german it outsourcing intelligence report 2011

IT Sourcing Europe European IT Outsourcing Market

Intelligence

October 2011

European IT Outsourcing Intelligence Report 2011: Germany

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 | 2 0 1 1 | A l l R i g h t s r e s e r v e d


Contents

Contents .......................................................................................................... 2

Executive Summary ......................................................................................... 2

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

Key Takeaways From the Survey ..................................................................... 4

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

IT Outsourcing Drivers & Factors ................................................................... 10

IT Outsourcing Challenges & Problem Solving ............................................... 12

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

IT Outsourcing Costs...................................................................................... 15

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

Future Adoption of IT / SD Outsourcing in Germany ..................................... 18

Key Findings At a Glance ............................................................................... 24

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

Executive Summary

This Intelligence Report is based on the survey of the 304 German companies

that either outsource their Software Development / Information Technology

function(s) to an external service provider onshore (within Germany),

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 German 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 German 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 German IT Outsourcing (ITO) and In-House Software Development (SD)

survey was conducted between September 10 and October 7, 2011, in the

frames of the All-European ITO research.

Survey goals:

Explore factors that drive German 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 German companies away from outsourcing

their SD/IT function(s)

Compare and contrast the 2011 and future ITO demands across

German 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

Germany-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 campaign,

the following steps were taken:

Online press releases and survey announcements distribution;

Survey localization and optimization in social media such as LinkedIn,

XING, 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 German ITO

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)

http://www.surveymonkey.com/




The following categories fall under this activity:

Application (app) development and maintenance;

Website / ecommerce systems;

Data warehousing;

IT security;

Data / voice network operations;

Remote IT infrastructure management

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

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

Key Takeaways From the Survey

Most of German companies surveyed began to outsource their IT

function / software development more than 37 months ago

B2B software development companies are the most active users of

the outsourcing services

Most of ITO projects take 3 to 5 IT specialists to complete and are

valued at €500K+

Web and mobile solutions are most outsourced, while SaaS/Cloud

ones are least outsourced in Germany

Nearshore is the most preferred ITO destination

Most of German companies outsource to reduce operating costs,

focus on core competences, access available IT resources outside

Germany and speed up time-to-market

The key issues in ITO are poor communication with vendor’s teams,

change management, cultural difference and poor project

management on vendor’s side

Most of German companies outsource their IT / development to

small providers via the fixed-price/time-and-material (T&M) models

Most of companies refuse to outsource, because they want to have

100% managerial control of own software / IT projects




Profile of Outsourcers

Do Companies Outsource Any Element of Their IT / Software

Development?

Current Outsourcing Experience




Company Size (Headcount)

Primary Industry

*All other responses: manufacturing, government, transportation,

hospitality, tourism, IT (hardware)




Revenue Growth Expectations

Outsourcers

In-House Development Companies




Size of Project Team on Vendor’s Side (Headcount)

Value of the Outsourced Project(s)




The Outsourced Areas of Expertise

Do Companies Multi-Source?




Outsourcing Destinations

IT Outsourcing Drivers & Factors

Key IT Outsourcing Drivers




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




IT Outsourcing Challenges & Problem Solving

Key Challenges of the Outsourced IT / Software Development

*All other responses: language barriers ,hidden agenda, lack of transparency

Key Responses to the ITO Challenges




Client – Vendor Relationships

How Companies Found Their ITO Vendors

*Other: personal networking

Vendors’ Size




Service Delivery Models Used In the Outsourcing Engagements

*Other: elancer-team.de etc

Who Hires IT Talent To Be Involved In the Outsourced Project

Execution?




IT Outsourcing Costs

Do Companies Know Exact Salaries of Their Project Team Members

On Vendor’s Side?

Levels of Companies’ Satisfaction With Their Current Vendors and

The Quality of Services Provided




How Actual Annual Incurred Costs Compare To the Contracted Ones

Actual Savings From the Outsourced IT / Development




Impressions of IT Outsourcing




Future Adoption of IT / SD Outsourcing in Germany

Do Companies Plan to Continue Outsourcing Their Projects In The

Next 12 To 24 Months?

Future Outsourcing Destinations




Key Challenges of the In-House Software Development

*Other: lack of strong IT management within the company, poor communication of

business goals to software developers, wrong software development methodology

etc

How In-House Developers Respond To Challenges

*Other: hire more internal resources, revise IT budgets, dedicate more financial

resources




Reasons Keeping Companies Away From ITO




Circumstances In Which Companies Would Consider Outsourcing IT /

Development In the Next 12 To 24 Months

Where Current Non-Outsourcers Would Transfer Their IT /

Development In the Future




Factors’ Importance In the Future Choice of the Outsourcing

Destination

Factors’ Importance In the Future Choice of the Outsourcing Partner




How Companies Would Search For Their Outsourcing Partners If They

Make A Decision To Outsource Their IT / Development In The Future




Key Findings At a Glance

Of the 304 companies surveyed, 140 were outsourcers and 164 were in-

house software development companies. Of the 140 outsourcing companies,

the prevailing majority have been outsourcing their IT solutions for more

than 37 months now, which proves outsourcing to have been utilized as a

survival tactic by many companies in Germany at the time of recession. In

2011, 42.7% of companies surveyed were small (less than 50 by headcount)

(down 8.3% from 2010), 46.3% were mid-sized (50-599) (up 10.3% from

2010) and 20.4% were large (600+) (up 7.4% from 2010). The greatest ITO

demand comes from software companies specialized in the B2B segment,

followed by B2C IT companies and professional service providers (e.g., legal,

accounting, real estate, consulting etc). Manufacturing, government,

transportation, hospitality, tourism, IT (hardware) are the least active ITO

adopters.

Comparing the annual revenue growth expectations in 2011, the majority of

outsourcing companies anticipate growth by 10% to 19% and almost 5%

expect revenue growth by 50% and more. On the other hand, the majority of

non-outsourcing companies in Germany expect the 1%-9% annual revenue

growth, while more than 10% expect their revenue to have no increase at all.

As the survey finds, most of outsourcing companies surveyed have 3-5 IT

specialists involved in the outsourced project execution (augmented staff on

vendor’s side), while almost 12% have 30 and more employees in augmented

staff. Regarding the value of the outsourced projects, 35% of German

companies outsource projects worth of EUR 500K+ (up 27% from 2010) and

25% outsource projects worth of EUR 0-49K (up 14% from 2010). Web is the

most outsourced area of expertise in 2011 (up 44.7% from 2010), followed by

mobile (up 42.2% from 2010). Cloudsourcing remains the least popular type

of outsourcing (up 2.5% from 2010).

The research further shows that the prevailing majority of German

outsourcers partner with more than one ITO service provider (or multi-

source).

In 2011, nearshore remains the most preferred ITO destination for the

German clients (up 1.5% from 2010), onshore is second most preferred hub

(up 6.1% from 2010) and offshore is the least preferred destination (down

15.3% from 2010).

The top three drivers of ITO decisions in Germany are reduction of operating

costs (up 42.3% from 2010), focus on core competences (up 12.7% from

2010) and shortage of domestic IT skills and resources (up 23.8% from 2010).

As the survey shows, the top three most important factors that German ITO

buyers consider when choosing their ITO locale are language skills (up 41%

from 2010), available IT talent pool (up 50.5% from 2010) and low costs (up

26.7% from 2010).

The top three most decisive factors in the choice of the ITO partner are

successful test/pilot project completion (up 57.6% from 2010), sound

experience in similar projects (up 44.7% from 2010) and flexible contract

terms (up 57.7% from 2010).

The top three challenges of the outsourced IT / software development are,

according to the survey results, poor communication with vendor’s project

management and executors (down 9% from 2010), change management and

cultural difference (up 10.3% from 2010). The top three responses to these

and other challenges are increased face-to-face communication between

clients and ITO partners (up 17% from 2010), multi-sourcing (up 26% from




2010) and dedication of more management resources (up 9% from 2010). In

2011, 15% of German outsourcers bring / plan to bring outsourced

operations back in house (back-source), which is up 14% from 2010.

Regarding the actual search for ITO partner, more than 40% of companies

surveyed asked peer companies for references, cumulative 25% release

RFP/RFQ publicly, did online research and found the partner via personal

networking, while only nearly 20% hired an outsourcing consultancy to assist

in finding the partner and/or were approached by the future partner via

telemarketing calls, newsletter or likewise marketing activities. The prevailing

majority of German outsourcers partner with small ITO service providers

(less than 50), while only 12.5% partner with large organisations (1,000+).

Regarding the service delivery models used in ITO relationships, a project-

based model is the most widely used one, followed by DDC and Own

Development Team models. Although 50% of companies are partly involved

in the process of HR selection run by their ITO partners, almost 53% do not

know each and every member’s remuneration on vendor’s side.

In 2010, the majority of German outsourcers were dissatisfied with the

quality of vendor’s work (41%), but in 2011 most of companies are very

satisfied with their decision to outsource (almost 37%).

The survey demonstrates that in most cases the actual annual incurred costs

of outsourcing match the contracted ones and nearly 33% of companies

surveyed report saving 10% to 24% of operating costs thanks to outsourcing.

Quite a big percentage of companies – almost 16% - save 60% and more of

their corporate budgets.

Overall, German outsourcing companies have rather positive impressions of

the outsourced development/IT: almost 43% believe it is important to have

the ITO partner located on- or nearshore (in a geographically close area),

almost 37% think their decision to outsource has been the right one and

almost 32% believe that although outsourcing does save operating costs, it

inevitably raises the management costs. On the other hand, almost 22% of

companies are very dissatisfied with their decision to outsource, almost 16%

say that actual costs are higher than expected and slightly more than 5%

think their intellectual property is currently at risk.

Based on the most frequently cited challenges of the outsourced

development, companies that regret their decision to outsource have

problems managing the internal change that occurred as a direct response to

their outsourcing activity and may thus be having some negative impressions

because of own inability to properly articulate the change to all stakeholders

and to manage the outsourcing processes.

Regarding the reasons that keep companies away from ITO, almost 50% do

not want to lose managerial control of their software/IT project(s) (up 17.1%

from 2010), almost 35% do not want to put their intellectual property at risk

(up 25.3% from 2010) and nearly 26% believe they are yet too small and

immature to outsource. In 2011, slightly more than 11% of survey

participants consider outsourcing as an unethical practice that takes jobs out

of the national boundaries, which is up 9% from 2010.

Analyzing the results of the survey of non-outsourcing companies, the top

three issues of the in-house development are: high cost of German IT

resources (up 10% from 2010), scarce local IT talent pool (up 26% from 2010)

and pressing customers. To respond to these challenges, in-house

development companies continue to extend project deadlines (up 19% from

2010), improve/change software development methodology (down 3.4%

from 2010) and encourage internal staff to work overtime (down 6.8% from

2010). Alternatively, almost 15% of non-outsourcing companies surveyed




consider outsourcing some parts of their software development / IT function

in the near future (up 12% from 2010).

As the survey shows, current non-outsourcers are very likely to outsource in

the next 12 to 24 months to make their capital funds available, respond to

internal and external pressures to lower down IT budgets and access highly

qualified yet lower-cost IT resources outside Germany. Nearshoring is going

to be the most popular ITO destination, followed by onshore outsourcing.

The survey of non-outsourcing companies allows benchmarking the future

demand for / trends of the outsourced IT / software development in

Germany.

Regarding factors that today’s non-outsourcers would consider as the most

important ones in their future choice of the outsourcing locale, the highest

rated ones are language skills, legal system and IP protection maturity,

available IT talent pool and political and economic stability. This finding

suggests that in the future most of German outsourcers will focus more on

securing their outsourced operations and copyright and will set higher

expectations for the country of work transfer.

Regarding factors that are likely to be decisive in the future choice of the ITO

partner, the highest rated ones are provider’s ability to successfully complete

the test/pilot project, sound experience in similar projects/technologies and

positive references from peer companies. This suggests that the future

processes of selection of ITO partner(s) will remain almost unchanged and

the future German outsourcers will rely on peers’ outsourcing best practices

the same way they do nowadays.




Conclusions

The Second Annual German IT Outsourcing and In-House Software

Development Survey 2011 allows tracking the ways the German ITO market

has progressed and/or altered over a 12-months period.

Compared to 2010, in 2011 more companies outsource their IT / software

development function(s) in order to focus on core competences such as

product placement/marketing, business development, differentiation etc.

The number of companies that transfer their development nearshore has

slightly increased, while the number of offshore outsourcers has decreased

significantly in 2011. More outsourcers also multisource nearshore, offshore

and onshore as a response to such challenges as poor quality of deliveries

and delayed and/or unmet project milestones.

In 2011, language skills become another important factor used in the choice

of the ITO destination, while flexible contract terms become an important

factor in the choice of the ITO partner. Today’s companies look for easy exit /

back-sourcing and sufficient copyright protection terms in their ITO

contracts.

Delayed delivery and hidden agenda are no longer the key ITO challenges in

2011. This year, a communication gap between ITO buyers and providers is

the major issue in most of the ITO transactions. The fact that 50% of all

outsourcers in Germany do not have appropriate communication with

project management/executive teams on their vendor’s side proves that

many German companies still use wrong business models and/or

overestimate own abilities to do the sufficient audit of IT needs and/or

development processes to be outsourced. On the other hand, change

management being the second most critical issue in many ITO engagements

proves that companies planning to outsource should “sell” the idea to all

departments, from top to bottom, and get mutual understanding of the

outsourcing goals prior to signing any ITO agreements. Additionally, specific

change communication initiatives should be created and implemented at

every single stage of the project execution.

The fact that almost 15% of today’s non-outsourcing companies in Germany

are already planning to outsource to respond to the high cost / shortage of

domestic resources, pressing customers and slow time-to-market proves

outsourcing to be used more extensively in the months to come. However,

future ITO buyers will challenge their providers to develop and implement

more innovative service delivery models to be able to retain maximum

control of the outsourced projects and have predictable costs for further

planning of their ITO strategy.




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.

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