UK IT Sourcing & In-House Software Development Intelligence Report 2010

IT Sourcing
European IT Outsourcing Europe Ltd
Intelligence Report
2010.
Part 2: trends and
Nearsho re IT Out sourcing
challenges among the Market Resea rch &
Consultancy
UK outsourcing and non-
outsourcing companies
(reduced version)
Coventry, West Midlands
The United Kingdom
2010

Table of Contents

I. Executive Summary p.3

II. UK IT Sourcing Survey 2010 p.4

II.I. Key Survey Findings p.4

II.II. Trends Analysis p.5

II.III. Findings Discussion p.6

III. UK Software Development Best Practices Survey 2010 p.7

III.I. Key Survey Findings p.7

III.II. Trends Analysis p.8

III.III. Findings Discussion p.10

IV. Conclusions & Recommendations p.10

3
European IT Outsourcing Intelligence Report. Part 2: Trends & Challenges Among the UK Outsourcing & Non-Outsourcing Companies

I. Executive Summary However, as the global economies slowly stabilize, more European companies
begin to realize the true value they can gain from the right ITO engagement and
The recent economic crisis has proven to be the major force driving Western start transforming their business plans to source new avenues for generating
European and Nordic countries to look for ‘survival strategies’. Since in-house revenue, and increase productivity and effectiveness of their Outsourcing
software/web development, deployment and maintenance involve tremendous endeavors. This is how the Western European and global ITO landscapes look
costs, more European companies have turned to IT Outsourcing (ITO) as a way like today.
to reduce operating costs. While being considered as the strategy most
frequently adopted by large companies in the pre-crisis times, today’s ITO In the beginning of 2010 IT Sourcing Europe initiated the UK IT Sourcing Survey
practices find more and more supporters among the mid-sized and small 2010 as part of its ongoing European ITO Research. We reached our vast
companies, for whom cost efficiency is as important as an opportunity to have network of business contacts in the United Kingdom and invited UK IT decision
access to skills and services that can generally improve their online presence and makers to complete our online Survey and share their ITO experience with a
business performance. broader business community both within and outside of the UK. As a result, 250
companies kindly responded to our invitation and filled out the questionnaire.
However, engagement in ITO relationships has proven to be the most impactful
and culture-changing experience that does not always result in success. For Further on, in order to compare and contrast the outsourced software/web
development with the best practices of the in-house development and
some companies the outsourced software development can be a ruining rather
understand why some UK companies refuse to outsource their IT function to a
than an improving practice. It mainly happens because companies begin to 3d party, we have conducted another Survey of UK non-outsourcing companies.
adopt ITO as a reaction to short-term economic pressures and are not focused As a result, 222 companies with no ITO experience completed the Survey and
on the benefits they may gain in a longer-term perspective. Other reasons of the allowed us to assess the key factors keeping UK businesses away from the
failure of the ITO relationships include, but are not limited to the wrong choice outsourced development.
of an Outsourcing destination, partnering with a wrong ITO services supplier,
underestimation of the outsourced project scope etc.

Copyright IT Sourcing Europe Ltd. 2010. All Rights Reserved.

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II. UK IT Sourcing Survey 2010 II.I. Key Survey Findings

Of the 250 UK companies who kindly agreed to complete our online questionnaire, 35%  Although most of the UK companies still outsource their software/web
are small (less than 50 employees) and 65% are mid-sized to large (50 to 500+ development offshore (at least 3 time zones away from home country),
employees). In 2010 45% of the surveyed companies expect to gain EUR 1M to 49M the number of companies outsourcing nearshore (maximum 2 time
annual revenue and 48% expect to have revenue less than EUR 1M. Only 10% of zones away from) is very close to and is likely to outnumber offshore
companies report anticipating EUR 100M – 499M annual revenue. Regarding the outsourcers by the end of 2010.
revenue growth, 38% of companies expect 10%-19% growth and 34% - 1% - 9% growth
 Top three reasons why UK companies outsource their software/web
in 2010. Only 11% of companies report expecting 50%+ revenue growth.
development are: to reduce operating costs, to accelerate time to
Fifty-two percent of the surveyed companies have more than 3 years of general market via flexibility and scalability and to free in-house resources for
software development Outsourcing experience, 38% have 1 to 3 years experience and other business purposes.
10% outsourced their software/web development for the first time less than 12 months  Web and Enterprise solutions remain the most outsourced ones among
ago. the UK companies.
Twenty-five percent of the participating companies currently outsource their software  Most UK outsourcing companies partner with only one services
development offshore (at least 3 time zones away from home country), 23% outsource provider.
nearshore (maximum 2 time zones away from home country), 20% outsource within  Low costs remain the key factor impacting the UK companies’ choice of
own country, 18% outsource both nearshore and offshore, 13% outsource offshore and the Outsourcing destination and vendor.
within the UK and 4% outsource nearshore and within the UK.  Delays in delivery schedules is the most frequently cited challenge
facing the UK outsourcing companies, followed by poor communication
Sixty percent of the surveyed companies outsource their software/web development to
a single IT services provider and 40% distribute their development among 2 and more with vendor’s project management.
providers. Thirty-nine percent of respondents partner with small ITO providers (less than  The majority of the surveyed companies report 40%-59% actual savings
50 in headcount), while majority of the companies partner with mid-sized and large from the outsourced development.
providers (50 to 500+ in headcount).  Most of the UK outsourcing companies do not know the exact salaries
of each of their team members on the outsourced development team,
meaning that their current ITO engagement does not allow them to
have 100% managerial control of project teams and costs associated
with Outsourcing.


5

II.II. Trends Analysis Companies Outsource Their Software Development as a Whole!

Companies Outsource To Reduce Operating Costs and Speed Up Time To Figure 3. Volume of the outsourced software development.
Market!

Figure 1: Top Three Pressures that impact corporate decisions to outsource
software/web development.

90% - 100% 30%
30%
60% - 89% 23%
to reduce operating costs

to accelerate time to market via 16% 40% - 59% 23%
flexibility and scalability
to free in-house resources for other 10% - 39% 20%
12%
business purposes

In the UK the Biggest ITO Demand Comes From Web and Enterprise
In-House Assessment Comes First, Consultants - Last!
Solutions!
Figure 2. Actions companies take prior to signing an Outsourcing contract.
Figure 4. Most demanded areas of expertise in the UK ITO.

30%
conduct in-house assessment of IT…

ask others for references 22% Web 32%

16% Enterprise 30%
seek domestic low-cost providers
Mobile 16%
hire a consultancy 10%
Embedded dev. 11%


6

Low Costs and Available Talent Pool Are the Key Drivers of the Choice of II.III. Findings Discussion
the Outsourcing Destination!
The UK IT Sourcing Survey 2010 allows us to observe certain trends among the
Figure 5. Key drivers of the choice of the Outsourcing destination. companies that outsource their software/web development function to a 3d party
either offshore or nearshore. Thus, cost reduction remains the key factor driving most
UK companies to adopt the outsourced development. Other most cited factors include:
acceleration of time to market, freeing in-house resources for other business purposes,
low costs 28%
difficulty finding necessary resources within the UK, business development strategy
improvement, better product quality and pressure from investors / executive
available IT talent pool 25%
management to cut operating costs.
positive references 14%
Prior to looking for the ITO partnerships, UK companies do in-house assessment of the IT
areas to be outsourced and prefer hiring/promoting a manager to lead the Outsourcing
geographical and cultural proximity 12%
process rather than hiring a consultancy. Other companies prefer asking others for
references and seeking low-cost IT services providers within the UK, while only 10%
respondents report entrusting their Outsourcing decisions to a consultancy. This finding
explains well a rather high rate of the failed Outsourcing contracts – refusing to rely on
true technology professionals and bring in any outside assistance, many UK companies
An extended Trends Analysis is available in a full version of may overestimate their factual capability to do the proper assessment of the areas to be
the Report outsourced and, as a result, make the wrong choice of the ITO destination and supplier.
This eventually results in poor savings from the outsourced relationship, paying
overheads and inability to manage the outsourced project.

Most UK companies outsource their software/web development to a single ITO supplier
of 1 to 200 or 500+ employees in size. Analysis of the survey responses suggests that the
greater the company, the bigger supplier it tends to partner with.

The research presents the following findings with regards to the Outsourcing destination
and vendor selection criteria among the UK companies:

1) To select an Outsourcing destination, companies pay attention to low costs of
doing business, available IT talent pool, positive references and geographical and
cultural proximity. Factors such as political and economic stability, maturity of legal
system and Intellectual Property (IP) security and strong R&D base are considered


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to be less critical by most of UK companies in their choice of the Outsourcing III. UK Software Development Best Practices Survey 2010
destination.
Of the 222 UK companies who completed our Software Development Best Practices
2) To select the right ITO supplier, UK companies consider low service fees, survey of non-outsourcing companies, 73% are small (less than 50 employees) and the
references and supplier’s reputation, sound experience in the similar projects and rest are mid-sized to large businesses (50 to 500+ employees). Fifty-two percent of
specific skills which are hard to find in the UK. More companies begin to consider companies expect EUR 1M-49M and 39% expect less than EUR 1M annual revenue in
innovative and flexible business models that help differentiate suppliers from their 2010. Thirty-five percent of companies anticipate 1%-9%, 26% of companies - 20%-49%
competitors. Such criteria as available level of quality certification (ISO, CMMI etc) and 23% of companies – 10%-19% revenue growth for 2010.
and supplier presence in home country are least frequently used by the UK
companies when making their Outsourcing decision. Sixty-eight percent of companies develop, manage and maintain their software through
internal IT departments, 16% use remote services of freelance developers and 13% of
Overall, UK clients challenge their Outsourcing partners to be able to provide companies partner with local IT services providers.
transparent cost structures as well as a combination of speed, cost management
and growth supported by business agility and unprecedented technological Thirty-seven percent of non-outsourcing companies have 1 to 3 IT specialists on their
innovation. internal IT teams, 15% - 4 to 8 team members and only 7% have more than 60 staff
members in their IT departments.
More thought-provoking findings are available in a full
We asked our survey participants whether they believe their software is being currently
version of the Report. developed at the highest possible quality level or not. As a result, 55% believe it versus
45% of those who think their software leaves much to be desired.

III.I. Key Survey Findings

 The majority of the surveyed UK non-outsourcing companies believe their
software/web is being developed at the highest possible quality level.
 High cost of development and implementation and time it takes to complete a
software development project are two key obstacles to successful in-house
development.
 Many UK companies do not outsource, because they want to have 100%
managerial control of their software development project and team members.
 Most surveyed UK companies will start considering outsourcing their
software/web development, if they need faster time to present their
solution/product/service to market.


8

III.II. Trends Analysis

Costs and Slow Time To Market Are the Hugest Barriers To Successful In-
20%-50% of UK Corporate Budgets Go To Software Development! House Software Development!

Figure 15. Portions of corporate IT budgets that go to software development. Figure 16. Key challenges of the in-house software development.

high cost of development and 26%
0%-4% 19% implementation

time it takes to complete a software 23%
5%-9% 12% project

software bug/error fixing 20%
10%-19% 23%

IT department has to solve many other 16%
non-core issues
20%-49% 46%

staff turnover 13%

scarce local IT resources 5%


9

Methodology Improvement Is The Solution! Companies Do Not Outsource, Because They Want To Have 100%
Managerial Control of Their IT!
Figure 17. Top 4 strategies that UK companies use to respond to challenges
Figure 18. Key reasons why UK companies refuse to outsource their software
development.

20%
improve software development 38% want to have 100% managerial control of
methodology IT
totally satisfied with the in-house 13%
development

encourage staff to work overtime 25% think that ITO will result in poorer 13%
product quality
think that Outsourcing will cost more 11%
money and headaches

hire foreign IT specialists 21% reluctant to create shared environments 7%

reluctant to cope with change 7%
management

17% don't believe in ITO potential of lower 7%
implement distributed development cost countries

afraid of putting IP at risk 7%

have no pressure to cut costs 5%

think that Outsourcing is unethical 5%

An extended Trends Analysis is available in a full version of
the Report.

10

III.III. Findings Discussion IV. Conclusions and Recommendations
The UK Software / Web Development Survey 2010 allows us to observe certain trends The UK IT Sourcing Research 2010 arrives at some important conclusions which help
among the UK companies that develop their software solutions internally and stay away better understand current trends, challenges and problem solving techniques related to
from Outsourcing. the outsourced software/web development. The key findings are that in 2010 more
small to mid-sized UK companies start outsourcing their software development function
Unlike their outsourcing counterparts, the UK non-outsourcers do not view reduction of
to a 3d party either within own country, or nearshore, or offshore. Small companies
operating costs as the major driver of their future outsourcing decisions. Most
prefer partnering with small ITO suppliers, while large companies partner with one or
companies have admitted the likelihood to outsource software/web development, if
more large ITO suppliers. Cost reduction remains the major force driving the UK
they need faster time to market via flexibility and scalability. Another most frequently
companies to outsource their software development. Besides, the UK clients are looking
cited reason to start considering outsourcing in the future is if there are no necessary IT
for innovation, faster time to market and flexibility in their outsourcing deals. Currently,
resources left in the UK for successful software development.
companies outsource offshore and nearshore equally, but the number of companies
Again, unlike the UK outsourcers, the UK non-outsourcers express willingness and using different outsourcing mixes such as nearshore + within own country or nearshore
readiness to outsource nearshore rather than offshore. Although low costs are still cited + offshore is rapidly growing, likely to outnumber the offshore outsourcers by the end of
among the major drivers of the choice of the outsourcing destination, such factors as 2010.
geographical and cultural proximity and available talent pool are very important for the
In the UK, the major ITO demand relates to the Web and Enterprise development, while
future sourcing decisions of today’s UK non-outsourcers.
mobile, embedded development and cloud computing remain less demanded in ITO.
Regarding the future choice of ITO suppliers, current non-outsourcers name references
The recent recession has generally shrunken the value of the outsourced projects in the
and reputation, sound experience in the similar projects, flexible contract terms and low
UK: the majority of the surveyed UK companies (32%) value their outsourced projects at
prices among the most impactful selection criteria.
EUR 0 – 199K, 20% - at EUR 500K and more and 17% - at EUR 200-499K.

More thought-provoking findings are available in a full More conclusions and recommendations are available in a full
version of the Report.
version of the Report.


11

About IT Sourcing Europe
IT Sourcing Europe Ltd is a UK-based research and consultancy company
specializing in nearshore IT/software development Outsourcing. Our services
include:

 Independent IT Outsourcing market research and analysis
 Independent surveys of Western European outsourcers and their
ITO demand
 Independent surveys of Central and Eastern Europe's ITO services
providers and their factual capability to deliver top quality
products and services on time and on budget
 Consultancy and recommendations to companies planning to
change their current outsourcing strategies
 Consultancy and recommendations to companies planning to
outsource their IT function nearshore
 Custom market and competition research and surveys

Our Contact Details:

IT Sourcing Europe Ltd

The Meridian, 4 Copthall House,
Station Square, Coventry, West Midlands,
CV1 2FL United Kingdom
Email: info@itsourcing-europe.com
Tel.: +44(0)2476992505
Web: www.itsourcing-europe.com


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