The COVID-19 pandemic has had a significant impact on software development outsourcing. A shift to remote working, growing demand for highly skilled IT professionals, and a tech talent shortage—all this creates an urgent need to change the “classic” outsourcing model to adapt to the new reality in 2022.
IT outsourcing in the pre-pandemic era
Before the COVID-19 pandemic, the most popular model was the outsourcing model, where software development teams were built with IT professionals provided by a body leasing company. They worked on site, on the client’s premises and were managed directly by the client. In fact, when it came to everyday work organization, outsourced IT specialists did not differ from the client’s regular employees. This can be called a “classic” outsourcing model.
It was so popular because companies wanted to access highly qualified IT specialists in a simple, flexible, and secure way without incurring additional costs or growing internal headcount. At the same time, they wanted to have greater business agility and ensure compliance with the labor law requirements in a given country. In the case of large multinational enterprises, it allowed them to maintain common standards across different branches of the organization.
Benefits of the “classic” IT outsourcing model
The “classic” approach to IT outsourcing offered a number of benefits.
#1 Recruitment process handled by a specialist outsourcing provider
Even a few years ago, many IT managers believed that it was extremely difficult to conduct an IT recruitment process whilst maintaining the highest standards. To do it right, you needed to have mature processes, a great and constantly upskilling recruiting team, industry-specific and up-to-date know-how, and last but not least the appropriate scale.
Additionally, in their opinion, companies were too slow to introduce improvements, and not agile enough in their adaptation to changing market situations. At the same time, companies did not have a big demand for new IT specialists and their brand was not recognized in the labor market. In consequence, they were unable to recruit the best candidates.
Given all this, it was much easier to outsource the recruitment process to a specialist outsourcing company than launch it by yourself. Outsourcing vendors knew how to access the talent pool of the most in-demand IT specialists and could help you build a team with the desired skill set.
#2 Additional hiring costs reduced
In a multinational company, hiring an IT specialist generates a long list of additional costs not related to the salary itself. Some costs can be hidden, but are still real.
Apart from being a member of a project team, such a new employee needs to be assigned to a functional structure, have their own manager, and take part in many HR processes (e.g., performance reviews, competence development, training, etc.). Usually, employees take part in different additional company-wide activities that are not directly related to the work they are doing. These can be company and status meetings, reporting, activities related to corporate social responsibility, etc. When you sum all of this up, the total working time and its costs do not equal the time spent on realizing project-specific tasks.
Also important is that an employment contract, which was the only acceptable form of employment, allowed employees to take paid vacation or medical leave. As a result, it was hard to foresee when the project would be completed, and what its results and real costs would be. Many IT managers perceived this as an issue that undermined their efforts to reach the KPIs they were accountable for.
Outsourcing allowed IT managers to avoid all these additional costs and pay for the actually delivered software functionalities and not for internal meetings, HR processes, etc.
#3 Avoiding problems with unsuccessful recruitment
What if an IT specialist recruitment process went wrong?
There are plenty of reasons why a newly hired candidate may not have met the requirements of the position: weak hard or soft skills, too low a level of motivation, or not being a good fit from the point of view of the organization culture or the project team.
The outplacement process, i.e., helping a terminated employee with the transition to a new job, was equally costly and requires the participation of many people and departments in the company.
Outsourcing, on the other hand, allowed you to avoid these potential problems, as the entire responsibility of providing a candidate that matched your criteria was put on the shoulders of an outsourcing company.
#4 Offering more competitive salary to the candidates
To motivate employees and ensure they were satisfied and would not leave the company, many companies offered additional non-salary benefits, e.g., medical care, launch cards, sports cards, etc. Of course, for many employees these benefits brought value. But the practical experience of many managers, as well various surveys conducted, showed that for employees, their salaries were the most important factor. Usually, when they were willing to change job, a higher salary was their main motivation. Still, the company was paying for perks and benefits, which additionally increased the total cost of hiring an IT specialist.
Most frequently, companies did not offer the same benefits to regular employees and contractors provided by an outsourcing company. It was true that in this way, contractors may not have felt integrated with the company. But if you stopped paying for extra benefits, the salary of a new IT specialist would have made the substantial part of the total cost of hiring. In other words, when managers would calculate the total cost of a new hire, they would not need to add additional benefit-related spending, which may sometimes have been difficult to estimate.
It is important to underline that for companies, where a payment scheme is associated with experience and seniority level and not with competences, it may be more difficult to offer a competitive salary to highly skilled engineers that are the most in-demand in the market. In such companies, an HR specialist at the same seniority level may have a similar salary to a database architect, which obviously does not reflect the market situation.
Outsourcing, on the other hand, is a type of service and its pricing is more in line with the real market situation. Therefore, you could offer a salary that was closer to candidates’ expectations and be more competitive.
#5 Building a development team faster
It is hard to stay flexible when it comes to hiring developers for IT projects. You need to plan and prepare budgeting well in advance. And the entire process is costly and has the serious drawbacks mentioned above.
Most importantly, such a traditional approach did not allow you to face challenges that changing business reality brings. Companies need to develop new competences and products to stay ahead of a curve. In many industries, it often happens that you need to build a complete team from scratch and start a new business-critical project in two to three weeks.
Thanks to outsourcing, you can react to growing demand more efficiently and hire IT specialists with the skill set needed much faster.
#6 Easier management of outsourcing development teams
Before the pandemic, many companies treated IT specialists hired from an outsourcing vendor on practically the same terms as their regular employees, except for HR matters and non-salary benefits. Developers provided by an outsourcing vendor worked in the same location and in the same room (as a part of a project team), used the same hardware, project tools, and software, and had a similar type of access to company’s IT systems (in project-related matters) and to the company’s premises as regular employees of the client. The project tasks assigned to them depended on their skills, experience, and the role assigned to them in the project. So outsourced and regular employees worked practically as one team and were managed by one manager.
Such an approach had one crucial benefit: it made management much easier. Thanks to the outsourcing, managers could be more flexible from a business point of view. At the level of a project, they could use one integrated and homogeneous team, very often working in one location, and manage it on site in the traditional way.
The impact of the pandemic on the outsourcing model—a shift to remote work
The most immediate effect of the pandemic was a shift to remote working. Later, companies started returning to offices, but most frequently in a hybrid model. This had a significant impact on team management.
For IT specialists, working remotely was not a big deal. The character of their work simplified the entire process. They simply had to use communication tools more frequently.
For IT managers, or at least for some part of them, it was a completely new challenge. We can say that most of them faced it well when it comes to tools, methodologies, the settlement procedures for the work done by development teams, project planning, and quality checks. But many of them noted lots of problems related to soft skills such as building and maintaining team motivation and especially developing new competences.
They also realized that it was very difficult to introduce junior developers to the team, develop their skills, and evaluate results. For this reason, in mid 2020, the demand for junior developers decreased considerably as companies were not willing to hire them.
Before the pandemic, a junior dev usually worked in the same office with the rest of the team and was doing similar tasks in the project as their colleagues. For juniors, this was a great way to upskill and gain new experiences, as they could count on the knowledge and experience of senior colleagues or simply talk to them in formal and informal ways. Of course, to some extent these contacts were moved to communication platforms (Slack, Teams, Mattermost), but these cannot entirely replace face-to-face interactions.
The impact of the pandemic on the outsourcing model—acceleration of the digital transformation
Secondly, the pandemic has sped up the process of digital transformation considerably. In some industries, executives realized that many of their processes were still being performed manually with the minimal use of technology. It became very clear when companies were shifting to remote work. Some of them needed just one day to adapt to the new reality. For others, however, it took as long as three months to provide hardware and software, ensure security, implement operational procedures, and deal with the politics necessary to start working remotely.
Another important factor was that a surge in the use of digital technologies meant that some organizations, even though their business-critical areas were fully digitalized, experienced performance issues. They realized that their procedures and legacy solutions were outdated, as well as hard to maintain and develop, due to technological debt. It was due to the fact in the pre-pandemic times, these processes were done digitally only on a small scale and in a limited number of scenarios. Most of day-to-day tasks were still being performed manually.
The companies that were participating in larger supply chains needed to adapt to the new reality and requirements of their business partners. To achieve this, they had to use digitalization solutions at much bigger scale than they did before the pandemic. Additionally, they realized that also in the case of their internal operations, digitalization technologies (e.g., process automation) could offer them considerable benefits.
When office and back-office workers started working remotely, many organizations realized that many of their processes (mostly operational, like HR, administration, or legal) were based on paper documentation. They needed to digitalize them quickly, which increased the demand for digitalization solutions, even in the form of simple or moderately complex applications built with low-code platforms.
All this leads to an increased demand for IT specialists that could develop standard, dedicated, or software as a service (SaaS) solutions.
The “classic” outsourcing model needs to change
To sum up, we can say that IT managers have to face a new reality.
First, IT specialists do not work in one office anymore. Teams work remotely or in a hybrid mode, which makes them more difficult to manage.
Secondly, most appreciated and in-demand in the market are senior specialists with higher competencies and more experience. At the same time the demand for tech talent increased, as many companies started business-critical projects. As a result, it is even more difficult to hire top talents with skill set desired.
So, many companies are now facing the challenge of how to effectively build software development teams with competent engineers that will be able to work remotely on their business-critical projects. These challenges cannot be tackled in a “classic” outsourcing model by body leasing companies, as they do not have enough knowledge or resources to build an effective remote software development team.
How to choose a good outsourcing provider in 2022
In tough market conditions where there is a tech talent shortage and a high demand for highly skilled IT professionals, the “classic” outsourcing model is not enough. You need a reliable outsourcing partner that will be able to offer more value than simple body leasing.
But how can you find one?
Following the best practices below should help you make an informed decision.
In the selection process, consider if an outsourcing company can meet the following criteria:
- build a complete software development team from scratch filling all project roles (frontend, backend, full-stack developers, UX/UI designers, DevOps engineers, project manager, solution architect, Scrum master, business analyst, etc.)
- build a development team also considering soft skills
- choose the right team composition based on the seniority level (junior, regular, senior)
- scale the team up or down depending on current project needs
- cover the technology stack you need in your project
- offer different types of services depending on your business scenario: staff augmentation, dedicated teams, or a hybrid model
- secure all your risks related to team onboarding, work organization, performance, absence management, etc.
- take full responsibility for team performance
- can effectively build a team and start delivering in less than three months
Also bear in mind that in the pandemic reality, you can no longer expect that all members of your team will be working on site. It may also be difficult to find people with the required skills in your own country. In this context, nearshoring, i.e., hiring software developers from a neighboring country, or offshoring, i.e., looking for software development teams in overseas countries, can be an interesting alternative to explore.
Once you decide on the outsourcing partner you will be working with, we highly recommend organizing your outsourcing relationship according to clear rules defined in a framework agreement for IT outsourcing services. Such a framework agreement should cover key processes (e.g., team onboarding, work acceptance and settlement, staff replacement, etc.) and legal matters (e.g., security and compliance, confidentiality, copyright, non-solicitation).
A framework agreement will allow you to start your projects faster, as all processes and legal procedures have already been defined and will be automatically applied to every new project. It also allows for greater business agility, e.g., when it comes to team size and composition.
Last but not least, you need to choose a contractual model, either time and materials (T&M) or quoted time and materials (QT&M), that will serve as the basis for the payments for the work done.
IT outsourcing trends in 2022—main takeaways
The pandemic is changing the way outsourcing services are provided. Body leasing is falling out of the game. Only those outsourcing providers that know how to build a remote software development team with the skill set required will stay in the game in 2022.