uk it outsourcing intelligence report 2011

IT Sourcing Europe

Nearshore IT Outsourcing

Market Research & Consultancy

May 2011

European IT Outsourcing

Intelligence Report 2011: The

United Kingdom

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

European IT Outsourcing Intelligence Report 2011: The United Kingdom

Contents

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

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

Respondents’ Profile ........................................................................................ 5

Outsourcing Behaviors ................................................................................... 10

Outsourcing Drivers & Factors ....................................................................... 13

Outsourcing Challenges & Solutions .............................................................. 16

Client – Vendor Relationships ........................................................................ 18

Outsourcing Costs ........................................................................................... 21

Impressions of Outsourcing ............................................................................ 22

Future Outsourcing Plans ............................................................................... 23

In-House Software Development Trends & Challenges ................................. 24

Key Findings’ Highlights .................................................................................. 33

Conclusions ..................................................................................................... 36

Executive Summary

This Intelligence Report is based on the survey of the 729 UK companies that

either outsource their Software Development (SD) / Information Technology

(IT) function(s) to an external service provider onshore (within the UK),

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 the UK outsourcing companies:

Get an in-depth understanding of the current UK IT Outsourcing (ITO)

demands and trends

See what challenges are facing their market peers and how they

respond to them

Revise / improve their current ITO engagements / business models

based on the industry best practices

The Report aims to help the UK non-outsourcing companies:

Better understand modern SD/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 SD/ITO and how they are /

will be preparing for adoption of the outsourced development in the

future




Survey Overview

The UK ITO and In-House Software Development survey was conducted

between March 14 and April 29, 2011, in the frames of the All-European ITO

research.

Survey goals:

Explore factors that drive the UK 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 the UK companies away from outsourcing

their SD/IT function(s)

Compare and contrast the 2011 and future ITO demands in the

United Kingdom

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 UK

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 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,

XING, Facebook, Mobile Monday London, 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 UK 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.net




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

The key takeaways from the survey:

In the UK, companies that do not outsource their

SD/IT outnumber those that outsource by 5.8%

Most of the UK outsourcers have been outsourcing

their SD/IT for less than 12 months now

Fifty percent of the UK outsourcers value their

outsourced projects at €0-49K

Most of the UK outsourcers partner with their ITO

service providers via the Dedicated / Own Team

Model

Web is the most outsourced area of expertise in the

UK, followed by Mobile Computing

Most of the UK companies single-source their

solutions

Nearshore is the most preferred outsourcing

destination in the UK

The Top Three drivers of ITO decisions in the UK are:

reduction of operating costs, shortage of domestic IT

skills and resources and focus on core competence




Respondents’ Profile

Primary Industry




Company Size (Headcount)

Currently Outsourcing?




Size of Outsourcing Companies

(Headcount)




Ratio of Outsourcing Companies per

Industry




Revenue Growth Expectations in 2011: In-House Developers vs.

Outsourcers

In-House Development Companies

Outsourcing Companies




Outsourcing Behaviors

Overall SD/ITO Experience

Size of the Outsourced Team(s) (Headcount)




Value of the Outsourced Project(s) (In €)

Business Models Used To Partner With ITO Provider(s)




Do Companies Multisource?

Outsourced Areas of Expertise




Current Outsourcing Destinations

Outsourcing Drivers & Factors

Drivers of Decisions to Outsource IT/SD




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




Outsourcing Challenges & Solutions

Main Challenges of the Outsourced

Software Development




How Companies Respond to the Challenges




Client – Vendor Relationships

How Companies Found their ITO Partners




Size of the ITO Partner*

*Companies with more than 1 partner referred to their major one

Who Selects IT Specialists to Be Involved in the Project?




Do Companies Know Exact Salaries of Each of Their Developer

on the Outsourced Teams?

Satisfaction with ITO Service Providers




Outsourcing Costs

How Actual Annual Incurred Costs of SD/ITO Compare to the

Expected (Contracted) Costs

Actual Savings from the Outsourced SD/IT




Impressions of Outsourcing

outsourcing saves operating costs, but inevitably increases

management costs

outsourcing our software development has been the right

decision

costs are higher than expected

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

capabilities

it is important to have the supplier's team working within or close

to the same time zone

providers have more disciplined methodologies, which can lower

costs further in a longer-term perspective

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

provider is unable to meet deadlines and/or commitments

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

cooperation

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

capabilities

we are very dissatisfied with the decision to outsource our

software development

generally, the outsourced development meets our company’s

expectations




Future Outsourcing Plans

Do Companies Plan to Continue Outsourcing in the Future?

Future Outsourcing Destinations




In-House Software Development Trends & Challenges

How UK Companies Develop / Manage Their Software

Size of Internal IT Department/Team(s)




Part of Corporate Budget that the UK Companies Spend On

IT/SD

Level of Satisfaction with the In-House Development / IT




Key Challenges of the In-House

Software Development




How Companies Respond to their

Challenges




Factors Keeping the UK Companies Away From SD/ITO

we want to have 100% managerial control of our software

project(s)

we are too small and immature to outsource

we're afraid that outsourcing will eventually cost us more

money and ‘headaches’ than in-house development

we think that the outsourced development will result in poorer

software product quality

we do not want to create any shared environments

we're totally satisfied with our in-house development results

we don't want to put our intellectual property at risk

we don't get any pressure to cut costs from

customers/investors/executive management

we had some negative experience with the outsourced

development in the past

we think that outsourcing is unethical and work should be kept

within own house




Circumstances in Which Companies

Would Consider Outsourcing Their

SD/IT in the Future




Where Companies Will Outsource If They

Make Such a Decision in the Future




How Companies Will Rate Destination

Selection Criteria If They Decide to

Outsource in The Future




How Companies Will Rate Provider

Selection Criteria If They Decide to

Outsource in The Future




Key Findings’ Highlights

In the United Kingdom, SD/ITO is most actively used by IT/web service

providers (42%), followed by mobile development companies (16%),

educational organisations (7.5%) and professional services providers (7.5%).

The vast majority of the outsourcing companies in the UK – 57.8% - are less

than 50 in headcount (up 22.8% from 2010), 27.8% are 50 to 499 in

headcount (down 22.2% from 2010), and 14.4% are more than 500 in

headcount (down 25.6% from 2010).

In 2011, almost 34% of the UK outsourcers expect the 10% - 19% revenue

growth (versus 25.5% of the non-outsourcers), only 6.5% of the outsourcers

expect to grow their annual revenue by 0% or less (versus 12.5% of non-

outsourcers), and 13% of companies expect 50%+ in annual revenue growth

(versus less than 10% of the in-house development companies).

Regarding the value of the outsourced projects, the following trends are

observed in 2011, compared to 2010: the number of the €0-49K projects

increased by 18%, the number of the €50-199K projects increased by 6%, the

number of the €200-499K projects dropped by 7% and the number of the

€500+K projects dropped by 8%. This finding proves 2011 to be the year of

small ITO contracts in the UK.

In 2011, most of the UK outsourcers – 41% - partner with their ITO services

providers via the Own (also referred to as Dedicated/Managed) Team Model,

which is up 11% from 2010. A Fixed Price project remains the second most

popular outsourcing model used by almost 40% of the outsourcers (up 2%

from 2010), and the Offshore/Nearshore Dedicated Center is the third most

popular engagement model in the UK used by 25.7% of companies (down 3%

from 2010).

Slightly more than 53% of the UK companies outsource their IT/SD to a single

vendor (down 7% from 2010), while almost 47% of companies (up 7% from

2010) think it is critical to have backup providers in case the primary one fails

to deliver on time and/or stick to the commitments and, thus, outsource

their projects to 2 and/or more vendors (usually the geographically dispersed

ones).

In 2011, most of the UK companies outsource Web solutions (up 33% from

2010), followed by those that outsource Enterprise development (down 2%

from 2010), Mobile computing (up 13.5% from 2010), SaaS/Cloud Computing

solutions (up 7% from 2010) and Embedded development (down 1.5% from

2010). Significant growth of the outsourced mobile development and cloud

solutions in 2011 proves the rapid dynamics of the outsourcing penetration

into the most innovative areas of expertise that require very fast time to

market, access to the global resources and the ability to meet the rapidly

changing market / consumer demands.

In 2011, the outsourcing destinations of the UK companies have changed

compared to 2010. More than 30% of the companies outsource nearshore

(up 8% from 2010), 20.5% of companies transfer their IT/SD offshore (down

4.5% from 2010), almost 28% outsource onshore, or within the UK (up 7.5%

from 2010), more than 10% multisource both nearshore and onshore (up

6.5% from 2010), 8.5% outsource both nearshore and offshore (down 9.5%

from 2010), 7.5% multisource both offshore and onshore (down 5.5% from

2010) and another 7.5% multisource their solutions nearshore, onshore and

offshore (up 1.5% from 2010).

These findings generally hallmark a clear trend that in 2011 more UK

companies tend to either transfer their development / IT function(s)

nearshore to be able to have a better face-to-face communication with ITO

service providers on a regular basis or distribute development among 2




and/or more providers in geographically dispersed locations to be able to

secure the project(s) with back-up providers in case the primary one fails to

deliver properly.

In 2011, the top three drivers of corporate decisions to outsource IT / SD in

the UK are: 1) reduction of operating costs (up 38% from 2010), 2) shortage

of domestic IT skills and resources (up 19% from 2010) and 3) necessity to

focus on core competences such as product marketing/placement, business

development, infrastructure setup/upgrade etc (up 16% from 2010).

When choosing SD/ITO destinations in 2010, the highest rated selection

criteria among the UK companies were low rates and taxes, an available

talent pool and positive references from the peer companies. In 2011, the

highest rated criteria are: language skills, an available IT talent pool and

political stability. The latter may be explained by the current uprise in social

protests and armed rebellions in North Africa and the Middle East that most

of the European businesses in general and the UK businesses in particular are

concerned about. The ongoing political restlessness in the above regions has

already hit many European investors and, therefore, the UK companies want

to make sure that the hubs where they transfer their SD/IT are politically

stable to avoid possible financial and security risks.

Regarding the highest rated criteria of the ITO partner selection, in 2010 they

were low service fees, positive references, and specific skills that are hard to

find/too expensive within the United Kingdom. In 2011, the highest rated

partner selection criteria are: innovative and flexible business / service

delivery model (s), sound experience in the similar projects and successful

pilot project completion. This finding mirrors well the current situation at the

global ITO market. Traditional outsourcing models such as fixed price

projects, Build-Operate-Transfer (BOT) or Offshore Development Center

(ODC) prove to be failing to meet today’s market demand for agility,

scalability, speed of marketing and predictable ITO costs. Therefore, more UK

companies begin to realize the importance of having as much managerial

control of their outsourced projects and resources as possible and use

outsourcing as a long-term strategy to improve software/IT products’ quality

and respond proactively to pressing customers and rapidly changing market

demands rather than just a short-term tactic to reduce costs. Thus, they tend

to partner with those ITO service providers who are able to offer

engagement via innovative business models such as Client Own/Dedicated

Team, Virtual Operating Subsidiary, SCRUM Team and other likewise models

allowing transparent pricing and no hidden agenda, access to the resources

and skills that is not limited to a single geography, extensive knowledge

sharing beyond Service Level Agreements and easy / flexible exit terms.

In 2010, the key challenges of the outsourced SD/IT were: delayed deliveries

and /or missed project milestones, time and cultural difference and poor

client-vendor relationships. In 2011, the key challenges of the outsourced

development are: poor quality of delivered products/services (36.6% of

respondents), poor communication with vendor’s project

teams/management (35%), cultural difference (33%) and delayed delivery

(33%).

Poor quality of the delivered products and/or services can be explained by

the size of ITO vendors that most of the UK outsourcers partner with. More

than 50% of the UK companies partner with providers that are less than 50 in

headcount, while only 18% partner with mid-sized and large providers (500+

in headcount). Many small ITO vendors are startups themselves and, thus,

are missing project management expertise and/or focused on short-term

profit generation goals rather than establishing long-term partnerships with

the opportunity to share risks. Larger providers usually care more about their

reputation as reliable, responsible and responsive business partners and, as a

result, put more efforts in getting an in-depth understanding of each client’s




business needs, have a regular face-to-face communication with clients’ PMs,

launch live knowledge sharing events and activities and provide different

value-added services to achieve the highest possible client satisfaction rates.

To respond to their major challenges in 2011, the UK companies increase

face-to-face communication with vendor’s project management and

development teams (up 30% from 2010), dedicate more management

resources (up 20% from 2010), extend deadlines (up 9% from 2010), revise

and update vendor management processes (up 15% from 2010) and consider

partnering with different vendors (up 20% from 2010).

In 2011, more than 60% of the survey respondents admit that the actual

annual incurred costs of outsourcing are about the same as the expected

(contracted) ones – up 12% from 2010.

Regarding the actual savings from the outsourced SD/IT, in 2011 the situation

is significantly different, compared to 2010. This year, a prevailing majority of

the UK outsourcers manage to save less than 10% of operating costs from

their ITO engagements, which is up 27% from 2010. Fewer UK companies

save 60% and more from their ITO, which is down 3% from 2010.

This trend can also be attributed to the fact that many UK outsourcers

choose to partner with very small ITO service providers who, unlike their

mid-sized and large peers, do not have an appropriate access to the qualified

IT workforce, do not invest enough in the training and professional

advancement of their employees and do not have any best practice in

effective staff retention. Also, since only very few small ITO providers are

able to afford to pay competitive salaries (in terms of their home countries’

market rates) to their employees, the risk is high that the clients get

insufficient and unqualified personnel involved in their outsourced projects.

In addition, many small nearshore ITO vendors practice outsourcing some of

their clients’ tasks to even lower-cost offshore destinations due to the lack of

domestic resources they have access to / financial inability to outbid

competitors’ staff / win the local headhunting. The mix of such circumstances

inevitably leads to the situations when the ITO buyers are overcharged in

order to cover new hires / employee replacement in case of vendor’s staff

turnover, “secret” re-outsourcing / outtasking practices as well as fixing

product’s bugs and errors at the post-release stages due to vendor’s

unqualified resources. These obstacles typically prevent most of the UK

outsourcers to save more from their ITO engagements.

And finally, comparing annual revenue growth expectations of the UK

companies in 2011, 36.5% of companies that develop IT/SD solutions within

own house anticipate 1% to 9% growth, while 33.5% of IT/SD outsourcers

expect to increase their revenue by 10% to 19%. In addition, 9.8% of the in-

house software development companies expect to gain more than 50%

revenue growth versus 13.9% of SD/IT outsourcers.




Conclusions

The 2011 UK IT Outsourcing survey demonstrates significant changes in the

ways companies behave with regards to the adoption / management of the

outsourced development / IT function(s). Outsourcing is gradually becoming

a commodity practice that the UK companies use to reduce operating costs,

get access to the qualified IT resources missing within the home country and

free in-house staff for business development and other core competences.

The positive trends of the UK ITO market observed in the course of the

research are as follows:

• There is a growing demand for the outsourcing services from both

‘traditional’ sectors such as IT (software development), professional

and financial services, education and hospitality and innovative

lucrative niches such as mobile computing and digital media

• More UK outsourcers realize the importance of engaging with their

ITO partners through innovative business models that are able to

provide agility, scalability, speed, pricing transparency and

predictable SD/IT spending

• Most of the outsourced projects are small in value and require only

1–3 IT specialists to complete, which generally destroys the myth

that outsourcing is for large companies only and is likely to drive

more UK innovative startups and SMEs to adopt SD/ITO in the near

future (today, 50% of the UK companies do not outsource, because

they mistakenly think they are yet too small and immature for such

an undertaking)

• Almost 60% of the UK outsourcers plan to continue with their

outsourced operations in the next 12 months, while only less than

17% plan to terminate / backsource their ITO contracts in 2011.

The negative trend of the UK ITO market observed in the course of the

research is as follows: many UK outsourcers still underestimate the

importance of careful and proactive planning of their SD/ITO strategies and,

as a result, are focused on immediate short-term savings instead of

establishing long-term “win-win” relationships with their ITO service

providers. Such attitudes and insufficient outsourcing strategy planning often

result in the failed outsourced projects, increased dissatisfaction and the

necessity to update/revise vendor management processes, which could have

been avoided if the right steps had been taken at the pre-engagement and

vendor selection stages.

The fact that the majority of the non-outsourcing companies are very likely

to outsource their development in the future to access better qualified and

lower cost IT resources and speed up time to market proves outsourcing to

be more extensively used within the UK business communities in the years to

come, since companies will have to respond to their current most critical

challenges in order to gain a competitive advantage and to better satisfy

their customers’ needs.




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 ITO market research and fieldwork services

• Evaluation of Central and Eastern Europe's ITO 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 ITO strategy /

engagement

• Ad-Hoc ITO strategy development and full-cycle support

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.

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