2.0 is the most

demanded area, followed by Enterprise 2.0. Germany and Sweden demonstrate

the highest rates of mobile development outsourcing (21% and 20% of

respondents correspondently), while Switzerland shows the highest rate of the

outsourced embedded development (17% of respondents) and Norway shows

the highest rate of SaaS/Cloud computing outsourcing (15% of survey

participants) (See Fig. 11).

Fig. 12 demonstrates the key drivers of the choice of the outsourcing

destinations in Europe in 2010. Low costs of software development and

maintenance is the major factor helping determine where to locate the

outsourced development in all countries surveyed except Austria, where the

major factor is geographical and cultural proximity. According to Fig. 5, Austria

shows very high rates of outsourcing nearshore and nearshore and within own

country. Surprisingly, but, on the other hand, Austria (along with Norway) shows

the smallest percentage of companies outsourcing their SD within own country

(only 5% of respondents). Other most frequently cited factors (in all countries

surveyed) are: available IT resource and talent pool and positive references.

Factors such as political/economic stability, legal system maturity, IP security,

strong R&D base and proficient English language skills are considered by

companies in the lowest priority.

In order to select an ITO partner, most of the companies surveyed in the UK and

Sweden consider low services rates, while most of German, Swiss, Austrian,

Dutch and Norwegian outsourcers consider vendor references and positive track

record. Availability of specific skills that are hard to find within own country

appears to be important for the majority of the UK, German, Dutch, Swedish,

Danish and Norwegian companies, while innovative business model is a very

decisive factor for German, Swiss, Danish and Norwegian outsourcers.

Further, IT Sourcing Europe explored the way how actual annual incurred costs of

the outsourced SD compare to the expected (contracted) ones in each country

surveyed (Fig. 14). The study shows that the actual and the expected costs are

about the same for most of the UK, Swedish and Danish companies. For most of

German, Swiss, Austrian, Dutch and Norwegian companies the actual incurred

costs are up to 25% higher than expected. Denmark is the only country among

the surveyed ones whose outsourcers (2% of respondents) have actual costs to

be 50% to 75% lower than expected. Additionally, 2% of the German, 1% of the

Swiss, 1% of the Austrian and 1% of the Dutch respondents claim that their actual

incurred costs of outsourcing are more than 75% lower than expected.

Overall, as shown on Fig. 15,, the majority of the UK, Swedish and Danish

companies save 40%-59% of operating costs from the outsourced SD, while the

majority of German, Swiss, Austrian, Dutch and Norwegian outsourcers save

10%-24%. Less than 10% of costs are saved by relatively big numbers of

companies in Germany and Netherlands, while more than 60% of costs are saved

by a lot of Austrian companies.

As seen from Fig. 17, most of Western European and Nordic ITO services buyers

(cumulative 40.96%) still engage with their partners via “traditional” outsourcing

models such as dedicated development center (DDC) or captive centers etc,

which do not allow them to have as much control of the outsourced projects and

development team members as possible and have transparent pricing structures.

Only cumulative 21.52% of the European companies know exactly and

cumulative 1.52% know partially what they pay for and are fully/partially

involved in the process of HR hiring for their outsourced projects. This finding is

demonstrative of the growing number of Western European and Nordic

companies who enter the ITO relationships via some innovative business models,

able to provide them with better control of the outsourced projects and, thus,

better ROI.

Further, IT Sourcing Europe explored the key challenges and issues in the

outsourced SD and their most popular solutions. As shown on Fig. 20,, delayed



25

product deliveries and missed milestones are reported to be the most critical SD

outsourcing challenge by most of the UK, German, Swiss, Swedish and Danish

companies. Alternatively, a lot of the UK and Dutch companies point to time and

cultural difference as the most critical challenges of their SD outsourcing. IT

Sourcing Europe determined the top three challenges for each country surveyed

(in a descending way from most to least faced): UK – delayed delivery,

time/cultural difference and poor client-vendor relationships; Germany –

delayed delivery, poor PM from vendor’s side and hidden agenda (actual costs

far exceed the expected ones); Switzerland – delayed delivery, hidden agenda

and poor client-vendor communication; Austria - poor client-vendor

communication, hidden agenda and delayed delivery; Netherlands –

time/cultural difference, poor client-vendor communication and delayed

delivery; Sweden - delayed delivery, poor PM from vendor’s side and hidden

agenda; Denmark - delayed delivery, poor client-vendor communication and

poor quality of delivery; and Norway - poor client-vendor communication,

delayed delivery and time/cultural difference. The less critical challenges

identified are: excessive vendor’s bureaucracy, insufficient data safety, change of

management and inability to control and reduce vendor’s staff turnover. The lack

of appropriate resources from vendor’s side can be considered to be a somewhat

critical issue in the process of successful outsourced development.

To respond to the most critical challenges, most of companies from all of the

surveyed countries increase face to face communication, revise their ITO

engagements and dedicate more managerial resources. They do it by hiring

additional ITO and/or project managers, relocating them to work permanently on

vendor’s site, improving the training function for the outsourced teams, changing

SD methodology, process, interaction with team members and PMs, canceling

current ITO contracts and looking for new partners etc (see Fig. 21). Another big

ratio of companies extends project deadlines and brings in outside assistance

such as ITO consultancies etc.

The least popular actions include: dedication of more IT resources for the

improvement of client-vendor relationships, vendor management redesign and

SD outsourcing termination and back-sourcing (bringing development back to

house). It is interesting to note that Swedish and Norwegian outsourcers are

most active in cancelling ITO engagement and back-sourcing, while German ITO

buyers are most reluctant to cancel their outsourced development.

Overall, the above findings make an impression that in most of cases today’s SD

outsourcers are ready to sacrifice fast time to market for the benefit of retaining

their current ITO engagements. On the other hand, Western European and

Nordic outsourcers become more insistent in challenging their ITO partners to

improve value-added services, PM and product quality and to provide

transparent cost structures as well as a combination of speed, cost management

and growth supported by business agility and unprecedented technological

innovation.

Further, IT Sourcing Europe asked survey participants to share their general

impressions of the outsourced software development. As reflected on Fig. 18,

more outsourcers have rather positive than negative outsourcing experiences.

Thus, the majority of companies in all countries surveyed admitted the fact that

outsourcing their software development has been the right decision after all. The

statement that it is critical to have backup providers in case the primary provider

is unable to meet deadlines and/or commitments was supported by most of the

surveyed companies with dominance from Netherlands and Germany. The

statement that it is important to have the supplier’s team located within or close

to the same time zone (i.e. nearshore) was supported by most of the surveyed

companies with dominance from the UK and Denmark. The statement that

provider’s work is of higher quality compared to the in-house capabilities was

supported by most of the surveyed companies with dominance from Germany

and Switzerland, while the statement that provider’s work is of lower quality

compared to the in-house capabilities was mostly supported by Austrian, Dutch

and Swedish outsourcers. The statement that providers have more discipline,



26

which can lower down costs further in a longer-term perspective, was mostly

supported by the UK and Danish companies.

Further, the majority of the Swiss respondents, followed by the German ones,

claimed that costs were higher than expected. The majority of German, Austrian

and Danish outsourcers expressed concerns that their IP is at risk. Most of

German, Dutch and Norwegian outsourcers complained that ITO providers were

unreliable and not focused on mid- to long-term cooperation. The most

dissatisfied with the decision to outsource their SD are the German companies,

while the Norwegian outsourcers appear to be the least dissatisfied ones.

Additionally, most of Norwegian and Austrian outsourcers believe that although

the outsourced development lowers down the operating costs, it inevitably

increases the PM costs.

Further, IT Sourcing Europe explored reasons why companies in the countries

surveyed refuse to adopt SD outsourcing. As shown on Fig. 19, the most

frequently cited reason is that companies want to have 100% control of their SD

projects. Additionally, the majority of the UK, German, Swiss and Danish

companies do not outsource, because they are afraid of hidden

agenda/overheads; most of the UK, German, Austrian, Danish and Norwegian

companies do not get any pressure from investors and/or executive

management to reduce costs and/or cut down SD budgets. Most of the UK,

Dutch and Norwegian companies do not outsource, as they do not actually

believe in the high-tech potential of the low-cost countries, the qualification of

their IT resource and talent pools and quality of delivered products and services.

Most of the Austrian companies followed by the Norwegian ones do not

outsource, because they think they are yet too small, immature and/or have

underdeveloped infrastructures to be able to successfully adopt the outsourced

development. Most of the UK, Austrian, Dutch, Danish and Norwegian companies

also think that the outsourced SD will eventually cost them more money,

resources and other ‘headaches’, compared to the in-house capabilities and think

that the outsourced SD will eventually result in poorer quality and, as a result,

higher customer dissatisfaction rates.

It is interesting to note that very few companies in the countries surveyed do not

outsource, because they think that outsourcing is an unethical practice and work

should be kept within own house and own country and because they had

negative outsourcing experience in the past.

All of the above findings prove the overall efficiency of the outsourced SD, its

actual potential to leverage operating costs, optimize IT and human resources,

improve business development strategy, accelerate time to market and bring

both short- and long-term value to corporate growth and sustainability.



27

Part III: Forecast on the Future Adoption of the

Outsourced Software Development by Western

European & Nordic Companies

The following country-specific data are presented in the form of industry

aggregates.

Figure 22: Factors that will drive more companies to adopt the

outsourced software development in the years to come

Figure 23: Where will today’s non-outsourcers place their

outsourced development in the future?

0%20%40%60%80%

100%

13% 14%0 14% 14% 13% 11% 16%

31%18%

28% 22% 21% 22% 26% 19%

13%15% 21% 17% 17% 16% 16% 18%

29%29% 31% 28% 31% 28% 24% 23%

6%10% 9% 6% 6% 6% 13% 9%

6% 11% 5% 12% 10% 10% 4% 13%

2% 3% 6% 1% 1% 5% 6% 2%

never

there's pressure to cut down SD budgets

need to handle 24/7 operations

difficulty finding resources within own country

free in-house resources

speed up time to market

reduce operating costs

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15% 26% 13% 13% 9% 21%0

3%





28

Figure 24: Top Three destination selection criteria to be

considered in the future outsourcing decision making

Figure 25: Top Three vendor selection criteria to be considered in

the future outsourcing decision making

0%

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0 0 0 0

0

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0 0 0

low costs geographical/cultural proximity

available IT resource pool legal system maturity

strong R&D base

0%

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14%

0 00

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00

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low rates references & reputation

specific skills successful pilot project

innovative business model sound experience in similar projects



29

Figure 26: Who will decide on the size and cost of the outsourced

development team(s) in future SD outsourcing?

Findings’ Discussion

IT Sourcing Europe has surveyed non-outsourcing companies in the selected

countries in order to be able to predict to possible scenarios of future adoption

of SD outsourcing in Western and Northern Europe. Based on the findings of IT

Sourcing Europe’s country-specific surveys of the in-house software

development, the following forecasts were made:

1) Surprisingly, but reduction of operating costs will not be the key driver

of future decisions to outsource part of/entire SD, unlike in 2010 (Fig.

22).

In the years to come, Western European and Nordic companies will source IT

resources outside of their home countries due to the significant shortages of

domestic IT resources and specific skills. It will be the number one reason for

most of German, Swiss, Austrian, Dutch, Swedish and Norwegian companies. In

the United Kingdom and Denmark, though, most of companies will most likely

choose to outsource in order to accelerate time to market. Overall, it is the

second most popular driver of future decisions to outsource SD. The third most

popular driver is the need to free in-house resources for more critical business

goals and core competencies. The less important factors cited are: need to

handle 24/7 operations (support functions outsourcing) and pressure from

investors/executive management to cut down the SD budgets.

This forecast is enhanced by the findings of the In-House SD survey 2010 with

regards to the most critical challenges facing today’s non-outsourcers in the

selected countries. According to the findings, slow time to market, high cost of

in-house development and maintenance and lack of domestic IT resources and

skills are the top three barriers in the way of successful SD within own house.

These challenges basically set the ground for the future profile of companies that

outsource their SD function to the 3d party offshore, nearshore and/or within

own countries. It suggests that in the near future Western European and Nordic

companies will be looking out to outsource their SD to accelerate time to

develop, implement and market the product/service and to have an opportunity

to win their own niche at the market before the competitors do so.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

61%54%

47% 49%47%

46% 47%46%

35%

36%

35% 36% 41% 42% 40% 42%

4%10%

18% 15% 12% 12% 13% 12%

client vendor in collaboration



30

As most of today’s non-outsourcers refuse to outsource, because they want to

have 100% managerial control of the SD projects and teams involved (see Fig.

19), the future ITO engagement will inevitably shape this factor. A greater focus

will be placed on the long-term benefits from outsourcing as well as use of

outsourcing for strategic goals of business development improvement rather

than sole cost reduction achievement. The findings of the given study

demonstrate well that future outsourcers will have to establish specific

partnerships with their ITO services suppliers, in which the management role will

be assigned to the client, while the supplier will act as a resource and skills

supplier rather than a project executor. Companies will be looking for innovation

via agility and flexibility combined with payment transparency. The latter will

shape the overall state of affairs in the post-recession business world, where

companies tend to grow smart towards money spending and proper investments

allocation.

2) More Western European and Nordic companies will be sourcing

nearshore (Fig. 23).

Cumulative, only 6.96% of companies surveyed (from all countries selected)

admitted the likelihood of outsourcing offshore in the future, versus 14.4% of

those who plan to outsource nearshore. This finding proves the assumption that

nearshore SD outsourcing will be the key outsourcing destination in the years to

come. 2010 as well as the previous post-recession year have shown an

unprecedented trend towards SD quality, speed and sustainability. Managing an

SD project outsourced as closely to the home country as possible eliminates

extra hassle associated with development teams management, long and

expensive trips to vendor’s site, time and cultural difference etc. On the other

hand, nearshore outsourcing is able to increase project traceability, face-to-face

communication between the client and vendor and, in case of disappointment

with the outsourced development, shortens time to back-source.

Another future tendency observed is that companies will tend to try and

challenge several potential ITO vendors to decide whom to stay with for long-

term cooperation and benefits. Thus, outsourcing SD projects nearshore is able

to facilitate the task of disseminating the outsourced projects among two and

more vendors in different locations, including the homeland, and then to move

several pieces of project to the main provider.

3) Low costs will continue to map the future SD outsourcing destinations

(Fig. 24).

Although, as seen from Fig. 22, cost reduction will not be the main driver of the

corporate decisions to outsource SD in the near future, low costs will still be

considered among the primary criteria in the process of selecting the outsourcing

destination. Low costs are one of the top three future SD outsourcing location

selection criteria in all countries surveyed, with dominance in the UK,

Netherlands, Denmark and Norway. Another important criterion identified in the

course of the research is geographical and cultural proximity, cited among the

top three selection criteria in the UK, Germany, Switzerland, Austria and Norway.

Available IT resource pool is the third most frequently cited criterion in all

countries surveyed. As a shortage in domestic IT resource and talent pool is one

of the most critical challenges of the in-house SD in 2010, it is logical enough for

future outsourcers to focus on locations with high annual numbers of IT

graduates and IT workforce employed, strong R&D base/legacy and legal system

maturity.

4) Most of today’s non-outsourcers in Western and Northern Europe will

partner with ITO suppliers with positive references and strong track

record in the future (Fig. 25).

Positive references and reputation will be the main driver of the future choice of

the ITO provider, according to the given research findings. This factor was

marked by the majority of participating companies from all countries surveyed

(cumulative 14.5%). This tendency will eventually challenge ITO providers to

improve their client management and retention practices, expand the range of

add-on and value-added services such as consultancy, staff training etc and offer

innovative business models able to provide the clients with 100% control of the

outsourced projects, no hidden agenda and minimal errors fixing at the

production and post-release stages. ITO providers will also be challenged to find

the golden ratio between new client winning and existing client retention and to



31

make customer relations practices work side by side with the sales and

marketing efforts.

Access to specific skills which are hard to find within home country is named

among the top three vendor selection determinants by most of German, Swiss

and Danish companies. Innovative business models are named among the top

three vendor selection criteria by most of the UK, German, Swiss and Dutch

companies. A lot of Austrian, Swedish and Norwegian non-outsourcers named

successful pilot project completion by the potential vendor as one of the most

decisive drivers of their future choice of the ITO partner. Additionally, most of

Austrian, Dutch, Swedish, Danish and Norwegian companies pointed to vendor’s

sound experience in similar projects as one of the three factors influencing their

future outsourcing decisions. Surprisingly enough, but low service rates were

named among the top three future vendor selection criteria by most of the UK

companies only. In other countries surveyed, companies did not put low rates

among their top three vendor selection indicators.

5) In the future, more outsourcers will strive to control their outsourced

projects (Fig. 26).

Unlike current SD outsourcers, most of whom do not know the exact salaries of

each of the member on the outsourced team and are not involved in the process

of hiring the HR to be involved in the outsourced project(s) (see Fig. 17), the

future Western and Northern European outsourcers will tend to be more active

in the outsourced project management and monitoring of vendor’s staff turnover

(which is a very critical issue influencing success or failure of the outsourced

projects).

To conclude with, in the upcoming years more companies from Western and

Northern Europe will outsource their SD mainly for the purpose of getting access

to qualified IT resources and to speed up time to market. Future outsourcers will

be sourcing mostly nearshore and will demand from their ITO vendors the

following: strong track record as a credible and reliable IT services provider,

differentiation, outstanding technology expertise and projects portfolio,

transparent pricing structures, 24/7 support, involvement in HR hiring process

and team members’ compensation negotiation, strong ability to retain and grow

staff, the state-of-the-art quality and grasp of innovation and cultural proximity.

Low costs of SD as well as low IT salaries (compared to the domestic market) will

be the number one reason of the choice of the future outsourcing destination,

while references and reputation will be the major driver of the future choice of

the outsourcing partner. Western European and Scandinavian ITO services

buyers will be focused on establishing long-term relationships with their ITO

partners. It will no longer be enough for companies just to offload their SD to the

vendor and focus on core competencies; companies will tend to get as much

managerial control of their outsourced SD projects as possible and will need

more open and face-to-face communication with their vendor’s PM and

development teams.



32

Part IV: Conclusions and Recommendations

The All-European IT Outsourcing research 2010 shapes the highly unsettled

conditions in which most of today’s Western European and Scandinavian

outsourcers work. Companies basically use outsourcing to leverage operating

costs and increase in-house capacity by embracing on-demand strategies aimed

to achieve their global reach and fix market presence. Therefore, companies

prefer easily scalable, pay for use models to process-packaged, capital-intensive

and fixed-cost engagements. Outsourcing plays a vital role in margin protection

by providing an opportunity to quickly scale up and downsize SD budgets without

harming the end-product quality. In the past years, ITO services providers in

Central and Eastern Europe were hungry for new clients from Western and

Northern Europe and, thus, made aggressive actions towards winning the clients

and helping them optimize their IT costs, while upgrading and enhancing own

infrastructures in part at the client’s cost. Providers strived to make a fortune off

the immediate income and cared more about filling up their pipeline than

retaining the existing clients. As a result, most of providers became hardwired in

the traditional way of thinking and focused on short-term benefits, thus failing to

establish strong partnerships based on the concept of mutual trust, credibility

and permanent “bar raising”. This led to the failure of most of the outsourced

projects and rather high rates of customer dissatisfaction with services and

deliveries received. Modern companies no longer need process-packaged

relationships and excessive vendor’s bureaucracy. Instead, they need agility,

flexibility and speed, combined with access to vast IT resources and specific skills,

to solve their current challenges of the in-house development such as the lack of

domestic IT resources and man force, high costs of development and

maintenance, staff turnover etc. Today’s SD outsourcers need to create a core

capability of reinforced operating flexibility that will eventually contribute in

development of highly valued business partnerships rather than unavoidable

“overhead” that outsourcing is often associated with nowadays.

On the other hand, the research demonstrated well that SD outsourcing in 2010

is different from outsourcing of, say, ten years ago. It is no longer a risky

undertaking for the majority of companies, regardless of their size, annual

revenue and business goals; instead, it is a mainstream strategy that is being

proactively and widely adopted across the corporate universe all over Europe.

Today, a typical mid-sized organization in Western or Northern Europe transfers

10% to 59% of the corporate SD function to execution by the 3d party, while a

typical large company outsources 90% to 100% of their SD, meaning the entire

development lifecycle. It proves the assumption that companies do trust

outsourcing and gains one can get from it. When we asked our survey

participants to share their general impressions of the outsourced development,

the cumulative majority of companies (around 85%) ticked the option

“outsourcing our SD has been the right decision”. On the other hand, when we

asked participating companies to assess their current level of satisfaction with

the services, project delivery quality, prices and attitudes provided on a 5-point

scale (where 1 is least satisfied and 5 is most satisfied), the cumulative majority

issued their ITO partner(s) 3 points, meaning they are somewhat satisfied, but

not very much satisfied. These contrasting findings show the actual discrepancy

between clients’ business needs and the wrong engagement model through

which they partner with their providers. It is rather obvious that under the

current economic conditions many IT decision makers overestimate their own

role and/or believe that it is their duty to the organization to find an external

vendor and increase corporate savings. Relying on their own experience, which

may not be enough to make the right ITO decisions, they solely select the vendor

and location and then have to deal with increased PM costs, vendor’s

infrastructure improvement and hidden agenda, which prevent companies from

enjoying the maximum benefits from the outsourced development in a longer-

term perspective. If at least one tiny thing is missed in the process of planning

outsourcing strategies (e.g., cultural fit or time difference are not considered

from the beginning etc), then the whole project and ITO relationship are at a

great risk of going wrong. As a result, the ITO services buyers blame their

providers of inability to understand their business goals, using hard-to-manage



33

business models and/or not delivering on time, often ignoring the fact that they

are guilty too, as they couldn’t make the right outsourcing decisions and failed

developing a smart sourcing strategy. Client’s dissatisfaction with their ITO

providers can be partly explained by IT executives’ wrong understanding of why

they need outsourcing at all. This finding demonstrates a strong need of the new

thinking in outsourcing, from the partner selection to the project results’

measurement. It is high time to begin thinking about outsourcing as an

opportunity to add value to the corporate climate by implementing cultural

change, adding quickly mature capabilities, introducing new disciplines and

methodologies, developing differentiators and best practices and learning from

the errors of the past. When more companies begin to think of outsourcing in

this way, they will be able to partner based on personal relationship rather than

a structured process and, thus, enhance their SD processes and evolve further

out of the multicultural environments they create.

Below is a set of actions that IT Sourcing Europe would recommend to every

company thinking about the adoption and/or revision of its ITO engagements.

We believe that these few preparatory practices will help clients select vendors

able to bring innovation, optimize both costs and processes and fit culturally into

the organizational alignment.

1) Companies willing to outsource their SD should set clear vision!

Clarity of corporate vision, mission and goals is critical to success of any ITO

partnership. Prior to make any outsourcing decisions, companies should

understand their own priorities and drivers, rank their partner selection criteria

and, what is more importantly, open a dialogue with multiple stakeholders to

determine which areas/elements/processes should be outsourced and which –

retained within own house, how to integrate the outsourced and in-house

project outcomes at the production stage with as few mistakes and bugs as

possible, what SD methodology would best fit in this certain project and what

business model to use in the future ITO collaboration. When setting the vision, IT

managers on client’s side should not forget that outsourcing will inevitably bring

about organizational change that all-level stakeholders will have to cope with.

Actions should be planned proactively on how to facilitate different stakeholders’

adaptation to the change and how to manage it with minimum damage for

internal and external clients. When setting the vision, IT executives should not

forget that outsourcing is all about people rather than processes and technology.

Outsourcing obviously affects the daily operational activities of many employees

involved, so HR management strategy should also be planned in a strategic way

prior to entering any ITO relationship.

This research demonstrates that companies who bring in external assistance such

as consultancies at the outsourcing planning stage feel more comfortable with

their ITO relationships and more satisfied with the overall outcomes of their

outsourced development, compared to those that rely on their own experience

and expertise when planning an ITO strategy. So, we believe it is important for

any organization to hire a group of professional IT auditors to determine which

areas of the SD function should be outsourced and how. This investment,

although tried to be avoided by many today’s outsourcers, will provide the client

organization with a significant return in a longer run, because many extra tasks

such as bugs/errors fixing at the post-production stage, coverage of resources

spent on the project team member’s replacement etc will be eliminated or

minimized later as the project goes.

The use of professional external help can allow organizations to build internal

consensus on their business reasons for outsourcing, ensure that expectations

are set properly for both the vendor and the client and the stage is set for the

selection and negotiation process to follow.

2) Companies willing to outsource their SD must know own strengths and

weaknesses!

Firms must come to the negotiating table with an accurate assessment of IT

needs, current assets, talents and deficiencies. While external auditors can help

determine needs for outsourcing, only internal assessment can show actual weak



34

and strong points of every organization. For instance, many Western European

and Nordic companies wait for their vendors to perform due diligence, which is

one of the most crucial mistakes leading to high level of dissatisfaction with the

outsourced SD and failed projects. Due diligence performance may lead to

situations when the clients discover in the middle of the project that their vendor

has a much more disorganized infrastructure or unmanageable processes than

expected. Such discoveries usually create and enhance the tension within the ITO

relationship and set it on the wrong foot. Additionally, due diligence

performance may force vendors to use undocumented software and/or

processes, which will eventually make it hard to find all ends when the project

has been completed. In other words, due diligence performance withdraws

client’s locus of control and leads the project to become unmanageable and

unstructured.

It is a must for the client company to have realistic knowledge of the as-is state

of project and to enter a pragmatic outsourcing relationship, able to eliminate or

reduce delays in delivery and unforeseen expenses related to the wrong project

management on vendor’s side.

So, an internal audit of strengths and weaknesses is important to insure that the

most critical problem will not be thrown over the wall, while the less critical one

is paid too much attention to.

Later on, once determined, all of these weaknesses and strengths should be

reflected in the RFP/RFQ to be submitted to the potential vendor. Based on

them, the vendor should reflect in his response to the RFP/RFQ his ability to

meet the client’s expectations, not to dilute the ongoing vendor relationship with

ad hoc performance and contract expectations, to understand and plan risk

management and to be ready to support the entirety of the function that the

client chose to outsource. In other words, in their filled-in RFPs the potential

vendors should prove their ability to enhance client’s current strengths and turn

the weaknesses into new strengths. If the potential vendor fails to do so at the

pre-contract stage, the risk is high that he will fail to do so while the project is on

the go.

3) Intangible benefits should be a stronger driver of decisions to

outsource than mere cost reduction!

As the given research shows, although in 2010 most of Western European and

Nordic companies still choose to outsource to leverage operating costs and/or

cut down the SD budgets, a strong tendency is observed that in the years to

come more companies will focus on intangible benefits of outsourcing.

Outsourcing SD functions enables corporate IT decision makers to focus on

competitive differentiation and innovation rather than keeping the lights on for

routine SD functions. Contracting with an external IT services provider allows

companies to get access to better expertise and tools, more qualified

methodologies and disciplines and other features they would not get access to

otherwise.

In Western and Northern Europe it is a way too expensive for some type of

companies (startups, small, even mid-sized) to develop and implement own

robust applications or hire full-time IT specialists with specific skills (e.g.,

virtualization experts). Since outsourcing uses clear metrics and performance

incentives, it allows many companies, unable to develop own differentiated and

highly competitive products within own house, to surface the real cost of SD and

escape paying overheads associated with the in-house SD.

4) Companies willing to outsource their core development should search

for innovative business models!

By innovative business models IT Sourcing Europe means ITO engagements, able

to provide agility, scalability and 100% managerial control of the outsourced

project and development teams on the client’s side. By traditional business

models we mean engagements in which the vendor takes the client’s project and

executes it using in-house capabilities and available resources (e.g., DDC or staff



35

augmentation or project sourcing). The end results are then transferred back to

the client and the support/upgrade is retained within the vendor organization.

However, as the above findings suggest, today’s outsourcers should change their

way of thinking towards outsourcing and should tend to transform from mere

customers to sole project executors using external resources. That is where

innovative models are needed. Their major goal is to allow the client company to

retain as much control of the project to be outsourced as possible. This control

spreads from payment transactions to PM to staff retention and development.

One of such innovative models that IT Sourcing Europe recommends for

consideration during SD outsourcing decision making is the Own Development

Team model, in which IT employees fully belong to and are 100% managed by

the client. The key differentiator of this model from traditional remote team

model is that the client, not the vendor, makes the final decision on recruiting

development team members and has 100% managerial control of both the

outsourced project and each team member’s compensation. Such control is very

important, as it allows client s to retain their best employees and, thus, to keep

the project at a higher quality level from initiation to completion. This model is

perfect for the outsourced end-to-end software product development, as it is

transparent, agile, fully scalable and independent from the vendor’s technology

skill sets. It is equivalent to managing own in-house team, but for lower costs and

with no HR or administrative hassle, which is often associated with setting up

own SD operations in a lower-cost country.

Within this model, clients partner with vendors under the following conditions:

vendor agrees to act as a resource and office space provider rather than project

executor and client organization agrees to make a respective change in order to

allocate special roles to be in charge of the outsourced project management.

Thus, the vendor supplies candidates who best meet client’s requirements and

the client selects people that he wants to see in his outsourced development

team (depending on specification requirements) and negotiates a compensation

with each member on the outsourced team, without any interference from the

vendor. Every month the client receives a single bill comprised of the fixed

vendor’s service fee and each team member’s monthly salary plus benefits. The

client normally invests in the growth and development of his own outsourced

team as much as he wants and, what is more importantly, the client does not pay

any overheads and has a chance to retain his best IT people without relying on

vendor’s HR retention practices. In traditional models, clients have no control

over the vendor’s staff turnover and cannot influence hiring decisions. Vendors

try to literally squeeze as much from their staff as possible, that is why it is quite

a common practice in DDC when the same person is involved in two or more

different projects executed for different clients, faces a lot of occupation stress

and burnout and, as a result, either quits job and looks for a better employer, or

becomes demotivated, devastated and does not contribute all of his/her abilities,

skills and stamina to the project. In addition, it is usually the client company who

pays for new hires, role replacement etc. In Own Development Team model the

client selects people and can be sure that these people will work exclusively on

his project and it is up to him to motivate staff to work harder and more

productively (via material and non-material incentives, business trips, better

coaching etc). And if some team member still decides to leave the project, the

client will have to find a replacement and to make sure that this replacement is

the right fit and not just the “imposed necessity”.

IT Sourcing Europe’s continuous assessment of this model allows to conclude

that it is perfect for both large and small and mid-sized companies and for the

core end-to-end development. However, this model can only be successful as

long as it is employed within the nearshoring context. Since the model suggests

frequent face-to-face communication between the vendor and the client, it can

hardly be manageable within the offshoring context, when outsourced teams are

located 7 to 9 hours away from the home country. To ensure success within Own

Development Team model, it is a must to locate the development team within or

close to the same time zone.

The findings of the given study support the assumption that the Own

Development Team model is likely to become the most demanded one in the

years to come because of its agility, scalability and transparency. Today’s

outsourcers articulate their desire to have 100% managerial control of the

outsourced projects, more open communication with the vendor’s PM and

development teams and payment transparency. Cumulative 10% of all

companies surveyed (from all countries) (see Fig. 18) admitted the importance of

having the vendor’s development team located nearshore, which also supports



36

the statement that in the years to come Own Development Team model will be

the major engagement means in global outsourcing.

5) Companies must be able to manage their ITO relationship on a 24/7

basis!

Now when the company has signed the ITO contract with the most fitting ITO

vendor and has gained 100% managerial control of the outsourced project and

development team, it must adjust/revise its corporate management policies to

be able to properly manage the ongoing relationship. The ITO partner

management requires specialized skills, strategic understanding of business and

IT goals, strong negotiation and mediation capabilities.

Choosing to partner via an innovative business model means going beyond the

typical Service Level Agreement (SLA) scope and requires an entirely new set of

managerial skills. So, the client company should invest in hiring and developing

own outsourcing manager(s) with an extensive experience of successful

integration of the outsourced teams into the in-house IT team/department,

strong facilitation and conflict management skills etc. In general, a good ITO

manager is the one who is able to function equally well in four dimensions:

quality, finance, relationship and strategy. In terms of quality, the ITO manager

should monitor outsourced team’s compliance with contract and accuracy of

delivery. The specifically designed metrics should enable ITO clients to put their

expectations to the plate rather than just hope for such qualitative benefits as

process improvement or innovation and then turn those expectations into the

critical project success factors. In terms of finance, the ITO manager should make

sure that the actual incurred costs of outsourcing match the contracted ones and

the overall payment structures are transparent and not process-packaged. In

terms of relationship, the ITO manager should be able to plan the time and effort

needed to establish relationship of mutual trust and reliability and make

appropriate effort in reaching this goal. And in terms of strategy, the ITO

manager should be able to track how current ITO strategy matches the corporate

business goals and IT needs and make forecasts as to which direction the

outsourcing strategy will move in the next 6 to 12 months, 1 to 3 years etc. These

four dimensions both as a synergy and as separate units should aim to achieve

long-term benefits and help grow the company and differentiate the

product/service.

To conclude with, IT Sourcing Europe reminds that outsourcing is a people-

centric, rather than a process-centric business and cannot be treated as a simple

business transaction. The client company should clearly realize why it is going to

adopt the outsourced development and what benefits to expect from it. Without

clear vision and goals companies are nearly doomed to fail their ITO

engagements.

Although successful transition of the contracted responsibilities to the

outsourcing provider is essential, it is not sufficient, as the primary focus should

be placed on team morale improvement, combatting resistance to change and

achievement of multicultural evolution with strict adherence to the key

performance indicators and SLAs.

We believe that in the future the success of the ITO partnerships will be

measured not by the significance of savings achieved, but by the client’s ability to

outsource SD and insource knowledge, skills, innovation and the state-of-the-art

quality of development.



37

About IT Sourcing Europe

IT Sourcing Europe Ltd is a UK-based research and consultancy company

specializing in nearshore IT/software development Outsourcing. Our

services include:

• Independent IT Outsourcing market research and analysis

• Independent surveys of Western European outsourcers and

their ITO demand

• Independent surveys of Central and Eastern Europe's ITO

services providers and their factual capability to deliver top

quality products and services on time and on budget

• Consultancy and recommendations to companies planning

to change their current outsourcing strategies

• Consultancy and recommendations to companies planning

to outsource their IT function nearshore

• Custom market and competition research and surveys

Contact Details:

IT Sourcing Europe Ltd

The Meridian, 4 Copthall House,

Station Square, Coventry, West Midlands,

CV1 2FL United Kingdom

Email: [email protected]

Tel.: +44(0)2476992505

Web: www.itsourcing-europe.com

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