danish it outsourcing intelligence report 2011

IT Sourcing Europe

European IT Outsourcing Market

Intelligence

July 2011

European IT Outsourcing

Intelligence Report 2011:

Denmark

European IT Outsourcing Intelligence Report 2011: The UK

2 | C o p y r i g h t I T S o u r c i n g E u r o p e L i m i t e d 2 0 1 1 | A l l R i g h t s R e s e r v e d

European IT Outsourcing Intelligence Report 2011: Denmark

Contents

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

Survey Overview ............................................................................................... 3

Profile of Outsourcers....................................................................................... 5

IT Outsourcing Drivers and Factors ................................................................ 10

IT Outsourcing Challenges .............................................................................. 12

Client – Vendor Relationships ........................................................................ 13

IT Outsourcing Costs ....................................................................................... 16

Impressions of IT Outsourcing ........................................................................ 17

Future Adoption of IT / Software Development Outsourcing

by Current Outsourcers……………………………………………………………………………….18

Challenges of the In-House IT / Software Development ................................ 19

Factors Keeping In-House Development Companies Away

From Outsourcing……………………………………………………………………………………….20

Future Adoption of Outsourcing by In-House Development Companies……..21

Key Findings’ Discussion ................................................................................. 23

Conclusions ..................................................................................................... 27




Executive Summary

This Intelligence Report is based on the survey of the 674 Danish companies that either outsource their Software Development / Information Technology

function(s) to an external service provider onshore (within Denmark), nearshore (within/close to the same time zone) and/or offshore (more than 2 time zones

away), or develop their software/IT solutions in-house.

The Report aims to help Danish outsourcing companies:

Get an in-depth understanding of the current IT Outsourcing demands and trends

See what challenges are facing their market peers / competitors and how they respond to them

Revise / improve their current IT Outsourcing engagements / business models based on the industry best practices

The Report aims to help Danish non-outsourcing companies:

Better understand modern software development/IT costs optimization and/or reduction strategies

See what challenges are facing the in-house software development and how their market peers / competitors respond to them

Evaluate own readiness to adopt the outsourced / distributed development

Find out what their market peers think about software development /IT Outsourcing and how they are / will be preparing for adoption of the outsourced

development in the future

Survey Overview

The Danish IT Outsourcing (ITO) and In-House Software Development (SD) survey was conducted between May 17 and June 30, 2011, in the frames of the All-

European ITO research.

Survey goals:

Explore factors that drive Danish companies to outsource their SD/IT functions in 2011

Explore challenges associated with offshore/nearshore outsourcing and the most effective problem solving techniques

Explore the use of different business models in ITO engagements and find out which model works best for what type of companies and industries

Explore factors that keep Danish companies away from outsourcing their SD/IT function(s)

Compare and contrast the 2011 and future ITO demands across diverse Danish industries




The survey was available online and hosted by SurveyMonkey, the world’s leading provider of web-based survey solutions. In order to reach as many Denmark-

based companies as possible, IT Sourcing Europe used its own database of business contacts and sent out a survey invitation email to each company’s decision

maker(s) (C-level executives, IT / Outsourcing Managers, Directors, Heads of Software Development etc).

Additionally, inbound marketing initiatives were launched in order to attract more companies to participate in the survey. In the frames of this initiative, the

following steps were taken:

Online press releases and survey announcements distribution;

Survey localization and optimization in social media such as LinkedIn, Facebook, blogs ( Twitter, Word Press, IT Sourcing Europe’s Blog), event

management systems (Amiando), and B2B web portals (Europages, Hoovers)

All data obtained were analyzed in the form of industry aggregates. The answers to the open-ended questions were organized by their relativity to the study goals

and displayed as the option “all other responses” in charts and graphs further in the Report.

Outsourcing Activity & Categories Surveyed:

The following ‘outsourcing activity’ is referred to in the 2011 Danish ITO Intelligence Report:

Software Development / Information Technology Outsourcing (SD/ITO) is the process of transferring part of/entire software development function and/or

other Internet related work to the execution by the external IT services provider(s)

The following categories fall under this activity:

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

Application (app) development and maintenance;

Website / ecommerce systems;

Data warehousing;

IT security;

Data / voice network operations;

Remote IT infrastructure management

Web (Web 2.0, .NET, Java, PHP, 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

http://www.surveymonkey.net




Factors’ Rating In Terms of Their Importance In the Choice of the

Outsourcing Destination

Factors’ Rating In Terms of Their Importance In the Choice of the

Outsourcing Partner




Business Model Used In the ITO Engagements

Who Hires IT Talent To Be Involved In the Outsourced Project

Execution?




IT Outsourcing Costs

How Actual Incurred ITO Costs Compare To the Contracted Ones

Actual Savings From ITO




Impressions of IT Outsourcing




Factors Keeping In-House Development Companies Away From Outsourcing




Key Findings’ Discussion

Danish IT Outsourcing and In-House Software Development Survey 2011

has been conducted for the second year running and allows tracing ways

the Danish ITO market has changed over a one year period.

In 2011, more questions were added to the survey and some questions

asked in the 2010 survey were modified for the purpose of getting a more

objective outlook of the ITO trends and behaviors. Because of this, only

those indicators were compared and contrasted that had remained

unchanged from the 2010 research.

As the survey shows, in 2011, more Danish companies indicate having 37

and more months of overall IT/SD outsourcing experience (up 2% from

2010) and more companies indicate having started their ITO engagements

less than 12 months ago (up 6% from 2010).

The ratio of small, mid-sized and large outsourcing companies has not

changed much from 2010: of all outsourcers surveyed, 56.5% are small (less

than 50 employees), which is up 6.5% from 2010; 23.5% are mid-sized

(more than 50 and less than 600 employees), which is up 0.5% from 2010;

and 20% of companies are large (600 and more employees), which is down

5% from 2010.

In 2011, the greatest demand for the outsourcing services comes from IT

(software development) sector, followed by government and professional

services sectors. Telecommunication companies demonstrate the smallest

demand for the external IT resources. Overall, ITO services are used to a

certain extend across all of the major Danish industries.

The majority of Danish outsourcers have only 1 to 2 persons in project

teams on ITO vendor’s side (up 19% from 2010) and value their outsourced

projects at €0-49K (up 15.5% from 2010). The number of companies with

projects valued at €500K and more has dropped by 3% in 2011.

Web remains the most demanded area of expertise and is outsourced by

more than 70% of Danish companies (up 36% from 2010). Mobile

development follows being outsourced by 40.5% of companies (up 24.5%

from 2010). Although SaaS and Cloud solutions remain the least outsourced

ones, the demand for cloudsourcing is growing at a steady pace:

enterprises that cloudsource their solutions in 2011 outnumber those that

cloudsourced in 2010 by 5%. This finding is demonstrative of the general

trends that are currently observed on the global ITO and shared services

markets: companies are more eager to outsource solutions that require

very fast time-to-market and immediate responding to rapidly changing

customer needs and are less eager to outsource more complex IT processes

that are highly dependent on the internal IT infrastructure and strategy.

Regarding the cloudsourcing, many companies are very much concerned

about the data privacy issues and therefore bide their time to see other

companies’ “pioneer” experiences with this type of outsourcing.

The survey further finds that this year the number of multisourcing

companies dropped by 8.5%, compared to 2010, and the prevailing

majority of Danish companies still choose to outsource their solutions to a

single provider.

In 2011, the top three ITO destinations remain the same as in 2010: most of

companies still prefer to transfer / continue with their IT/development

nearshore (up 3% from 2010), a smaller segment outsources offshore (up

9% from 2010) and another smaller segment - onshore (up 1.5% from

2010). Asked to hypothetically think over the locales they would transfer

their IT/development if they make such a decision in the future, the

majority of Danish non-outsourcers indicated a very high likelihood to




outsource within Denmark (up 23.5% from 2010) and nearshore (up 23.5%

from 2010), while less than 15% would go offshore (up 3.5% from 2010).

As the survey shows, the top three drivers of ITO decisions have slightly

changed in 2011, compared to 2010: today’s companies still outsource to

reduce operating costs and access IT skills and resources that are hard to

find / costly within Denmark, but they are also driven by necessity to focus

on core competences and business development, while in 2010 they were

urged to accelerate time-to-market. If to compare these ITO drivers with

the challenges facing today’s in-house software development companies, it

is possible to see a clear interdependency: non-outsourcing companies

suffer most from the scarce local IT resource pool, high cost of domestic IT

resources and product development, and slow time to market.

According to the 2010 survey findings, the highest rated factors influencing

companies’ choice of the ITO destination were low costs, available IT talent

pool, positive peer references and cultural proximity. This year, a “low cost”

factor has moved down and been replaced by “appropriate foreign

language (English) skills”.

As per the 2010 survey findings, the most influential factors in companies’

choice of the ITO partner were: low service rates, positive peer references

and specific skills that are hard to find / too expensive within Denmark. In

2011, Danish outsourcers value innovative and flexible service

delivery/business models (so-called “Outsourcing 2.0”) and sound

experience in similar projects as the most decisive factors, while low service

rates are considered even less important than flexible contract terms,

successful pilot project completion and peer references. This finding

demonstrates a significant shift in the way today’s companies in Denmark

perceive IT/SD outsourcing. In 2011, companies are more concerned about

the effectiveness of communication with their ITO partners and project

teams and, therefore, it is important for them to ‘be on the same page”

with each and every specialist involved in the project execution. The

majority of outsourcing enterprises begin to realize that the better the

mutual understanding between the in-house and vendor’s management

and IT teams, the better the quality and timeliness of delivery. Some of

today’s Danish outsourcers agree to pay for the outsourcing services at

higher rates as long as they have all of their critical milestones met and do

not have to pay extra to fix bugs and errors emerging at the post-release

stage.

As the survey shows, challenges facing Danish outsourcers in 2011 are

totally different from those in 2010. This year, companies “suffer” from the

shortage of sufficient resources on vendor’s side, change management and

vendor’s inability/reluctance to understand their business concept, goals

etc. In 2010, the major ITO issues were related to the delayed delivery,

poor communication with vendor’s project management and a cultural

difference. This finding is basically linked to the previous one: once

companies begin to adopt outsourcing as a strategic step forward towards

more efficient business growth rather than a tactic to reduce costs in a

short-term perspective, they face difficulties introducing and managing the

change related to operations’ transfer within their corporate networks.

Outsourcing does require some adjustments and modifications of the

internal processes as well as “buy-in” from all of the company’s

stakeholders.

Two other ITO issues most likely relate to the choice of the wrong ITO

partner. According to the survey, the most popular steps companies make

to find ITO service providers are doing own online research and asking peer

companies/partners for references. Another interesting finding is that

almost 25% of Danish outsourcers engage with those service providers who

reach out to them via sales/telemarketing/direct email campaigns. Public

RFP/RFQ release/project bidding and cooperation with outsourcing

consultants are used equally by 15% of Danish outsourcers each. Also,




almost 2% of survey respondents admitted finding their ITO partners

through the Danida Initiative’s Technical Advisory Services. Asking fellows

for vendor references as well as doing online research may not be enough

for choosing the vendor with the best capability to match own software/IT

project requirements. What is good for one company may in fact be

insufficient or even destructive for another. The fact that the prevailing

majority of Danish outsourcers partner with small ITO vendors (being small

themselves) explains again why companies are challenged with the lack of

resources to be supplied by ITO vendors as well as vendors’

misunderstanding of their clients’ business concepts. The problem with

small vendors is that they usually do not have a strong competitive

advantage in the local IT headhunting and are unable to hire specialists who

are qualified enough to complete challenging tasks (just because these

specialists cost above the average local workforce market rates). Plus, such

specialists prefer to work for companies with a well-established track

record and well-developed infrastructure, which is not the case of most of

small ITO service providers. To fill in their internal resourcefulness gaps,

many small and mid-sized providers choose to re-outsource their client’s

projects to lower-cost locales with vaster and cheaper talent pools. These

practices result in unclear and messy relationships and hidden costs that

unsuspecting clients are charged with.

As the survey further shows, the most popular steps that Danish

outsourcers make to overcome some of their most critical challenges in

2011 are dedication of more management resources, increase of face-to-

face communication with vendor’s project managers and/or execution

teams and project deadlines’ extension. Today, more Danish companies

consider changing their current ITO vendor(s) (up 6% from 2010) and back-

sourcing (up 5% from 2010).

The 2011 research shows that Danish companies use diverse

business/service delivery models to engage with their ITO partners.

However, a project-based model is the most popular one and used by over

45% of outsourcers. Dedicated/managed and Own Software Team models

are used by 35% of companies, while once famous Dedicated Development

Center (DDC) model is currently used by less than 15% of all outsourcers

surveyed. This finding explains well the next findings that almost 50% of

companies are not involved in the process of interviewing and/or selecting

candidates to be involved in their project execution teams and that almost

80% of Danish outsourcers do not know exact salaries of each and every IT

specialist on their project team on vendor’s side (down 37.8% from 2010).

The survey results underscore that 35% of Danish outsourcers are

somewhat satisfied (down 7% from 2010), while slightly more than 10% are

somewhat dissatisfied with their current ITO vendors and the quality of

services provided (up 7% from 2010).

Regarding ITO costs, the survey finds that the grand majority of Danish

outsourcers face the hidden agenda with their actual incurred annual costs

being up to 25% higher than contracted (up 32.5% from 2010). Almost 20%

of survey respondents admit that the actual incurred costs match or nearly

match the contracted ones (down 34% from 2010).

Regarding the actual savings, almost 30% of companies manage to save less

than 10% (up 13.9% from 2010) and another 30% - 10% to 24% from their

outsourced operations (up 5% from 2010). In 2010, the number of

companies saving 60% and more from their ITO engagements outnumbered

this year’s number of “huge savers” by only 1%.

The survey allows comparing and contrasting companies’ overall

impressions and attitudes towards the outsourced development/IT in 2011

versus 2010. As the survey shows, 50% of companies believe that

outsourcing their development/IT function(s) to an external provider has

been the right decision (up 24% from 2010) and almost 45% of companies

http://www.danidadevforum.um.dk/en




point out that although outsourcing allows saving operating costs and

lowering down development budgets, it inevitably leads to the increase of

management costs. A bit more than 25% of companies claim that costs are

higher than expected (up 16% from 2010) and slightly more than 20% of

survey participants complain about the poor quality of vendor’s work.

Almost the same number of companies says that ITO vendor’s work is of

higher quality compared to the in-house capabilities (up 1.5% from 2010)

and more companies regret having made a decision to outsource (up 4%

from 2010).

The following survey finding provides an optimistic outlook of the future

adoption of the outsourced services across diverse Danish industries: most

of current outsourcers plan to continue with their outsourced operations in

the next 12 to 24 months, more than 30% - in the next 25+ months and only

3% plan to terminate their ITO contracts and back-source in-house. In the

future, more than 50% of current outsourcers plan to continue with

nearshoring, 30% plan to go offshore and less than 20% will be sourcing

within Denmark.

Both in 2010 and 2011, the key reason keeping most of the in-house

development companies away from adopting the outsourced development

is fear of losing managerial control of own software projects. Nearly 50% of

companies do not outsource due to negative ITO experiences they had in

the past and around 40% of companies are afraid of the hidden costs of

ITO. In addition, almost 35% of companies think they are yet too small and

immature for such an undertaking and only 5% of Danish businesses regard

outsourcing as an unethical practice responsible for the risen

unemployment within the country (up 2% from 2010). Overall, only 9.5% of

companies report total satisfaction with the outcomes of their in-house

software development.

Today’s in-house development companies indicate a very high likelihood of

outsourcing some elements of their IT / software development in the future

in order to respond to internal pressures of lowering down IT budgets and

operating costs and access resources and skills that are in short supply

within Denmark. Just like their outsourcing peers, Danish in-house

developers rate language skills and available IT resource pool as the most

important factors in their hypothetical choice of the ITO destination.

However, non-outsourcers will also scrutinize locales with mature legal

systems and intellectual property legislation if they make a decision to

outsource in the future.

Regarding the choice of the ITO partner, future outsourcers will challenge

their prospective service providers with test/pilot projects, check

companies’ experience in similar projects, make sure the ITO contract has

flexible terms (for scalability, exit, pricing etc) and will ask their peer

companies and partners for positive vendor references. The least attention

will be paid to companies’ presence on Denmark’s ICT market.

The latter finding denotes that many of today’s outsourcers in Denmark are

focused on strategic use of outsourcing and think proactively about their

project/team scaling while planning their ITO engagements. Vendor's global

footprint and reputation, level of quality certification (e.g., ISO, CMMI etc)

and physical presence in Denmark are the least important factors in Danish

companies’ future choice of the ITO partner.




Conclusions

Summing up the key findings of the 2011 Danish ITO and In-House Software

Development survey, there is an increasing demand for ITO services from

high-tech startups and enterprises in the SME sector as well as diverse

industry niches, both “traditional” such as finance and construction and

innovative such as digital media, online gaming and mobile computing.

Many Danish businesses adopted the outsourced IT / software

development at the time of the economic meltdown in order to “keep the

head above water” via the decreased IT budgets and operating costs and

continue using it now, both for cost leverage and enhanced business focus

purposes. On the other hand, there is another huge segment of companies

that adopted ITO less than 12 months ago driven by the shortage of

appropriate resources within Denmark. This segment is mostly filled by

innovative startups and SMEs from lucrative and rapidly evolving niches. As

for the large companies using outsourcing services, their number has

shrunk in comparison to 2010. However, it does not necessarily mean that

they are no longer in need of external resources. What it may mean,

however, is that some of the large companies acquired / merged with their

ITO partners or opened own IT subsidiaries in lower-cost locales.

Close-up analysis of the survey findings suggests that although a lot of

Danish outsourcers seem to be positive about the essential use of

outsourcing, there is still the evidence of inconsistency in what they tend to

achieve via the ITO engagement. On one hand, they realize the importance

of preparing for change management caused by IT/development transfer

and value barrier-free communication as a key driver of the ITO project’s

success. On the other hand, they rely too much on own vendor selection

expertise and use service delivery models that worked well within the

outsourcing domain, 5 and more years ago, but fail to meet today’s market

trends and customer needs that change at a very fast pace.

Be this as it may, the survey findings do not expose any premises for a

slowdown in the future adoption of ITO services across diverse Danish

market sectors. In-house development companies continue to face the

same challenges that drove/drive their peers and/or competitors to

outsource: scarce local IT talent pool, high cost of domestic resources, slow

time-to-market, pressing customers and investors etc. While they try to fix

these issues by improving software development methodology and project

management processes, and/or adding freelance resources to their in-

house processes, most of them will inevitably opt to outsource earlier or

later, especially those who are focused on growth and competitiveness. The

key issue that needs being solved by these prospective outsourcers is how

to retain maximal managerial control of their outsourced projects. And this

is where the innovative Outsourcing 2.0 models will step in allowing

companies to simultaneously outsource development of solutions and

insource knowledge and expertise to add significant value to their in-house

capabilities.




About IT Sourcing Europe

IT Sourcing Europe is a UK company specialized in nearshore IT Outsourcing

consultancy, market research and analysis.

IT Sourcing Europe provides:

• Top quality quantitative and qualitative IT Outsourcing market

research and fieldwork services

• Evaluation of Central and Eastern Europe's IT Outsourcing services

providers and their factual capabilities to deliver innovative

technological solutions on time and on budget

• Free consulting services for European companies planning to

outsource IT / software development functions and / or change

their current IT Outsourcing strategy / engagement

• Ad-Hoc IT Outsourcing strategy development and full-cycle support

IT Sourcing Europe cooperates with several European ICT and Outsourcing

organisations in terms of free analytics / information exchange. Amongst its

major information partners are Outsourcing Verband, Das Outsourcing

Journal, Outsourcing Portal, Ngi and others.

Our Contacts:

The Meridian, 4 Copthall House, Station Square

Coventry, West Midlands,

CV1 2FL United Kingdom

Email: info(at)itsourcing-europe.com

Tel.: +44(0)2476992505

Web: www.itsourcing-europe.com

Blog: http://itsourcingeurope.wordpress.com

Follow our tweets @ITSourcingEurop

Registration at the UK Companies House: 07217899

You are free to use, share and/or remix any part of this work as long

as you attribute it to IT Sourcing Europe.

http://itsourcingeurope.wordpress.com/

https://twitter.com/itsourcingeurop

http://www.itsourcing-europe.com/

http://www.itsourcing-europe.com/

danish it outsourcing intelligence report 2011

Technology

outsourcing challenges

outsourcing european

outsourcing ito

danish outsourcing companies

outsourcing costs

outsourcing demands

outsourcing managers

offshorenearshore outsourcing