UK IT Outsourcing Intelligence Report 2011

IT Sourcing Europe
European IT Outsourcing Nearshore IT Outsourcing

Intelligence Report 2011: The Market Research & Consultancy

United Kingdom

May 2011

European IT Outsourcing Intelligence Report 2011: The United Kingdom

European IT Outsourcing Intelligence Report 2011: The UK

Contents Executive Summary

This Intelligence Report is based on the survey of the 729 UK companies that
Executive Summary .......................................................................................... 2 either outsource their Software Development (SD) / Information Technology
Survey Overview ............................................................................................... 3 (IT) function(s) to an external service provider onshore (within the UK),
Respondents’ Profile ........................................................................................ 5 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.
Outsourcing Behaviors ................................................................................... 10
The Report aims to help the UK outsourcing companies:
Outsourcing Drivers & Factors ....................................................................... 13
Get an in-depth understanding of the current UK IT Outsourcing (ITO)
Outsourcing Challenges & Solutions .............................................................. 16 demands and trends
Client – Vendor Relationships ........................................................................ 18 See what challenges are facing their market peers and how they
respond to them
Outsourcing Costs........................................................................................... 21
Revise / improve their current ITO engagements / business models
Impressions of Outsourcing............................................................................ 22 based on the industry best practices
Future Outsourcing Plans ............................................................................... 23 The Report aims to help the UK non-outsourcing companies:
In-House Software Development Trends & Challenges ................................. 24
Better understand modern SD/IT costs optimization and/or reduction
Key Findings’ Highlights .................................................................................. 33
strategies
Conclusions ..................................................................................................... 36 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

2|Copyright IT Sourcing Europe 2011 | All Rights Reserved



Survey Overview Additionally, inbound marketing initiatives were launched in order to attract
more companies to participate in the survey. In the frames of this initiative,
The UK ITO and In-House Software Development survey was conducted the following steps were taken:
between March 14 and April 29, 2011, in the frames of the All-European ITO
Online press releases and survey announcements distribution;
research.
Survey localization and optimization in social media such as LinkedIn,
XING, Facebook, Mobile Monday London, blogs ( Twitter, Word
Survey goals:
Press, IT Sourcing Europe’s Blog), event management systems
Explore factors that drive the UK companies to outsource their SD/IT (Amiando), and B2B web portals (Europages, Hoovers)
functions in 2011
All data obtained were analyzed in the form of industry aggregates. The
Explore challenges associated with offshore/nearshore outsourcing answers to the open-ended questions were organized by their relativity to
and the most effective problem solving techniques the study goals and displayed as the option “all other responses” in charts
Explore the use of different business models in ITO engagements and and graphs further in the Report.
find out which model works best for what type of companies and
Outsourcing Activity & Categories Surveyed:
industries
Explore factors that keep the UK companies away from outsourcing The following ‘outsourcing activity’ is referred to in the 2011 UK ITO Report:
their SD/IT function(s)
Software Development / Information Technology Outsourcing (SD/ITO) is
Compare and contrast the 2011 and future ITO demands in the
the process of transferring part of/entire software development function
United Kingdom
and/or other Internet related work to the execution by the external IT
The survey was available online and hosted by SurveyMonkey, the world’s services provider(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).




The following categories fall under this activity: The key takeaways from the survey:
Application (app) development and maintenance;
In the UK, companies that do not outsource their
Website / ecommerce systems;
Data warehousing; SD/IT outnumber those that outsource by 5.8%
IT security; Most of the UK outsourcers have been outsourcing
Data / voice network operations; their SD/IT for less than 12 months now
Remote IT infrastructure management
Fifty percent of the UK outsourcers value their
These categories further fall under the five key areas of expertise: outsourced projects at €0-49K
Web (Web 2.0, .NET, Java, PHP, open source etc); Most of the UK outsourcers partner with their ITO
Enterprise 2.0 (J2EE, J2SE, C#, MySQL etc); service providers via the Dedicated / Own Team
Mobile development (J2ME etc); Model
Embedded development;
Web is the most outsourced area of expertise in the
Software as a service (SaaS) and Cloud Computing
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)

10 | 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



Value of the Outsourced Project(s) (In €) Business Models Used To Partner With ITO Provider(s)




Do Companies Multisource? Outsourced Areas of Expertise




Outsourcing Drivers & Factors
Current Outsourcing Destinations
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* Who Selects IT Specialists to Be Involved in the Project?

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




Do Companies Know Exact Salaries of Each of Their Developer Satisfaction with ITO Service Providers
on the Outsourced Teams?




Outsourcing Costs

How Actual Annual Incurred Costs of SD/ITO Compare to the
Actual Savings from the Outsourced SD/IT
Expected (Contracted) Costs




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 Level of Satisfaction with the In-House Development / IT
IT/SD




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 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
In the United Kingdom, SD/ITO is most actively used by IT/web service to deliver on time and/or stick to the commitments and, thus, outsource
providers (42%), followed by mobile development companies (16%), their projects to 2 and/or more vendors (usually the geographically dispersed
educational organisations (7.5%) and professional services providers (7.5%). ones).

The vast majority of the outsourcing companies in the UK – 57.8% - are less In 2011, most of the UK companies outsource Web solutions (up 33% from
than 50 in headcount (up 22.8% from 2010), 27.8% are 50 to 499 in 2010), followed by those that outsource Enterprise development (down 2%
headcount (down 22.2% from 2010), and 14.4% are more than 500 in from 2010), Mobile computing (up 13.5% from 2010), SaaS/Cloud Computing
headcount (down 25.6% from 2010). solutions (up 7% from 2010) and Embedded development (down 1.5% from
2010). Significant growth of the outsourced mobile development and cloud
In 2011, almost 34% of the UK outsourcers expect the 10% - 19% revenue
solutions in 2011 proves the rapid dynamics of the outsourcing penetration
growth (versus 25.5% of the non-outsourcers), only 6.5% of the outsourcers
into the most innovative areas of expertise that require very fast time to
expect to grow their annual revenue by 0% or less (versus 12.5% of non-
market, access to the global resources and the ability to meet the rapidly
outsourcers), and 13% of companies expect 50%+ in annual revenue growth
changing market / consumer demands.
(versus less than 10% of the in-house development companies).
In 2011, the outsourcing destinations of the UK companies have changed
Regarding the value of the outsourced projects, the following trends are
compared to 2010. More than 30% of the companies outsource nearshore
observed in 2011, compared to 2010: the number of the €0-49K projects
(up 8% from 2010), 20.5% of companies transfer their IT/SD offshore (down
increased by 18%, the number of the €50-199K projects increased by 6%, the
4.5% from 2010), almost 28% outsource onshore, or within the UK (up 7.5%
number of the €200-499K projects dropped by 7% and the number of the
from 2010), more than 10% multisource both nearshore and onshore (up
€500+K projects dropped by 8%. This finding proves 2011 to be the year of
6.5% from 2010), 8.5% outsource both nearshore and offshore (down 9.5%
small ITO contracts in the UK.
from 2010), 7.5% multisource both offshore and onshore (down 5.5% from
In 2011, most of the UK outsourcers – 41% - partner with their ITO services 2010) and another 7.5% multisource their solutions nearshore, onshore and
providers via the Own (also referred to as Dedicated/Managed) Team Model, offshore (up 1.5% from 2010).
which is up 11% from 2010. A Fixed Price project remains the second most
These findings generally hallmark a clear trend that in 2011 more UK
popular outsourcing model used by almost 40% of the outsourcers (up 2%
companies tend to either transfer their development / IT function(s)
from 2010), and the Offshore/Nearshore Dedicated Center is the third most
nearshore to be able to have a better face-to-face communication with ITO
popular engagement model in the UK used by 25.7% of companies (down 3%
service providers on a regular basis or distribute development among 2
from 2010).



and/or more providers in geographically dispersed locations to be able to scalability, speed of marketing and predictable ITO costs. Therefore, more UK
secure the project(s) with back-up providers in case the primary one fails to companies begin to realize the importance of having as much managerial
deliver properly. control of their outsourced projects and resources as possible and use
outsourcing as a long-term strategy to improve software/IT products’ quality
In 2011, the top three drivers of corporate decisions to outsource IT / SD in and respond proactively to pressing customers and rapidly changing market
the UK are: 1) reduction of operating costs (up 38% from 2010), 2) shortage
demands rather than just a short-term tactic to reduce costs. Thus, they tend
of domestic IT skills and resources (up 19% from 2010) and 3) necessity to to partner with those ITO service providers who are able to offer
focus on core competences such as product marketing/placement, business engagement via innovative business models such as Client Own/Dedicated
development, infrastructure setup/upgrade etc (up 16% from 2010). Team, Virtual Operating Subsidiary, SCRUM Team and other likewise models
When choosing SD/ITO destinations in 2010, the highest rated selection allowing transparent pricing and no hidden agenda, access to the resources
criteria among the UK companies were low rates and taxes, an available and skills that is not limited to a single geography, extensive knowledge
talent pool and positive references from the peer companies. In 2011, the sharing beyond Service Level Agreements and easy / flexible exit terms.
highest rated criteria are: language skills, an available IT talent pool and
In 2010, the key challenges of the outsourced SD/IT were: delayed deliveries
political stability. The latter may be explained by the current uprise in social and /or missed project milestones, time and cultural difference and poor
protests and armed rebellions in North Africa and the Middle East that most client-vendor relationships. In 2011, the key challenges of the outsourced
of the European businesses in general and the UK businesses in particular are
development are: poor quality of delivered products/services (36.6% of
concerned about. The ongoing political restlessness in the above regions has respondents), poor communication with vendor’s project
already hit many European investors and, therefore, the UK companies want teams/management (35%), cultural difference (33%) and delayed delivery
to make sure that the hubs where they transfer their SD/IT are politically
(33%).
stable to avoid possible financial and security risks.
Poor quality of the delivered products and/or services can be explained by
Regarding the highest rated criteria of the ITO partner selection, in 2010 they
the size of ITO vendors that most of the UK outsourcers partner with. More
were low service fees, positive references, and specific skills that are hard to than 50% of the UK companies partner with providers that are less than 50 in
find/too expensive within the United Kingdom. In 2011, the highest rated headcount, while only 18% partner with mid-sized and large providers (500+
partner selection criteria are: innovative and flexible business / service
in headcount). Many small ITO vendors are startups themselves and, thus,
delivery model (s), sound experience in the similar projects and successful are missing project management expertise and/or focused on short-term
pilot project completion. This finding mirrors well the current situation at the profit generation goals rather than establishing long-term partnerships with
global ITO market. Traditional outsourcing models such as fixed price
the opportunity to share risks. Larger providers usually care more about their
projects, Build-Operate-Transfer (BOT) or Offshore Development Center reputation as reliable, responsible and responsive business partners and, as a
(ODC) prove to be failing to meet today’s market demand for agility, 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, their clients’ tasks to even lower-cost offshore destinations due to the lack of
launch live knowledge sharing events and activities and provide different domestic resources they have access to / financial inability to outbid
value-added services to achieve the highest possible client satisfaction rates. competitors’ staff / win the local headhunting. The mix of such circumstances
inevitably leads to the situations when the ITO buyers are overcharged in
To respond to their major challenges in 2011, the UK companies increase order to cover new hires / employee replacement in case of vendor’s staff
face-to-face communication with vendor’s project management and
turnover, “secret” re-outsourcing / outtasking practices as well as fixing
development teams (up 30% from 2010), dedicate more management product’s bugs and errors at the post-release stages due to vendor’s
resources (up 20% from 2010), extend deadlines (up 9% from 2010), revise unqualified resources. These obstacles typically prevent most of the UK
and update vendor management processes (up 15% from 2010) and consider
outsourcers to save more from their ITO engagements.
partnering with different vendors (up 20% from 2010).
And finally, comparing annual revenue growth expectations of the UK
In 2011, more than 60% of the survey respondents admit that the actual companies in 2011, 36.5% of companies that develop IT/SD solutions within
annual incurred costs of outsourcing are about the same as the expected own house anticipate 1% to 9% growth, while 33.5% of IT/SD outsourcers
(contracted) ones – up 12% from 2010. expect to increase their revenue by 10% to 19%. In addition, 9.8% of the in-
Regarding the actual savings from the outsourced SD/IT, in 2011 the situation house software development companies expect to gain more than 50%
is significantly different, compared to 2010. This year, a prevailing majority of revenue growth versus 13.9% of SD/IT outsourcers.
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




Conclusions
The 2011 UK IT Outsourcing survey demonstrates significant changes in the they mistakenly think they are yet too small and immature for such
ways companies behave with regards to the adoption / management of the an undertaking)
outsourced development / IT function(s). Outsourcing is gradually becoming • Almost 60% of the UK outsourcers plan to continue with their
a commodity practice that the UK companies use to reduce operating costs, outsourced operations in the next 12 months, while only less than
get access to the qualified IT resources missing within the home country and 17% plan to terminate / backsource their ITO contracts in 2011.
free in-house staff for business development and other core competences.
The negative trend of the UK ITO market observed in the course of the
The positive trends of the UK ITO market observed in the course of the research is as follows: many UK outsourcers still underestimate the
research are as follows: importance of careful and proactive planning of their SD/ITO strategies and,
as a result, are focused on immediate short-term savings instead of
• There is a growing demand for the outsourcing services from both establishing long-term “win-win” relationships with their ITO service
‘traditional’ sectors such as IT (software development), professional providers. Such attitudes and insufficient outsourcing strategy planning often
and financial services, education and hospitality and innovative result in the failed outsourced projects, increased dissatisfaction and the
lucrative niches such as mobile computing and digital media necessity to update/revise vendor management processes, which could have
• More UK outsourcers realize the importance of engaging with their been avoided if the right steps had been taken at the pre-engagement and
ITO partners through innovative business models that are able to vendor selection stages.
provide agility, scalability, speed, pricing transparency and
predictable SD/IT spending The fact that the majority of the non-outsourcing companies are very likely
• Most of the outsourced projects are small in value and require only to outsource their development in the future to access better qualified and
1–3 IT specialists to complete, which generally destroys the myth lower cost IT resources and speed up time to market proves outsourcing to
that outsourcing is for large companies only and is likely to drive be more extensively used within the UK business communities in the years to
more UK innovative startups and SMEs to adopt SD/ITO in the near come, since companies will have to respond to their current most critical
future (today, 50% of the UK companies do not outsource, because 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.


UK IT Outsourcing Intelligence Report 2011

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UK IT Outsourcing Intelligence Report 2011