This year’s ManpowerGroup Talent Shortage report revealed that seven out of ten companies are having difficulty hiring skilled workers. This is the highest rate over the past 15 years, and authorities claim the tendency is getting even worse:
- According to a McKinsey Global Survey, 87 percent of companies say they are experiencing skill shortages now or expect to experience them within a few years.
- The International Monetary Fund reports that a global shortage of more than 85 million tech workers is expected by 2030.
Skill gaps can be observed across industries and niches, from logistics and manufacturing to administration and office support. The global talent pool is struggling to handle the increased demand, especially in the booming information and communications technology (ICT) sector. Recruiters are fearing they’ll have to start adding zeros to job offers, while C-level managers are nervously pulling out their hair after yet another unsuccessful attempt to staff a project team.
In situations like these, employers traditionally have turned to outsourcing as a way to access skilled specialists that can’t be found within an in-house team. But the IT outsourcing (ITO) market itself seems exhausted and can no longer maintain the flow of quality talents for staff augmentation.
What is “overheating” in the outsourcing market?
When we speak about overheating in terms of the ITO market, we are basically talking about two phenomena:
- Growing competition raises the stakes and makes the cost of specialists skyrocket.
- Staffing, onboarding, and training a software development team requires significantly more time than before due to a skill shortage.
In other words, despite the saturation of the outsourcing market, it’s becoming more and more challenging to find talents and staff software projects within the scope and budget.
Why has outsourcing become so popular, and is it still a silver bullet for software development?
The development of the IT outsourcing market is wave-like. Looking back at the history of the outsourcing market over the last 10 years, it’s easy to see that its current state is the result of a logical sequence of events.
Outsourcing has been experiencing continuous growth for 10 years now. What started as a way to access new technologies and improve business processes quickly became an irreplaceable part of a software development strategy. But what stirred things up and made the ITO market boil in the past few years?
In a nutshell, the core driver of the recent ITO market overheating is the coronavirus pandemic that shook the world in 2020. The bubble, which had been growing for almost a decade, approached its peak when we entered the era of COVID-19.
Digitization became a necessity. While putting projects on hold was a response to the global pandemic and uncertainty, moving businesses online and digitizing work processes was the only remedy to keep on going during the difficult times.
Startups boomed. Statista reports that 72 percent of the world’s startups experienced revenue declines due to the pandemic. New projects were postponed despite getting the first round of investments before the virus. Once we all realized that COVID-19 was something we were going to be handling for the next few years, however, startups had to move forward. Now they are back on track, needing more workers to meet deadlines and get funding from stakeholders.
Project termination became more common. The increased risks of early contract termination imposed additional expenses on employers hiring in-house. Outsourcing appeared a way to share the responsibility with a software development vendor, as in most situations, the vendor is the one who deals with financial issues related to laying off employees.
The mindset of C-level executives changed. The situation with the coronavirus made employers quickly adjust their business models. Before the pandemic, companies still opted for hiring on-premises and followed historical work processes. In 2020, remote work increased global agility, erasing the borders between teams and collaborators.
A combination of the above factors contributed to the overheating of the ITO market, making staffing software projects more complicated than ever. Does this mean organizations should stop considering outsourcing as a hiring option? No way. But what definitely requires transformation is their approach to choosing a software outsourcing partner.
Popular software outsourcing destinations
With the talent shortage getting more severe and remote becoming the new normal, more organizations are opting for outsourcing without borders. According to the Kearney Global Services Location Index (GLSI), the most popular ITO destinations of 2021 are more diverse than ever.
While the US and India are always ranked at the top, some European countries may still be underestimated despite the quantity and quality of local tech talents.
Some things that organizations usually consider when choosing an ITO destination are:
- Financial attractiveness
- People skills and availability
- Cybersecurity concerns
- Digital adoption
- Language proficiency
- Cultural fit
Let’s see what’s happening with the ITO market in the regions we mentioned above.
Despite the overheating in the US tech talent market, organizations still consider onshore and nearshore outsourcing in the United States. According to Evans Data Corporation, there are 26.9 million software developers in the US as of 2021. Hunting for local talent is challenging, however, for the following reasons.
1. A small pool of experts. The US IT talent market is exhausted. But despite global demand, the 2021 State of Computer Science Report by Code.org shows that only 51 percent of US high schools are teaching computer science on a regular basis. If this continues, the US will have a lack of experts available. What’s more, the American Council on Education reports a 43 percent decline in international students due to the pandemic, which means 11,200 fewer computer information systems (CIS) post-graduates in 2021. That fact also means a 25 percent decrease in the workforce for tech giants recruiting under Optional Practical Training (OPT).
2. High salary expectations. With the evolving competition among high-skilled tech specialists, the cost for hiring talents onshore has become the exact opposite of what we might call “affordable.” Statista reports senior software developers getting an average annual salary of about $177,500, which is the highest paying job for software developers in the US in 2021. According to the Tech Salary Report by Dice, California ranks first, with an average tech engineer getting $126,801 a year. The lowest salary expectations are reported in Minneapolis, at $102,341. This is still three times more than the average in Eastern European countries, however.
3. Financial risks in case of constructive dismissal. US legislation protects employees from being dismissed, and this concern became especially acute with the coronavirus pandemic. According to Hired, 58 percent of tech talents in the US are not concerned about being laid off at all. On the other hand, this imposes severe financial risks on employers who hire specialists from the US.
The situation in the US talent market is rather ambiguous. Despite the US being placed among the top ITO destinations in the world, hiring developers from the United States is not something companies with midsize budgets can afford. The situation is getting tighter as fewer experts remain available each year.
The Indian National Association of Software and Service Companies (Nasscom) reports the IT-BPM sector employed 4.5 million people in India as of March 2021, though GitHub claims the number is 5.8 million. Kearney names India an emerging digital hub and highlights its startup activity and digital investments over the past three years. But global overheating has not spared this region either. As per Nasscom, India’s demand for digital talent is eight times greater than the pool of fresh talent available.
What are the pros and cons of hiring an outsourcing partner from India?
- Low development costs. Comparatively low rates are one of the main reasons to choose IT staffing from India. According to Payscale, the average annual salary of a software engineer is a bit lower than $7,000, which is super affordable compared to India’s counterparts.
- Outsourcing-friendly policies. Outsourcing is a powerful driver of India’s economy, and it’s well supported by the government.
- Possible quality gaps. Considering the skill shortage in the Indian IT market and the low rates of local developers, it’s easy to come across unskilled workers. In the longer run, this may mean additional costs for fixes.
- Lack of digital literacy. At present, digitally skilled workers represent only 12 percent of India’s workforce. The number of workers in India requiring digital skills will need to increase nine times by 2025 and the average worker in India will need to develop seven new digital skills by 2025 to keep pace with technological advancements and demand according to a recent report commissioned by Amazon Web Services.
As the second largest English-speaking country in the world, India is often considered an international ITO destination. In summary, while comparatively low development costs are one of the main reasons for hiring an Indian IT partner, there can be pitfalls like low digital adoption and possible quality gaps.
Central and Eastern Europe (CEE)
Statista reports the European IT services outsourcing market is steadily growing, exceeding $103.9 billion in 2021 compared to $93.1 billion in 2016. European countries have become a popular ITO destination due to a high level of education, diverse domain expertise, a convenient time zone, cultural fit, and relatively low development costs. The IT sector is booming, but the market is not that saturated and quality talents are still available at a good price.
To choose the best outsourcing vendor in the CEE region, you can check out the Top Eastern Europe Custom Software Development Companies ranking by Clutch.co.
Let’s now overview three European destinations that are often considered for offshore software development: Poland, Ukraine, and Belarus.
Poland has the largest IT expert pool in the CEE region, accounting for 430.000 IT specialists. The Polish software development services market represents about eight percent of the country’s GDP. In 2020, KPMG, a global network providing audit, tax, and advisory services (and who is among our clients), confirmed that “every dollar invested in Poland by American companies creates 50 percent more value than other foreign investments.” Being a popular ITO destination, Poland is often considered for staff augmentation, and it’s good choice for the following reasons:
- High language proficiency. Poles rank 16th in the Global English Proficiency Index, which translates to a rating of high proficiency and proves the ability to communicate across the language barrier.
- Cуbersecurity. According to PasswordManagers.co, Poland has the highest Cybersecurity Exposure Index among its European counterparts and occupies 22nd place globally. India, which is considered a far more popular outsourcing destination, ranks 55th in the global ranking.
At the same time, there is one significant drawback about outsourcing software development to Poland:
- Relatively high cost. Proximity to Western Europe, a high level of education, and relatively high standards of living make the cost of Polish talent one of the highest in the CEE region. The average rate for software development starts at $40 an hour as per Clutch.co.
Ukraine is a fast-growing destination to hire tech talents. The country’s share of freelance professional developers is reported by State of European Tech as one of the largest in the CEE region. According to Beetroot.co, the number of tech specialists reached 205,000 in 2021, representing 1.13 percent of the country’s total labor force. Tech giants like Google, Samsung, Rakuten, and Huawei have located R&D centres here. Skype, eBay, Microsoft, Ericsson, IBM, Ubisoft, and Upwork have also chosen Ukraine as an outsourcing destination, either establishing regional branches or delegating projects to local outsourcing teams.
- Booming tech sector. The Ukrainian tech industry is maturing, generating successful startups like Grammarly, Reface, People.ai, and GitLab. Ukraine is also home to more than 100 incubators and accelerators.
- Growing tech talent pool. Ukraine has one of the largest shares of computer science and STEM graduates in Europe, at nearly 10 percent.
- Good value for money. Ukrainian developers scored eighth in a global ranking of IT skills by Ideamotive.co. Along with that, the hourly rates for software development provided by Clutch.co start at $30 per hour, which is lower than in neighboring Poland.
The IT market in Belarus employs 55,700 specialists, out of which 60 percent are either external or outsourced. Although the local market is much smaller than in other CEE countries, it doesn’t compromise the quality. Despite its compact size, the Belarusian IT talent pool is growing due to the presence of tech-specific universities, technology hubs, and a dynamic startup ecosystem.
Here are the most significant characteristics of outsourcing software development to Belarus:
- Mid-range cost for quality tech talents. Belarussian rates are approaching Polish rates but are still slightly above the Ukrainian rates. As per Clutch.co, on average, software development in Belarus starts at $35 per hour, and local developers rank seventh in the TopCoder ranking.
- Emigration of specialists due to the unstable political situation. Global leaders, including the European Parliament, were alarmed by the results of the 2020 Belarusian presidential election and are at odds with the political regime in Belarus. Mass protests that erupted throughout the country after the 2020 election and unsuccessful calls for new elections supported by the local IT community resulted in tech workers fleeing the country. Dev.by reported 12 IT companies transferring employees abroad, 59 pursuing partial relocation, and 112 considering their options in August 2020.
- Unfavorable business environment. Although Belarusian authorities take actions to stimulate the growth of the IT sector, the situation remains turbulent. Among the blockers that prevent Belarus from creating a favorable tech and business environment are intricate legislation, visa requirements for business travel, recurring internet and cellular communication shutdowns, and strong dependence on the Russian government.
Considering the situation with overheating in the US software development market and the fact that low rates are likely to compromise the quality of Indian vendors, the CEE region makes a good alternative for staff augmentation.
Once you pick an outsourcing destination that fits your priorities, it’s time to study the best practices for choosing a software development company.
How to choose a software development company?
To help you better organize your outsourcing strategy, we’ve divided the process of choosing vendors into six stages.
1. Define your requirements. Define the tasks to delegate. Determine your core expectations and needs with your outsourcing partner — what is important to achieve high product quality and make communication easy. This may be specific domain expertise, meeting targets for development cost and velocity, or eliminating language barriers.
2. Do your research. Identify companies that potentially fit your requirements. Narrow down your list by checking each company’s rates on Clutch, GoodFirms, and other ranking services.
3. Submit a request for proposal (RFP). When there are a variety of factors that may impact your decision, simply requesting a quote is not enough. Take the time to describe your business and market aims, specify your requirements, and ask the potential vendor to suggest a solution. Check out our advice on how to write an RFP to your potential partner.
4. Analyze profiles. Based on your potential vendors’ proposals, proceed to deeper analysis of their profiles. Check for existing and past clients, ask about their experience with the company, or check for testimonials on a vendor’s website. Figure out any details that may influence your choice.
5. Evaluate. Conduct a Q&A session with your candidates. Concentrate on points that still cause doubts and discuss the after-sale and future service support. Assess how the communication was and take your time to come to a final decision.
6. Decide and sign. Sign a service agreement with your outsourcing partner of choice.
Considering the overheating in the ITO market, effectively choosing a software development company requires deep involvement in the hiring process. Here are some best practices you can apply at each stage.
Consider the development process
Make sure the suggested software development life cycle (SDLC) is well structured, and evaluate if it aligns with your business processes and corresponds to your values.
At Yalantis, we follow an established agile development process which includes discovery, development, and post-release support. This process makes development predictable and can easily be adjusted to fit specific business needs and company types.
Security is a top priority throughout the whole software development outsourcing process. It starts with signing an NDA and continues with developing a safe infrastructure, contributing to database safety, preventing data losses, and ensuring smooth work during high loads on IT systems. When choosing an IT outsourcing service, make sure the team complies with standards, regulations, and laws such as ISO standards, PCI DSS, and HIPAA. This is especially important when dealing with sensitive data such as patients’ personal information or bank account details.
Yalantis’ approach to cyber protection involves taking security measures throughout the development process, from requirements elicitation to deployment and post-release support.
Seek a long-term outsourcing partnership
The current situation in the outsourcing market has shown that building long-term relationships with software development vendors is of great value. Apart from increasing software development velocity, long-term cooperation has multiple advantages including:
- A high level of engagement and strong business analysis. Together, you can go far and achieve more, as long-time partnerships require a deep understanding of the product and its market aims. In this case, a software development company often becomes the one that facilitates new ideas and knows how to align them with the existing project scope.
- Better commitment due to increased responsibility. As all major risks, including staffing a software team and replacing specialists in a timely manner, fall on the shoulders of the vendor, their commitment increases and is likely to remain high throughout the cooperation.
How to choose the right software development outsourcing partner?
Staffing software projects in the overheated outsourcing market seems a real challenge, and we understand how frustrated you may find yourself searching for a reliable development partner. Regardless of the ITO destination you chose, there are several key points to consider for successful staffing:
1. Stable growth demonstrated despite the pandemic. The way a company withstands crises shows if you can rely on them in times of uncertainty or if anything goes wrong in development. It is also an indicator of market relevance. Yalantis demonstrated 66 percent annual company growth in 2021.
2. Short time to kick-off. When the market became overheated, lots of companies had to increase time for staffing, as recruiters needed more time to find quality talents. Increasing our headhunting capacity and optimizing the recruitment flow has allowed Yalantis to preserve the speed of staffing and start new projects in two to four weeks.
3. How long it takes the company to find a perfect candidate. If an IT partner is attentive to details and clearly understands your requirements, you’ll hardly be wasting your time on rounds of interviews. In the case of Yalantis, it’s usually a first- or second-attempt fit.
4. Investing in skills. Skilling up is important, as it directly influences the quality, scalability, and development velocity of your product. On average, Yalantis offers 12 to 16 schools (courses) annually in different IT specializations, including business analysis, project management, and popular programming languages. Our team regularly organizes Web Crowd meetups, workshops, and events to grow the local digital community and educate in-house specialists.
5. Effective risk management. A reliable outsourcing partner opts for creating a risk log that includes the probabilities of risks and ways to deal with them. It’s usually a project manager who is in charge of dealing with risks. In our article on project management, we explain what a project manager does at each stage of the software development process.
6. Supporting long-term cooperation. This will help you wisely allocate your budget and achieve better results. A holistic approach and continuous cooperation led Yalantis to a six-year partnership with Healthfully, an all-in-one enterprise healthcare solution provider, and helped gain the trust of market giants like Toyota Tsusho Corporation.
7. Recommendations and reviews are also essential to make the right choice. Check out what our clients are saying about their cooperation with Yalantis.
With competition growing in the global ITO market, staffing a software project is a real fight for talent. At the same time, outsourcing remains the most effective way to attract talents in the era of digital transformation and increased demand for software development. To overcome the global tech skills shortage and find quality talent for your project, we recommend trying ITO destinations and sticking to staff augmentation best practices. Among them are carefully evaluating the SDLCs suggested by potential vendors, ensuring security at each development stage, and seeking a long-time partnership with a reliable outsourcing partner.