What are the types of IT outsourcing and why do you need to choose your provider based on your specific needs?

IT outsourcing comes in a variety of formats and business models based on location and contract type. Which flavour of IT outsourcing best fits your organisation’s unique requirements?

IT Consulting/Digital TransformationUPDATED ON May 28, 2024

John Adam K&C head of marketing

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IT outsourcing is a sub-category of outsourcing, which focuses exclusively on the sub-contracting of IT functions to a third-party provider. But IT outsourcing exists in a variety of forms and covers a wide spectrum of IT functions. Not all IT outsourcing companies offer or specialise in every model and cover the same functions and project scale.

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Different organisations have different IT outsourcing needs

A huge variety of organisations rely on IT outsourcing providers to fill tech functions it makes strategic or business sense to contract out to a third-party specialist. Businesses from large enterprises to SMEs all often outsource IT work for a variety of reasons, including:

  • Cost – many IT outsourcing providers offer specialists who work remotely from lower salary economies.
  • Balance sheet – IT outsourcing contracts are accounted for as variable rather than fixed expenses, unlike employee salaries.
  • Flexibility – outsourced IT resources can be scaled up and down without hiring and firing.
  • Recruitment difficulties – a lack of in-house expertise to recruit for tech roles efficiently or not enough suitably qualified local candidates within budget.

It’s not only companies that use IT outsourcing. Other organisations from NGOs to local and national government, sports clubs, events etc., can all have IT functions and it often, for the same reasons, makes sense to outsource them.

But the outsourcing needs of a local school or small municipality are not the same as a start-up or upwardly mobile mid-sized company. Enterprise-level companies like banks, consumer goods companies and manufacturers will again be a very different profile with larger scale projects and requirements of their third-party providers.

There are different types of IT outsourcing and different types of IT outsourcing providers cover the variety of needs. The company that can offer the most appropriate service to one kind of client will often not be the right fit for another.

For example, if your company or organisation requires that third-party providers are ISO certified, and have a minimum level of turnover or employee numbers, you will probably be limited to working with larger IT outsourcing companies. You might have to consider GDPR or other personal data regulations that mean certain IT functions must be located within the EU or another jurisdiction.

Before narrowing down a shortlist of IT outsourcing companies to speak to about your organisation’s needs, you should first define the type of IT outsourcing you need. So let’s detail the different types of IT outsourcing that exist on the market. That will help you identify the type you need as a starting point for the process of contracting the right provider.

Types of IT outsourcing

The spectrum of IT outsourcing services available can be broken down by type in different ways. The most obvious are:

  • By IT function
  • By cooperation model
  • By engagement model
  • By scale
  • By geography

The IT functions that can be outsourced

IT functions that are often outsourced include:

  • Help desk and technical support
  • Application development and maintenance
  • QA/testing
  • IoT development & maintenance
  • Infrastructure management
  • Data centre management
  • Cybersecurity
  • AI & Machine Learning development
  • IT consultancy

A majority of IT outsourcing companies specialise in one or more, but rarely all, IT functions. For example, the types of IT outsourcing K&C specialises in are software application development and maintenance, QA and testing (automated & manual) and cloud infrastructure set-up and management.

We don’t offer help desk and technical support specialists, data centre management or the development of specialist AI and IoT/embedded software. But other IT outsourcing providers do. As such, your shortlist of potential providers should focus on those that offer the type of IT functions you plan to outsource.

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IT outsourcing by type of cooperation model

IT outsourcing providers also offer a variety of service level tiers, the most common examples of which are:

  • Outstaffing/body leasing
  • Full delivery management with HR functions
  • A contractually agreed hybrid between the two where some functions are taken on by the end client and others by the outsourcing partner.
  • Build-Operate-Transfer (BOT)

Infographic showing types of IT outsourcing by service level and business model

Outstaffing/Body Leasing

The most stripped-back kind of IT outsourcing is outstaffing, sometimes also referred to as body leasing, where the outsourcer is only responsible for presenting candidates for interview and subsequently payroll. Body leasing is common when the end client needs to augment inhouse IT resources with additional resources or fill skills gaps.

Full delivery management

At the other extreme, the outsourcing provider can be responsible for the interview process and recruitment decisions, full project and delivery management, provide HR functions such as professional development and disciplinary procedures as well as payroll and all other admin.

The client simply sets the requirements for the IT functions to be provided by the outsourcer, the outputs expected of those functions and any rules and standards that must be adhered to. The outsourcing partner is then fully responsible for the execution lifecycle and quality of the output as per the contracted requirements.

Build-Operate-Transfer (BOT)

Another IT outsourcing model is build-operate-transfer (BOT). Here, the outsourcer recruits and onboards a team of specialists, which could range from a several members-strong software development team to a whole R&D or support centre. The operating team is then transferred to the end client, who takes over their employment and associated responsibilities.

This type of arrangement is often used when an organisation lacks the expertise, resources, or time to undertake a project internally, and instead chooses to partner with an external company that has the necessary capabilities. The BOT model allows the end client to benefit from the expertise and resources of the outsourcer, while still maintaining ownership and control over the project in the long term.

Not all IT outsourcing providers offer every type of model. At K&C, we specialise in providing teams that come with full delivery management but also offer a stripped-back body leasing/outstaffing service if that is what our client requests. We’ve also executed BOT projects, such as this case study for building a 120-developer-strong Liferay R&D centre.

IT outsourcing by business model – time and material, fixed cost or hybrid?

  • Time and material
  • Fixed cost
  • Hybrid models

Traditionally, IT outsourcing services are based on a “time and material” business model that means the end client is billed by the hour, day, week or month. Rates for the specialists provided and any additional services such as delivery management, HR functions payroll etc. are agreed and contracted, as well as often the minimum and maximum parameters and notice periods for scaling the outsourced functions up and down.

A time-and-material engagement model is usually necessary for larger or ongoing projects, especially in the context of an agile approach to software development. However, it can make sense for outsourcing partners to offer a fixed price offer for smaller software development projects, consultancy or other IT functions where requirements are clear, fixed and time-boxed.

Hybrid models such as fixed-cost agile can also be agreed. This usually involves breaking a project down into modules, elements or stages where requirements are clear and fixed. When one stage has been completed for an agreed fixed price, the requirements for the next stage are detailed and agreed upon and a fixed cost for their execution is contracted.

Hybrid models can, executed well in the right circumstances, help both the end client and IT outsourcing partner budget more efficiently and be less exposed to changing market conditions.

IT outsourcing by project scale and provider requirements

As already touched on, IT outsourcing requirements can range from a single consultant a few days a month or a compact software development team to a fully staffed R&D or support centre. Not all IT outsourcing companies will be willing to take on smaller projects and not all will have the resources to handle large projects.

Your organisation may have other requirements an IT outsourcing provider must meet, such as ISO certification, AWS partner status, number of employees and minimum turnover, to name just a few.

The scale of your organisation and its corporate requirements for third-party providers, as well as the scale of the team or project you want to outsource, will influence your choice of outsourcing partner.

IT outsourcing types by geography

IT outsourcing types are often also defined by geography, which informs the common labels of:

  • Onshore
  • Nearshore
  • Offshore

Onshore IT outsourcing

In onshore IT outsourcing relationships, the contracted IT functions are based in the same country as the end client. When an end client contracts outsourced IT functions onshore it is usually because of one of the following reasons:

  • Onsite collaboration required
  • Language – it is difficult to recruit specialists with the required language skills in other geographies.
  • Data security regulations – some IT functions involve access to and the transfer of data regulated in a way that requires anyone performing those functions to be in the same country as the data itself.

Nearshore IT outsourcing

Nearshore IT outsourcing means IT functions are physically located in another country but one that is loosely defined as being in relative geographical proximity to that of the end client. For example, Eastern Europe is considered nearshore to Western Europe and Mexico to the USA.

There is no fixed definition of how near an outsourcing market has to be to the end client’s domicile to qualify as ‘nearshore’ but it is generally accepted as meaning time zones are compatible and travel back and forth convenient. A rough approximation would be to see a nearshore market as reachable with what would be defined as a short-haul flight.

Nearshore outsourcing’s advantages are usually that costs are lower because the IT functions are based in a lower salary, lower tax and generally lower cost economy than the end client. However, onsite collaboration is still relatively easy and cost-effective when required.

High levels of language and business culture compatibility are other advantages often associated with nearshore IT outsourcing.

For a full list of the advantages of nearshoring, as well as some potential issues that come with it, read our blog post on why nearshoring works – based on our first-hand experience.

Offshore IT outsourcing

If nearshore IT outsourcing is loosely defined as locating IT functions a short-haul flight away, offshore IT outsourcing destinations involve a long-haul flight. India and the Philipines, for example, are considered offshore outsourcing markets from the perspective of European and North American end clients.

Organisations usually favour offshore locations ahead of nearshore options based on either perceived cost or the availability of the qualified talent they need.

What type of outsourcing do you need?

It is important to first define the type of IT outsourcing you need within the framework of your budget. Especially at the senior level, IT specialist salary levels around the world have become less differentiated than was once the case. IT outsourcing has become less about cost and more about its other strategic benefits.

However, nearshore and offshore outsourcing do still usually reduce costs compared to onshore or hiring in-house for organisations based in high salary economies. And there are emerging IT services markets where costs are still lower. For example, in 2022 K&C opened new offices in Baku, Azerbaijan and Sulaymaniyah, a university city in the politically stable semi-autonomous region of Iraqi Kurdistan.

Beyond cost, consider what level of outsourcing service you need, from body leasing to full management or a BOT model, the scale of your needs and preference or requirements where outsourced IT functions will be located eg., within the EU due to GDPR.

You will then be able to identify a shortlist of potential providers with the right profile to service your IT outsourcing needs.

Have you already found the right IT outsourcing partner?

We’d love you to tell us about your IT outsourcing needs and propose a solution. Munich-based K&C has over twenty years of experience as a nearshore IT outsourcing provider to a range of clients from enterprise-level corporations to exciting start-ups and mid-sized growth companies.

We recruit across Eastern Europe, including EU countries and have physical offices in Munich, Krakow (Poland), Kyiv (Ukraine – currently suspended), Baku (Azerbaijan) and Sulaymaniyah (the semi-autonomous region of Iraqi Kurdistan).

We specialise in fully managed teams but can also offer body leasing, hybrid models and BOT, depending on your requirements.

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