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IT Sourcing Europe European IT Outsourcing Market
Intelligence
October 2011
European IT Outsourcing Intelligence Report 2011: Germany
European IT Outsourcing Intelligence Report 2011: The UK
2 | 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
European IT Outsourcing Intelligence Report 2011: Germany
Contents
Contents .......................................................................................................... 2
Executive Summary ......................................................................................... 2
Survey Overview ............................................................................................. 3
Key Takeaways From the Survey ..................................................................... 4
Profile of Outsourcers ..................................................................................... 5
IT Outsourcing Drivers & Factors ................................................................... 10
IT Outsourcing Challenges & Problem Solving ............................................... 12
Client – Vendor Relationships ....................................................................... 13
IT Outsourcing Costs...................................................................................... 15
Impressions of IT Outsourcing ....................................................................... 17
Future Adoption of IT / SD Outsourcing in Germany ..................................... 18
Key Findings At a Glance ............................................................................... 24
Conclusions ................................................................................................... 27
Executive Summary
This Intelligence Report is based on the survey of the 304 German companies
that either outsource their Software Development / Information Technology
function(s) to an external service provider onshore (within Germany),
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.
The Report aims to help German outsourcing companies:
Get an in-depth understanding of the current IT Outsourcing demands and trends
See what challenges are facing their market peers / competitors and how they respond to them
Revise / improve their current IT Outsourcing engagements / business models based on the industry best practices
The Report aims to help German non-outsourcing companies:
Better understand modern software development/IT costs optimization
and/or reduction strategies
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 software development /IT
Outsourcing and how they are / will be preparing for adoption of the
outsourced development in the future
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Survey Overview
The German IT Outsourcing (ITO) and In-House Software Development (SD)
survey was conducted between September 10 and October 7, 2011, in the
frames of the All-European ITO research.
Survey goals:
Explore factors that drive German companies to outsource their
SD/IT functions in 2011
Explore challenges associated with offshore/nearshore outsourcing
and the most effective problem solving techniques
Explore the use of different business models in ITO engagements and
find out which model works best for what type of companies and
industries
Explore factors that keep German companies away from outsourcing
their SD/IT function(s)
Compare and contrast the 2011 and future ITO demands across
German industries
The survey was available online and hosted by SurveyMonkey, the world’s
leading provider of web-based survey solutions. In order to reach as many
Germany-based 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 / Outsourcing Managers,
Directors, Heads of Software Development etc).
Additionally, inbound marketing initiatives were launched in order to attract
more companies to participate in the survey. In the frames of this campaign,
the following steps were taken:
Online press releases and survey announcements distribution;
Survey localization and optimization in social media such as LinkedIn,
XING, Facebook, blogs ( Twitter, Word Press, IT Sourcing Europe’s
Blog), event management systems (Amiando), and B2B web portals
(Europages, Hoovers)
All data obtained were analyzed in the form of industry aggregates. The
answers to the open-ended questions were organized by their relativity to
the study goals and displayed as the option “all other responses” in charts
and graphs further in the Report.
Outsourcing Activity & Categories Surveyed:
The following ‘outsourcing activity’ is referred to in the 2011 German ITO
Report:
Software Development / Information Technology Outsourcing (SD/ITO) is
the process of transferring part of/entire software development function
and/or other Internet related work to the execution by the external IT
services provider(s)
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
The following categories fall under this activity:
Application (app) development and maintenance;
Website / ecommerce systems;
Data warehousing;
IT security;
Data / voice network operations;
Remote IT infrastructure management
These categories further fall under the five key areas of expertise:
Web (Web 2.0, .NET, Java, PHP, open source etc);
Enterprise 2.0 (J2EE, J2SE, C#, MySQL etc);
Mobile development (J2ME etc);
Embedded development;
Software as a service (SaaS) and Cloud Computing
Key Takeaways From the Survey
Most of German companies surveyed began to outsource their IT
function / software development more than 37 months ago
B2B software development companies are the most active users of
the outsourcing services
Most of ITO projects take 3 to 5 IT specialists to complete and are
valued at €500K+
Web and mobile solutions are most outsourced, while SaaS/Cloud
ones are least outsourced in Germany
Nearshore is the most preferred ITO destination
Most of German companies outsource to reduce operating costs,
focus on core competences, access available IT resources outside
Germany and speed up time-to-market
The key issues in ITO are poor communication with vendor’s teams,
change management, cultural difference and poor project
management on vendor’s side
Most of German companies outsource their IT / development to
small providers via the fixed-price/time-and-material (T&M) models
Most of companies refuse to outsource, because they want to have
100% managerial control of own software / IT projects
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Profile of Outsourcers
Do Companies Outsource Any Element of Their IT / Software
Development?
Current Outsourcing Experience
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Company Size (Headcount)
Primary Industry
*All other responses: manufacturing, government, transportation,
hospitality, tourism, IT (hardware)
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Revenue Growth Expectations
Outsourcers
In-House Development Companies
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Size of Project Team on Vendor’s Side (Headcount)
Value of the Outsourced Project(s)
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
The Outsourced Areas of Expertise
Do Companies Multi-Source?
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Outsourcing Destinations
IT Outsourcing Drivers & Factors
Key IT Outsourcing Drivers
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
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
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
IT Outsourcing Challenges & Problem Solving
Key Challenges of the Outsourced IT / Software Development
*All other responses: language barriers ,hidden agenda, lack of transparency
Key Responses to the ITO Challenges
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Client – Vendor Relationships
How Companies Found Their ITO Vendors
*Other: personal networking
Vendors’ Size
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Service Delivery Models Used In the Outsourcing Engagements
*Other: elancer-team.de etc
Who Hires IT Talent To Be Involved In the Outsourced Project
Execution?
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
IT Outsourcing Costs
Do Companies Know Exact Salaries of Their Project Team Members
On Vendor’s Side?
Levels of Companies’ Satisfaction With Their Current Vendors and
The Quality of Services Provided
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
How Actual Annual Incurred Costs Compare To the Contracted Ones
Actual Savings From the Outsourced IT / Development
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Impressions of IT Outsourcing
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Future Adoption of IT / SD Outsourcing in Germany
Do Companies Plan to Continue Outsourcing Their Projects In The
Next 12 To 24 Months?
Future Outsourcing Destinations
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Key Challenges of the In-House Software Development
*Other: lack of strong IT management within the company, poor communication of
business goals to software developers, wrong software development methodology
etc
How In-House Developers Respond To Challenges
*Other: hire more internal resources, revise IT budgets, dedicate more financial
resources
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Reasons Keeping Companies Away From ITO
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Circumstances In Which Companies Would Consider Outsourcing IT /
Development In the Next 12 To 24 Months
Where Current Non-Outsourcers Would Transfer Their IT /
Development In the Future
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Factors’ Importance In the Future Choice of the Outsourcing
Destination
Factors’ Importance In the Future Choice of the Outsourcing Partner
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
How Companies Would Search For Their Outsourcing Partners If They
Make A Decision To Outsource Their IT / Development In The Future
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Key Findings At a Glance
Of the 304 companies surveyed, 140 were outsourcers and 164 were in-
house software development companies. Of the 140 outsourcing companies,
the prevailing majority have been outsourcing their IT solutions for more
than 37 months now, which proves outsourcing to have been utilized as a
survival tactic by many companies in Germany at the time of recession. In
2011, 42.7% of companies surveyed were small (less than 50 by headcount)
(down 8.3% from 2010), 46.3% were mid-sized (50-599) (up 10.3% from
2010) and 20.4% were large (600+) (up 7.4% from 2010). The greatest ITO
demand comes from software companies specialized in the B2B segment,
followed by B2C IT companies and professional service providers (e.g., legal,
accounting, real estate, consulting etc). Manufacturing, government,
transportation, hospitality, tourism, IT (hardware) are the least active ITO
adopters.
Comparing the annual revenue growth expectations in 2011, the majority of
outsourcing companies anticipate growth by 10% to 19% and almost 5%
expect revenue growth by 50% and more. On the other hand, the majority of
non-outsourcing companies in Germany expect the 1%-9% annual revenue
growth, while more than 10% expect their revenue to have no increase at all.
As the survey finds, most of outsourcing companies surveyed have 3-5 IT
specialists involved in the outsourced project execution (augmented staff on
vendor’s side), while almost 12% have 30 and more employees in augmented
staff. Regarding the value of the outsourced projects, 35% of German
companies outsource projects worth of EUR 500K+ (up 27% from 2010) and
25% outsource projects worth of EUR 0-49K (up 14% from 2010). Web is the
most outsourced area of expertise in 2011 (up 44.7% from 2010), followed by
mobile (up 42.2% from 2010). Cloudsourcing remains the least popular type
of outsourcing (up 2.5% from 2010).
The research further shows that the prevailing majority of German
outsourcers partner with more than one ITO service provider (or multi-
source).
In 2011, nearshore remains the most preferred ITO destination for the
German clients (up 1.5% from 2010), onshore is second most preferred hub
(up 6.1% from 2010) and offshore is the least preferred destination (down
15.3% from 2010).
The top three drivers of ITO decisions in Germany are reduction of operating
costs (up 42.3% from 2010), focus on core competences (up 12.7% from
2010) and shortage of domestic IT skills and resources (up 23.8% from 2010).
As the survey shows, the top three most important factors that German ITO
buyers consider when choosing their ITO locale are language skills (up 41%
from 2010), available IT talent pool (up 50.5% from 2010) and low costs (up
26.7% from 2010).
The top three most decisive factors in the choice of the ITO partner are
successful test/pilot project completion (up 57.6% from 2010), sound
experience in similar projects (up 44.7% from 2010) and flexible contract
terms (up 57.7% from 2010).
The top three challenges of the outsourced IT / software development are,
according to the survey results, poor communication with vendor’s project
management and executors (down 9% from 2010), change management and
cultural difference (up 10.3% from 2010). The top three responses to these
and other challenges are increased face-to-face communication between
clients and ITO partners (up 17% from 2010), multi-sourcing (up 26% from
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
2010) and dedication of more management resources (up 9% from 2010). In
2011, 15% of German outsourcers bring / plan to bring outsourced
operations back in house (back-source), which is up 14% from 2010.
Regarding the actual search for ITO partner, more than 40% of companies
surveyed asked peer companies for references, cumulative 25% release
RFP/RFQ publicly, did online research and found the partner via personal
networking, while only nearly 20% hired an outsourcing consultancy to assist
in finding the partner and/or were approached by the future partner via
telemarketing calls, newsletter or likewise marketing activities. The prevailing
majority of German outsourcers partner with small ITO service providers
(less than 50), while only 12.5% partner with large organisations (1,000+).
Regarding the service delivery models used in ITO relationships, a project-
based model is the most widely used one, followed by DDC and Own
Development Team models. Although 50% of companies are partly involved
in the process of HR selection run by their ITO partners, almost 53% do not
know each and every member’s remuneration on vendor’s side.
In 2010, the majority of German outsourcers were dissatisfied with the
quality of vendor’s work (41%), but in 2011 most of companies are very
satisfied with their decision to outsource (almost 37%).
The survey demonstrates that in most cases the actual annual incurred costs
of outsourcing match the contracted ones and nearly 33% of companies
surveyed report saving 10% to 24% of operating costs thanks to outsourcing.
Quite a big percentage of companies – almost 16% - save 60% and more of
their corporate budgets.
Overall, German outsourcing companies have rather positive impressions of
the outsourced development/IT: almost 43% believe it is important to have
the ITO partner located on- or nearshore (in a geographically close area),
almost 37% think their decision to outsource has been the right one and
almost 32% believe that although outsourcing does save operating costs, it
inevitably raises the management costs. On the other hand, almost 22% of
companies are very dissatisfied with their decision to outsource, almost 16%
say that actual costs are higher than expected and slightly more than 5%
think their intellectual property is currently at risk.
Based on the most frequently cited challenges of the outsourced
development, companies that regret their decision to outsource have
problems managing the internal change that occurred as a direct response to
their outsourcing activity and may thus be having some negative impressions
because of own inability to properly articulate the change to all stakeholders
and to manage the outsourcing processes.
Regarding the reasons that keep companies away from ITO, almost 50% do
not want to lose managerial control of their software/IT project(s) (up 17.1%
from 2010), almost 35% do not want to put their intellectual property at risk
(up 25.3% from 2010) and nearly 26% believe they are yet too small and
immature to outsource. In 2011, slightly more than 11% of survey
participants consider outsourcing as an unethical practice that takes jobs out
of the national boundaries, which is up 9% from 2010.
Analyzing the results of the survey of non-outsourcing companies, the top
three issues of the in-house development are: high cost of German IT
resources (up 10% from 2010), scarce local IT talent pool (up 26% from 2010)
and pressing customers. To respond to these challenges, in-house
development companies continue to extend project deadlines (up 19% from
2010), improve/change software development methodology (down 3.4%
from 2010) and encourage internal staff to work overtime (down 6.8% from
2010). Alternatively, almost 15% of non-outsourcing companies surveyed
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
consider outsourcing some parts of their software development / IT function
in the near future (up 12% from 2010).
As the survey shows, current non-outsourcers are very likely to outsource in
the next 12 to 24 months to make their capital funds available, respond to
internal and external pressures to lower down IT budgets and access highly
qualified yet lower-cost IT resources outside Germany. Nearshoring is going
to be the most popular ITO destination, followed by onshore outsourcing.
The survey of non-outsourcing companies allows benchmarking the future
demand for / trends of the outsourced IT / software development in
Germany.
Regarding factors that today’s non-outsourcers would consider as the most
important ones in their future choice of the outsourcing locale, the highest
rated ones are language skills, legal system and IP protection maturity,
available IT talent pool and political and economic stability. This finding
suggests that in the future most of German outsourcers will focus more on
securing their outsourced operations and copyright and will set higher
expectations for the country of work transfer.
Regarding factors that are likely to be decisive in the future choice of the ITO
partner, the highest rated ones are provider’s ability to successfully complete
the test/pilot project, sound experience in similar projects/technologies and
positive references from peer companies. This suggests that the future
processes of selection of ITO partner(s) will remain almost unchanged and
the future German outsourcers will rely on peers’ outsourcing best practices
the same way they do nowadays.
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
Conclusions
The Second Annual German IT Outsourcing and In-House Software
Development Survey 2011 allows tracking the ways the German ITO market
has progressed and/or altered over a 12-months period.
Compared to 2010, in 2011 more companies outsource their IT / software
development function(s) in order to focus on core competences such as
product placement/marketing, business development, differentiation etc.
The number of companies that transfer their development nearshore has
slightly increased, while the number of offshore outsourcers has decreased
significantly in 2011. More outsourcers also multisource nearshore, offshore
and onshore as a response to such challenges as poor quality of deliveries
and delayed and/or unmet project milestones.
In 2011, language skills become another important factor used in the choice
of the ITO destination, while flexible contract terms become an important
factor in the choice of the ITO partner. Today’s companies look for easy exit /
back-sourcing and sufficient copyright protection terms in their ITO
contracts.
Delayed delivery and hidden agenda are no longer the key ITO challenges in
2011. This year, a communication gap between ITO buyers and providers is
the major issue in most of the ITO transactions. The fact that 50% of all
outsourcers in Germany do not have appropriate communication with
project management/executive teams on their vendor’s side proves that
many German companies still use wrong business models and/or
overestimate own abilities to do the sufficient audit of IT needs and/or
development processes to be outsourced. On the other hand, change
management being the second most critical issue in many ITO engagements
proves that companies planning to outsource should “sell” the idea to all
departments, from top to bottom, and get mutual understanding of the
outsourcing goals prior to signing any ITO agreements. Additionally, specific
change communication initiatives should be created and implemented at
every single stage of the project execution.
The fact that almost 15% of today’s non-outsourcing companies in Germany
are already planning to outsource to respond to the high cost / shortage of
domestic resources, pressing customers and slow time-to-market proves
outsourcing to be used more extensively in the months to come. However,
future ITO buyers will challenge their providers to develop and implement
more innovative service delivery models to be able to retain maximum
control of the outsourced projects and have predictable costs for further
planning of their ITO strategy.
European IT Outsourcing Intelligence Report 2011: The UK
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European IT Outsourcing Intelligence Report 2011: Germany
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 IT Outsourcing market research and fieldwork services
Evaluation of Central and Eastern Europe's IT Outsourcing 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 IT Outsourcing strategy / engagement
Ad-Hoc IT Outsourcing strategy development and full-cycle support
IT Sourcing Europe cooperates with several European ICT and Outsourcing organisations in terms of free analytics / information exchange. Amongst its major information partners are Outsourcing Verband, Das Outsourcing Journal, Outsourcing Portal, Ngi and others.
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