IT outsourcing (ITO) is gaining more power in the business world year by year. Over the last 10 years, the ITO market has adapted to many significant events. Moreover, in 2020, we entered a new era of business relationships due to the global pandemic. The end of the 2010s marked a significant moment for IT outsourcing industry. Today, businesses should analyze the current state of the ITO market to make decisions such as where to outsource and which ITO vendors to choose.
The last two decades both ended with disruption and global challenges, requiring many enterprises to make risky decisions. The global financial crisis from 2008 to 2009 and the coronavirus pandemic that began in 2019 transformed the IT market. To see how these events have impacted today’s outsourcing market, let’s consider what ITO services looked like in the 2010s.
ITO market recession in 2008–2010
After the 2008 global financial crisis, businesses were cautious about investing in outsourcing. Global financial uncertainty slowed businesses’ decision-making and caused a shift in IT outsourcing destinations.
Amid an economic slump, global unemployment rates skyrocketed, and many employees had to agree to lower wages and reduced working hours. In the US, job growth stagnated in 2008 and then faced an impressive drop in 2009 and 2010. This influenced the IT outsourcing market worldwide.
In particular, at the beginning of 2009, Central and Eastern European IT outsourcing markets experienced a 15 percent to 20 percent decrease in contracts compared to the same time in 2008.
A Forrester study on IT management in 2009 revealed that:
- 43 percent of businesses in Western Europe were cutting expenses on IT outsourcing
- 70 percent of US companies were trying to negotiate lower rates for IT services
- almost 60 percent of US companies had reduced spending on contractors
But even the darkest night will end and the sun will rise. And so it happened with the ITO market, which began to gradually revive in 2011.
ITO market recovery from 2011
In 2011, businesses started to grow and try to reach their pre-crisis employee counts. Consequently, investments in information technology outsourcing started to grow as well.
However, hesitation about outsourcing was still strong. According to 2011 HFS research, 39 percent of 347 buy-side organization representatives said that major factors stopping them from outsourcing were unclear service provider capabilities and indefinite long-term business benefits.
What influenced ITO market growth over the years
- Geographical factors. Key drivers that encouraged organizations to outsource varied by geographical area. However, the top driver in favor of outsourcing across all areas was reducing costs. Additionally, each country and region had specific drivers. Companies in the US, the UK, and continental Europe were aiming to globalize their business services. For the Asia-Pacific region, among the key drivers were getting access to new technologies and improving business processes.
- Technological innovation. As new technologies emerged, the necessity for IT outsourcing and access to a wide talent pool was growing. According to the Deloitte Global Outsourcing Survey 2014, 69 percent of respondents (157 unique respondents representing 140 private and public sector entities) said that cloud computing would be their major reason for outsourcing in the years to come.
- Demand for multi-sourcing. Since 2014, global organizations have shifted from sole-sourcing to multi-sourcing, i.e. they have ceased to cooperate with a single IT services provider but rather have opted to work with many providers. By doing this, businesses hoped to eliminate risks and gain more experience from working with different ITO vendors.
- The COVID-19 pandemic. The robotic process automation (RPA) leap of 2016 and 2017 posed a threat to the ITO market. However, the pandemic has intensified the need for ITO services, as many organizations didn’t have sufficient in-house resources to keep up with the digital transformation. Industries such as agriculture, healthcare, and manufacturing experienced a surge in demand for new technologies and digital solutions to keep their businesses safe amid the crisis. In 2020, investments in AgriTech and FoodTech hit a record $45 billion compared to $24 billion in 2019. Healthcare faced accelerated growth in artificial intelligence and machine learning in 2019 and 2020.
The evolution of the IT outsourcing market has been influenced by global economic trends, recessions, and emerging technologies. However, the ITO remains one of the most popular global business relations.
Most popular ITO destinations over the last 10 years
To analyze and compare the most popular ITO destinations over the last 10 years, we’ve investigated AT Kearney reports from 2011, 2014, 2016, 2017, 2019, and 2021. Kearney is an American consulting firm that produces an annual Global Services Location Index (GSLI) that defines the best offshore and nearshore destinations for ITO and BPO (business process outsourcing) services.
With growing demand for ITO and BPO services, the number of countries in the GSLI reports increased from 50 in 2011 to 60 in 2021.
AT Kearney’s rankings are based on the following criteria:
- Financial attractiveness (compensation costs, infrastructure costs, tax and regulatory costs)
- People skills and availability (ITO/BPO experience and skills, labor force availability, education, language skills)
- Business environment (country environment, infrastructure, cultural adaptability, security of intellectual property)
In 2019, Kearney researchers added one more criterion — digital resonance, which includes digital skills, legal and cybersecurity performance, and corporate activity — due to the rapid technological progress since 2017.
Based on all of these criteria, India, China, and Malaysia have been the top three outsourcing destinations since 2003. However, if we consider each criterion separately, the results may be surprising.
The first and most prominent factor that impacts the overall GSLI score is financial attractiveness, referring to compensation costs, infrastructure costs, and tax and regulatory costs.
Compensation costs mean average salaries for relevant positions in the ITO and BPO sectors. Infrastructure costs include rental costs, commercial electricity rates, international telecom costs, and costs to travel to customers’ destinations like New York, London, and Tokyo.
Let’s take a look at the table below to see which countries are leaders when it comes to the costs of ITO services.
We can see that Sri Lanka has been on top since 2016. In 2014, Bangladesh was added to the GSLI list and took first place that year.
Surprisingly, India was never the leader in terms of financial attractiveness. Indonesia and Malaysia, which are leaders in the overall GSLI score, also lag when it comes to financial benefits.
Outside of Asia, it’s notable that Ukraine has surpassed many other European countries in financial attractiveness, even taking third place in 2019.
The least attractive countries in terms of the financial aspect of outsourcing have been the US, the UK, Australia, Canada, Ireland, Germany, France, and Singapore. However, the situation changes significantly once we consider the second criterion: people skills and availability.
People skills and availability
Let’s have a look at one more table showing countries with the best scores for ITO/BPO experience and skills, language skills and education, and workforce availability.
The USA, China, and India have been leaders in people skills and availability for the past 10 years due to high English proficiency, strong education, and vast talent pools (the latter refers more to India and China).
Looking at positions 4 through 15, we see that many countries that aren’t attractive financially are among the best in terms of people skills and availability.
In 2019 and 2021, Turkey made it into the top 15 countries in terms of people skills. And in 2021, in the top 15 there are a few new countries such as Japan, South Korea, and the Netherlands.
The third criterion is the business environment, which considers a country’s business practices, infrastructure, cultural adaptability, and intellectual property safeguards. This criterion reveals absolutely different facts.
It appears that Singapore has the most favorable business environment for delivering ITO and BPO services. Lots of Eastern European countries also fall into this category, with Estonia being in the top five in 2011 and the Czech Republic remaining in the top 15 until 2019 (in 2021, it took 19th position).
At Yalantis, we stick to the legal best practices enshrined in Estonian and European Union laws and directives, such as Directive 2009/24/EC on the legal protection of computer programs. Find out how Yalantis protects clients’ intellectual property and ensures a safe business environment for collaboration.
With the advance of automation and the eruption of new technologies, a digital resonance factor was included in 2019 and changed the picture of the GSLI ratings.
We’ve composed one more table showing country rankings based on digital resonance.
Taking into account digital resonance only, Asian countries drop in the rating, outpaced by countries in more technologically advanced regions. In 2021, in fact, India takes only 17th position in the digital resonance rating. Asia remains a leader in the overall GSLI rankings due to its significant scores in financial attractiveness, though this situation may change if digital resonance gains ground and becomes a more impactful criterion in the GSLI.
In 2021, we saw new entrants in the GSLI top 10 ranking in digital resonance such as Sweden, Finland, and the Netherlands due to their rapid digital growth and startup activities. However, these countries don’t make it to the top positions in the overall GSLI ranking because of low scores in financial attractiveness, people skills, and availability.
Choosing the right ITO location
With such an abundance of ITO locations, it’s easy to become overwhelmed. The reason why we’ve looked at GSLI ratings according to different criterion is to help you choose a country based on which criterion is most significant for your business.
If a favorable business environment is a more critical factor for you than the cost of services, then your go-to ITO destination could be Singapore. For instance, Boston Consulting Group outsourced their entire center of excellence to an IT services company in Singapore, and the UPS logistics company outsourced the development of shipment software with package tracking features to a Singaporean IT company.
But if you want to make a balanced decision between cost and digital resonance factors, then Eastern European countries could be the most suitable for you.
In particular, Ukraine was among the top 25 ITO countries from 2016 until 2019 (2021 changed the picture, as more countries were added) and has a great balance regarding cost and digital skills. As per the 2021 digital resonance ranking, Ukraine outperforms India, the Czech Republic, Bulgaria, Lithuania, Latvia, Poland, Romania, and a few more countries in terms of digital skills.
Let’s focus now on the current situation in the IT market.
Current state of the IT market: COVID-19 consequences
The pandemic has significantly influenced the IT market. A 2020 KPMG study of IT leadership reveals key changes in the IT sector based on the answers of 4,219 technology business leaders across 83 countries and various industries. (By the way, you can explore the online communication application we built for KPMG.)
Key takeaways from the KPMG survey
Location isn’t a limit for business cooperation. COVID-19 has decreased the importance of face-to-face communication and made remote work more common than ever. Based on this transformation, new ways of collaboration are evolving, which may mean a mix of permanent and contract collaboration or a combination of offshore and nearshore IT outsourcing strategies.
Increased investment in technology. The use of technology across diverse industries surged because of the pandemic. 75 percent of survey respondents reported that they increased investment in IT after COVID-19 hit the global market.
Cybersecurity is of primary importance. 75 percent of survey respondents said that during the COVID-19 pandemic, instances of cybercrime have increased. Particularly, there has been a big jump in spear phishing and malware attacks.
Collaboration between people and technology. Survey respondents anticipate that the advance of robotics and AI will only create new ways for people and machines to collaborate. These technologies can improve overall business performance by enhancing human capabilities. This new trend creates a vast variety of needs that businesses may soon need to fulfill.
Increase in IT headcounts. As proof of the previous statement, 45 percent of respondents plan to grow their IT teams to proceed with technological growth. This means many business leaders believe that automation can’t replace the people skills that are necessary for their business. The healthcare domain is the most determined in this respect. Healthcare representatives expect an increase by 54 percent in the IT headcount in the next year or two.
Top outsourcing drivers among businesses
The above findings help us grasp the current changes in the IT sphere. Now, let’s have a look at the findings of the Deloitte Global Outsourcing Survey 2020 among 40 executives of Deloitte’s clients across the globe to figure out what drives organizations to opt for outsourcing.
Cost reduction. As a result of the COVID-19 pandemic and the associated recession, reducing costs is again the primary reason for outsourcing. In 2018, for instance, clients stated that speed to market was a more important outsourcing driver than reducing costs.
Cloud and RPA solutions. Since 2020, even more businesses have adopted cloud computing and robotic process automation (RPA) solutions. Thus, the need for such solutions intensified the interest in outsourcing. With RPA solutions being more widespread, AI technology is also gaining popularity.
Microservice software architecture. A software solution with a microservice architecture consists of several separate services instead of one. Such an architecture ensures much better software security and scalability. Learn how we ensured a microservice architecture for a delivery and logistics system. Cloud service providers that offer microservice architectures will soon outperform traditional IT services suppliers.
Shorter contracts and more flexibility. This is another growing trend in delivering ITO services that has been induced by COVID-19. Businesses are now more cautious when deciding on outsourcing destinations and companies. Today, it’s especially relevant to conclude short and flexible contracts. Plus, clients now expect more from software vendors than simply delivering software. They want to partner with vendors that understand their businesses and can offer timely solutions.
All of the above-mentioned changes in the IT sphere and IT outsourcing drivers logically result in a growing demand for ITO providers. According to the statistics from the HFS OneOffice Pulse Study, H1 2021, 60 percent of respondents (800 representatives of global enterprises) are planning to invest more in onshoring, while 57 percent plan to invest more in nearshoring. The popularity of offshoring is a bit lower, with 53 percent of respondents saying they are likely to increase spending for it.
Below are examples of digital transformation currently taking place in the healthcare and supply chain domains. These domains are rapidly evolving, and their representatives are among our most frequent clients.
Healthcare digital growth
The healthcare domain is opting for outsourcing services even more during the COVID-19 pandemic, as the adoption of new technologies is only increasing.
A recent report by Deloitte on the 2021 global healthcare outlook surveyed 1800 clinicians, nurses, and key stakeholders to find out whether the pandemic encouraged them to adopt new technologies. Deloitte researchers found that:
- 65 percent of respondents said their organization implemented new technologies to support clinicians
- 64 percent of respondents opted for technology to offer better virtual care for their patients
Another reason healthcare businesses are choosing outsourcing is a shortage of healthcare cybersecurity professionals, as cyber safety is especially critical for the healthcare industry.
Supply chain and logistics digital growth
Logistics businesses are also increasing their investments in ITO services, as digitization of the logistics industry is ratcheting up. As customers’ expectations and the demand for goods grow, the supply chain industry is striving to streamline its services.
Supply chain companies are gradually entering the Industry 5.0 era, which means getting the most not only from technology but from the people involved in the supply chain. Technologies such as augmented reality, 5G mobile, automated drones, and working exoskeletons will be getting more and more popular. All of them are meant to enhance collaboration between people and technology.
In the last section of this article, we’ll discuss Ukraine as a sweet spot in the current global ITO market.
What makes outsourcing to Ukraine popular?
Keeping in mind all the findings and reports we’ve discussed in this article, let’s figure out what makes Ukraine such a popular destination for ITO services.
#1 Nearshore location. Ukraine is a go-to ITO destination for European businesses since it’s in the same or a nearby time zone. For US businesses, Ukraine is also viable, as there are many more overlapping business hours compared to India, for instance. Additionally, the whole of Ukraine is situated within the same time zone.
#2 Rapid growth of the IT sector. The Ukrainian IT market is growing at an unprecedented rate. Currently, there are 756 IT services companies and 1489 tech product companies in Ukraine. Plus, there are now 212,548 IT specialists in Ukraine, and over the last year their number has increased by 16 percent. Annually, about 16,200 IT specialists graduate from Ukrainian universities, and this number is only expected to grow in the years to come.
#3 Cultural compatibility. Ukrainians have a European mindset and values. In 2014, the Ukrainian parliament (the Verkhovna Rada) signed an Association Agreement with the European Union. Since then, there have been lots of positive changes in the Ukrainian business environment. According to the 2020 World Bank Group report on doing business, Ukraine takes 64th place among 190 countries in the ranking, compared to 71st position in 2019 and 112th in 2014.
Yalantis is one of the top IT service providers in Ukraine, with a wide talent pool and a wide range of technical expertise. We offer custom technology solutions, diving deep into each client’s business case. Our honest and responsible approach helps us establish long-lasting relationships and win client loyalty. Reach out to us if you need any technical support. We’ll be glad to assist you.