The History of IT Outsourcing and the Need for a Hybrid Offshore-Onshore Model

Why are many U.S. businesses still hesitant to act on the opportunities afforded by offshore and nearshore software development?

In this post we’ll explore the history of IT outsourcing and how a hybrid offshore-onshore arrangement can provide the ideal solution to any business still on the fence about taking their IT or software development project to a foreign country.

At 375 billion USD in 2017, the global market of IT outsourcing is constantly on the rise. Popular destinations, such as South-East Asia or Eastern Europe, ring up record-setting profits. Although a large percentage of businesses (around 56%) have outsourced IT and software development projects at some level, nearly half have yet to follow suit. What are the hurdles that prevent more U.S. companies from achieving an improved bottom line by making this move? And how can these hurdles be removed, so more businesses can gain reliable and relatively risk-free access to the IT resources they are so often strapped for?

In search of answers, we’ve turned to the several-decade-long history of IT outsourcing. When approached knowledgeably, it can provide both the answers to all these questions and some actionable insights that Western businesses, looking to outsource, can gainfully use.

How IT Outsourcing Came into Being and What We Can Learn from Its History

What is known today as the global business phenomenon of IT outsourcing, dates back to the 1960s-1970s. It is during this time that the first U.S. businesses started being computerized. In response to a growing need for computer automation among U.S. businesses, major U.S. information technology companies began to offer the service of IT staffing, i.e. providing qualified IT personnel to fulfill their IT needs. This was the inception of what is presently referred to as the service of IT staff augmentation. For about two decades, domestic IT staffing remained the primary business model used to fulfill the IT needs of businesses in the U.S. However, as the U.S. economy grew, the staffing capacity of U.S.-based IT companies began to fall short.

In the 1980s, the Indian Government and Indian information technology firms began to regard the lack of IT resources on the U.S. market as their golden and strategic opportunity to boost the nation’s economy. With English as their primary language, Indian IT companies set out to fill this business niche that held a colossal revenue-generating potential. The Indian government also saw this opportunity and created an extremely favorable business climate for their IT sector, which included a tax moratorium. This packed a tremendous punch for growth and became the beginning of the rapid rise of what is now the world’s largest IT outsourcing industry.

In 1991, Microsoft was sued by their external IT staffing consultants, on the premise that they were essentially the company’s employees, and, consequently, should be entitled to the company’s full employee benefits, including a discounted stock purchase plan. Microsoft lost this case, which created a “co-employment” regulation that affected all companies. This triggered widespread fear that something similar could happen to other U.S. businesses that used domestic IT staffing. As a result, U.S. companies capped the length of assignments for external IT staffing consultants to just 12 to 18 months.

To make matters worse, in the face of a rapidly increasing shortage of IT talent in the U.S., U.S. authorities limited the number of H-1B work visas issued to overseas IT workers to just 65,000 total. This left U.S. companies with only one real option to automate their business and stay competitive: take their IT needs to India.

In an attempt to stay price-competitive, U.S.-based IT staffing firms began setting up “nearshore” development centers in small localities of less expensive states like Iowa and Georgia. But competition from Indian IT vendors grew even fiercer as many of these firms began to establish an onshore business presence in the U.S. This move was meant to improve the perception of the level of service offered, as well as lessen fears many U.S. businesses had about sending an IT project to a far-off country.

This expansion of India’s IT outsourcing providers to onshore locations gave rise to the first version of the “hybrid” or “onshore-offshore” engagement model. This trend supports the idea that (especially for major software development projects) some IT services are best rendered onshore or even onsite.

The Present Day of IT Outsourcing and the Pressing Need for a More Sophisticated and Reliable Engagement Model

Although there have been some major changes on the international IT and software development outsourcing scene since the late 1990s and early 2000s, these changes were primarily associated with the advent of new, and presently very popular, destinations like Eastern Europe, Latin America, and South-East Asia. Additionally, the Indian IT industry, which pioneered the offshore IT space, has grown to enormous proportions (to illustrate, the Indian IT & ITeS industry’s exports are estimated to have reached a colossal 137 billion USD in 2018-2019).

Not much has changed in the U.S. IT staffing and outsourcing market in the last two decades. To date, U.S.-based IT staffing companies have continued to show fairly slow growth. The U.S. legislature remains extremely stringent, and despite the growing U.S. economy and accelerated demand for IT talent, the number of work visas issued to foreign IT workers remains limited to levels set back in the 1980s.

Furthermore, when it comes to outsourcing an IT job overseas, many U.S. businesses are faced with regulations that make the process extremely cumbersome and time-consuming. Plus, the concept of sending U.S. jobs outside of the country has historically been unpopular. In today’s reality, it may be easier for a U.S. company to pay a U.S. IT contractor a comparatively much higher salary than hire an IT worker with roughly the same qualifications at fraction of their wage in a foreign country. And yes, in this context, outsourcing to a foreign-based IT service provider would be comparable to hiring foreign IT workers directly.

On top of these complications, horror stories about a vast number of offshore IT projects turning belly up over the last couple of decades still causes many companies to fear this type of business arrangement.

What kind of impact does all this have on U.S. businesses with IT and software development needs?

Basically, U.S. businesses are affected in two ways: they have lower (in some cases, much lower) profitability due to higher labor costs, and have immature and ineffectual IT processes. In the latter case, the absence of external competition and the involvement of external experts makes it much easier for the IT departments of non-IT companies to keep their inefficiencies under wraps. Oftentimes, management at these companies has no inkling of how antiquated their IT infrastructure, technologies, and software apps really are.

So, what’s the solution?

One of the most promising options is to find a seasoned offshore or nearshore IT service provider with a considerable onshore business presence.

However, here several questions arise: what should the engagement for this kind of a client-provider relationship look like? When should this model be employed? And finally, how can this hybrid arrangement maximize service delivery, help achieve greater reliability, and optimize project outcomes and costs?

The Hybrid Onshore-Offshore IT Outsourcing Model: Its Main Variations and Advantages

First off, the hybrid delivery arrangement is no novelty. As a variation of the widely used dedicated team (or DDC) engagement model, it has been around and successfully utilized by a relatively small number of IT companies and their clients for quite a long time.

How does this model work?

Under the hybrid delivery arrangement, an IT service provider renders all the services that relate to identifying the client’s business needs and designing the solutions to fulfill those needs on the client’s side, i.e. onshore. This means that the service provider posts one or a few of their employees to the client’s site. As an alternative, they may also handle this part of the development effort from an onshore location where they have a sufficient business presence.

Conversely, the software development process and QA and testing are performed offshore or nearshore, allowing the client to benefit from reduced talent costs and increased development speed.

As a general rule, the services the IT provider renders locally include IT consulting and business analysis. In terms of business analysis, hybrid service delivery generally includes the following services:

  • The work of business analysts (BAs), who describe the client’s business needs and overall business situation.
  • The work of IT business analysts, who develop solutions to automate the client’s business needs.
  • The work of system analysts/architects, who create the technical requirements for the system to be built.
  • The work of middleware analysts (in some cases).

Additionally, as business analysis is increasingly impacted by data science, the on-site presence of business intelligence analysts may also be required. It is also imperative that the role of the product owner stay on the client’s side throughout the project.

Alternatively, the client can post a representative of their own to the IT service provider’s site for the duration of the project or an extended period. This role calls for someone who has a technical and training background. This variation of the hybrid delivery arrangement is best suited to those arrangements in which the IT service provider can post only a very limited number of their personnel on the client’s site, if any.

In addition to allowing you to closely emulate domestic-based IT service delivery and combine it with the multiple benefits of offshore or nearshore outsourcing (such as shorter recruitment cycles and dramatically reduced development costs), the hybrid IT outsourcing model creates a several meaningful, and sometimes mission-critical, advantages of its own.

What are those advantages?

The Advantages of the Hybrid Onshore-Offshore IT Outsourcing Model

There are several major upsides of the hybrid delivery arrangement, each one of which can be pivotal to the success of your outsourced IT project:
  • Improved cultural alignment: Both country- and business-specific cultural differences are bridged more quickly and effectively when resources from the IT service provider work onsite at the client’s location (or vice-versa). Better cultural alignment leads to more effective communications, which, in turn, results in greater levels of innovation and project success.
  • Reduced red-tape: The hybrid model relieves some of the red tape your U.S. business is bound to be faced with while outsourcing IT work abroad since part of the work is performed onshore in the U.S.
  • More accurate requirements gathering: You give your IT service provider ample opportunity to learn as much as possible about your business and its needs, ensuring your future system will be architected properly and accommodate possible future changes in your business situation.

    Notably, according to Statista, in 2015, 48% of software developers surveyed globally stated poorly or insufficiently documented project requirements as the primary reason for IT project failures.

  • Accelerated trust-building: Utilizing the hybrid delivery arrangement creates trust between parties faster than with traditional models. It helps eliminate obstacles that can cause delays and create a warm and productive working atmosphere.
  • Increased control: As a client, you have a lot more control over your project’s nearshore or offshore implementation.

    Regardless of whether you have your representative posted on your IT provider’s premises or have part of their team working in your office, you can keep close tabs on all the project-related developments in real time. You virtually have the same level of control as you would over a domestic IT service provider.

  • Faster time-to-market: You can count on much faster turnaround times, especially when you have a representative of your company posted at your IT service provider’s location. In the long run, this can result in a significantly shorter time-to-market for your project.
  • Smoother communications: The interactions between your in-house team and that of your IT service provider are facilitated greatly. Your on-site representative can always resolve part of the issues that will arise on their own, while also being able to quickly point your dedicated development team in the right direction whenever something needs to be escalated to a higher level within your organization.
  • Enhanced innovation and creativity: Most importantly, you will be able to fully utilize the creative and innovative potential of your external development team.

    While working on client projects, well-qualified nearshore and offshore development teams create numerous valuable technical innovations. These innovations are difficult to explain and propose to their clients’ technical or business stakeholders within the communication formats used by most other known types of IT outsourcing arrangements. Consequently, a great deal of value and potential innovation is simply lost.

    In this sense, the hybrid delivery arrangement can become a true and active source of continuous innovation for your IT project. You should also bear in mind that software development companies with well-established industry practices have, typically, implemented multiple projects for clients in a range of business domains in the past. As a result, they tend to know a great deal about the various industry specifics and project-related hazards that may occur. In this regard, the improved level of communication of this arrangement allows you to use the provider’s industry-specific expertise more fully and avoid many typical complications.

When Should You Employ the Hybrid Onshore-Offshore IT Outsourcing Model?

“Any time you have a project, involving more than 50 dedicated developers, it’s a must” – says Matt Moore, the Chairman of the Board at TEAM International. Matt, whose career in both international IT and software development outsourcing and domestic IT Staffing in the U.S. spans several decades and dates back to the early beginnings of these industries, says he hasn’t found any other model to be as productive and perform as brilliantly when it comes to larger-scale software development endeavors. “Especially when you have a representative of the client working on your premises alongside the development team. This allows for tighter cultural alignment and improved communications, which are key to fostering innovation and ensuring we add maximum value to the project” – says Matt.

One of TEAM International’s major Western-European Telco clients has greatly benefited from the hybrid delivery arrangement. In this case, a representative of the client has been posted to one of TEAM’s Ukrainian development centers on an ongoing basis. As a result of this close alignment, the relationship, scope, and size of the dedicated development team have grown tremendously over the last 9 years, turning into a truly strategic partnership. With the help of TEAM, this Telco leader has been able to innovate, stay ahead of their competitors, and surpass many of their business goals.

In Matt’s opinion, having one onshore employee for every 10 offshore/nearshore employees makes a perfect combination for any sizable outsourced software development project, rendering the development process immeasurably more productive. A much smaller proportion of onshore employees, if any, is required if the client’s representative is posted to the IT provider’s location.

“It is also crucial that the IT provider have enough project management and full-cycle software development experience and experience with the hybrid model to be able to estimate the required number of onshore employees more precisely” – says Matt Moore.

Recently, the hybrid onshore-offshore IT outsourcing model has become part of TEAM International’s regular service offering.

The Bottom Line

Despite its time-tested efficiency and its major potential, the hybrid IT outsourcing arrangement is seldom offered or, even, mentioned by the majority of nearshore and offshore providers.

In large part, this is because these service providers are either unable or reluctant to create this kind of an advanced outsourcing arrangement. Some of these companies don’t have any onshore business presence of their own, while most others are just U.S.-headquartered on paper, or maintain a small sales office in the U.S. (or, in some other client geography). Still others, although having a larger onshore business presence, lack local business knowledge, do not have the bandwidth to launch an efficient hiring process in their client’s location, or just don’t have the required IT consulting and BA expertise.

Similarly, it can be difficult to find offshore or nearshore software development vendors that are comfortable with the idea of having their clients’ representatives permanently posted on their premises, given the increased level of transparency this requires.

For these same reasons, the hybrid delivery arrangement has not been widely used, and is seldom formally included in offshore or nearshore providers’ service offerings.

Nevertheless, anyone looking to combine the benefits of nearshore or offshore with the reliability, improved cultural alignment and communications, and tight project control afforded by domestic-based IT service delivery, should seriously consider the hybrid model as a unique means of ensuring this much-sought-after yet hard-to-come-by combination.

Founded in Lake Mary, Florida in 1991, TEAM International has over 28 years of experience providing the highest quality IT and software development services to companies around the globe. Our flexible engagement models allow you to reap all the efficiency-driving and cost-saving benefits of nearshore/offshore IT outsourcing while providing a solid onshore and even onsite presence that ensures an exceptional level of communication, innovation, and quality. Contact us today to find the right solution for your IT and software development needs!

TEAM International

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