Norway's IT Outsourcing Intelligence Report 2011

IT Sourcing Europe European IT Outsourcing Market

Intelligence

November 2011

European IT Outsourcing Intelligence Report 2011: Norway

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


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

Trends & Challenges of the In-House Software Development .................... 188

Future Adoption of IT Outsourcing Services in Norway............................... 222

Key Findings at a Glance .............................................................................. 244

Conclusions and Predictions ........................................................................ 266

Executive Summary

This Intelligence Report is based on the survey of the 491 Norwegian

companies that either outsource their Software Development / Information

Technology function(s) to an external service provider onshore (within

Norway), 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 Norwegian 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 Norwegian 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




Survey Overview

The Norwegian IT Outsourcing (ITO) and In-House Software Development

(SD) survey was conducted between October 31 and November 25, 2011, in

the frames of the All-European ITO research.

Survey goals:

Explore factors that drive Norwegian 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 Norwegian companies away from

outsourcing their SD/IT function(s)

Compare and contrast the 2011 and future ITO demands across

Norwegian 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

Norway-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 Norwegian 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)

http://www.surveymonkey.com/




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

The greatest demand for ITO services in Norway comes

from B2B software development companies

Most of ITO projects take 3 to 5 and 10 to 19 IT specialists

to complete and are valued at € 0-199K

Web solutions are most outsourced, while Cloud

computing is least outsourced in Norway

Most of the Norwegian companies single-source offshore

or onshore

Most of the Norwegian companies outsource to reduce

operating costs, accelerate time to market, access IT staff

outside Norway and release in-house staff for other

business purposes

The key issues in the Norwegian ITO are delayed project

delivery, poor project management on vendor’s side and

cultural difference

Own Development Team is the most widely used

engagement model in Norway

In the future, more Norwegian ITO buyers will go

nearshore

Maximum project control retention is the key barrier that

prevents many Norway’s companies from adopting ITO

services




Profile of Outsourcers

Do Companies Outsource Any Element of Their IT / Software

Development?

Current Outsourcing Experience




Company Size (Headcount)

Primary Industry




Revenue Growth Expectations

Outsourcers

In-House Development Companies




Size of Project Teams on Vendor’s Side (Headcount)

Value of the Outsourced Project(s) (€)




The Outsourced Areas of Expertise

Do Companies Multi-Source?




Outsourcing Destinations

IT Outsourcing Drivers & Factors

Key IT Outsourcing Drivers




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




IT Outsourcing Challenges & Problem Solving

Key Challenges of the Outsourced IT / Software Development

Key Responses to the ITO Challenges




Client – Vendor Relationships

How Companies Found Their ITO Vendor(s)

Vendor’s Size*

*Respondents were asked to refer to their primary vendor in case of

multisourcing




Service Delivery Models Used In the Outsourcing Engagements

Who Makes Final HR Decision / Selects Specialists To Be Involved In

the Project?




Levels of Companies’ Satisfaction with Their Current Vendors and

Quality of Services Provided

IT Outsourcing Costs

Do Companies Know Exact Salaries of Their Project Team Members

on Vendor’s Side?




How Actual Annual Incurred Costs Compare to the Contracted Ones

Actual Savings from the Outsourced IT / Development




Impressions of IT Outsourcing




Do Companies Plan to Continue Outsourcing Their Projects In The

Next 12 To 24 Months?

Trends & Challenges of the In-House Software

Development

How Non-Outsourcing Companies Fulfill Their IT / Development

Tasks




Size of In-House IT Teams

Part of Corporate Budget Spent on Software Development




Level of Satisfaction with the In-House Development

Key Challenges of the In-House Software Development




How In-House Developers Respond To Challenges

Reasons Keeping Companies Away From ITO




Future Adoption of IT Outsourcing Services in Norway

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




Factors’ Importance In the Future Choice of the Outsourcing

Destination

Factors’ Importance In the Future Choice of the Outsourcing Partner




Key Findings at a Glance

Since the 2011 survey has been expanded and modified, only some of the

findings will be compared to the results of the 2010 survey, while the rest

will be analyzed ad-hoc.

As the 2011 survey shows, the greatest demand for the outsourcing services

in Norway comes from the B2B-focused IT sector. In general, ITO is used

across diverse verticals, including some lucrative innovative niches such as

mobile development and digital media. However, it is not this extensively

used by construction, education, financial, manufacturing, entertainment

sectors and government.

Most of the Norwegian ITO engagements are valued at €0-199K, which is

down 21.6% from 2010. In 2011, the volume of the €200-499K contracts

dropped by 24.3% and the volume of the €500K+ contracts increased by 2.7%

from 2010. This finding shows a significant shift from large to smaller ITO

contracts and can be attributed to the increased number of web

development projects (up 63% from 2010), mobile projects (up 31% from

2010) and SaaS/Cloud computing projects (up 10% from 2010).

Although more Norwegian ITO buyers started to multisource their solutions

(i.e. distribute the outsourced operations among 2 and more service

providers) in 2011 – up 21.9% from 2010 - the prevailing majority of

companies still outsource their IT solutions to a single ITO provider. In

general, this finding marks an emerging trend for multisourcing when more

companies in Norway outtask their projects to several different vendors

based on their technological expertise, available resource pool, business

models used etc.

Regarding the outsourcing destinations that the Norwegian companies

choose to offload their IT processes to, the survey comes up with some

interesting yet unexpected findings: the equal numbers of companies

outsource offshore, onshore or multisource nearshore and offshore and

nearshore and onshore, while only slightly more than 11% of Norwegian ITO

buyers source nearshore (down 20.9% from 2010).

Regarding the factors that the Norwegian companies consider as very

important when deciding on their outsourcing geography, 100% of survey

respondents believe that foreign language skills availability is the most

important factor, more than 71% look for low costs (up 44.4% from 2010),

around 57% look for available IT talent pool (up 43.1% from 2010) and

another 57% rely on positive references from peer companies (up 37.1&

from 2010).

Analyzing the top three drivers boosting corporate decisions to outsource in

2011, almost 63% of the Norwegian ITO buyers outsource in order to reduce

operating costs (up 39.5% from 2010), the same number of companies

outsources to speed up their time to market (TTM) – up 36% from 2010, 50%

outsource to access IT resources outside Norway (i.e. as a response to the

shortage of domestic IT skills and resources) – up 19% from 2010, and

another 50% outsource to free in-house resources for other business tasks –

up 39% from 2010.

This finding suggests that although the majority of Norwegian outsourcers

are still seeking cost reduction and lower-cost resources in their ITO

engagements, they also realize outsourcing’s ability to accelerate time to

product and time to market and release internal resources for other IT

and/or business related tasks.




Regarding the client – vendor relationships, more than 57% of the survey

participants admitted selecting their ITO partner(s) based on positive

references from peer companies, another 57% - based on own online

research, almost 30% - on RFP responses and cumulative 14.3% - thanks to

the outsourcing consultancy and ITO vendor’s online marketing campaigns.

Regarding the factors that the Norwegian outsourcers consider as the most

important ones in their choice of the ITO partner, more than 70% pointed to

positive peer references (up 51.4% from 2010), more than 62% - successful

pilot/test project completion (up 53.5% from 2010), 50% - sound experience

in the similar projects (up 35% from 2010) and another 50% - low service

rates (up 33% from 2010).

Regarding the vendor’s size, almost 43% of the Norwegian ITO buyers engage

with small vendors (less than 50), while less than 15% engage with large

service providers (1,000+). This finding is explained by the actual size of the

outsourcing companies surveyed: almost 60% were small (down 8.2% from

2010), while almost 24% were large. Since many large ITO service providers

are usually quite process-packaged, hierarchical and bureaucratic, it takes a

while to come into a mutually beneficial agreement with them regarding

terms of payment, pricing structure etc. Additionally, many small ITO buyers

feel more comfortable when cooperating with small providers and have a

stereotypical belief that small providers are more customer-oriented,

compared to the large ones.

What challenges are facing the Norwegian ITO buyers in 2011 versus 2010?

According to the survey results, the top two issues are the delayed delivery

and/or unmet project milestones (up 43.1% from 2010) and poor project

management on vendor’s side (up 32.9% from 2010).

In 2010, besides the delayed delivery, two other most critical issues were

time difference and poor client-vendor communication.

In order to fix their current ITO issues, more than 62% of companies increase

face-to-face communication with their vendor’s project management and

teams (up 42.5% from 2010), 50% dedicate more management resources (up

32% from 2010) and almost 38% dedicate more IT resources to their

outsourcing operations. In 2011, as many as 25% of ITO buyers consider

changing their primary ITO partner to improve the outsourced operations,

which is up 13% from 2010.

The finding that almost 43% of the Norwegian companies surveyed consider

their current ITO partners as unreliable and not focused on mid- to term-long

cooperation suggests that in 2011 Norwegian ITO buyers “raise the bar” for

their providers and challenge them with more difficult and sophisticated

tasks. As a result, only mature and well-prepared providers with realistic HR

growth capabilities and access to complex innovative technologies are able

to overcome these challenges and retain clients. Providers who are only

focused on winning more new clients and, thus, provide incomplete /

untruthful information in their RFP responses, intentionally overestimate

own project fulfillment capabilities and bid very low, often fail to meet their

clients’ increased demands. This finding generally suggests that ITO service

providers will have to modify their engagement models and focus more on

client retention in the upcoming months.

Regarding the ITO engagement models used by the Norwegian outsourcers,

the survey shows that the Own Development Team (when ITO buyers use

their partners as space and resources providers, but retain maximum project

management and control, i.e. literally extend their in-house IT teams to the

lower-cost and resource-abundant locales) is the most popular one in

Norway, followed by the project-based models. However, the fact that the

prevailing majority of Norwegian companies point to delays in delivery

schedules and poor project management on vendor’s side as their biggest

ITO challenges proves that the companies either do not use the Own




Development Team model correctly, or simply fail to manage their

outsourced projects in the right way. The following findings support this

suggestion: only less than 15% of Norway’s ITO buyers are fully involved in

HR selection process / make the final IT staff hiring decisions (with no

interference from ITO partners) and less than 30% know exact salaries of

each and every member on the outsourced project team and the actual

service fee they pay on top of the salaries (down 0.4% from 2010). It

generally means that most of the Norwegian IT outsourcers still face the

hidden agenda / non-transparent pricing in their engagements. On the other

hand, when asked to compare the actual annual incurred costs to the

expected (contracted) ones, 57% admitted the actually incurred and

contracted costs to be about the same (up 29.1% from 2010), 14.3% said

their actual incurred costs were up to 25% higher than expected (down

25.7% from 2010), 14.3% said their actual incurred costs were 50%-75%

higher than expected (down 4.7% from 2010) and another 14.3% said their

actual incurred costs were 50%-75% lower than expected (up 25% from

2010).

Regarding the actual cost saving in 2011, the equal numbers of companies –

28.6% each – save less than 10%, 10%-24% and 60%+ from their outsourced

operations, while only slightly more than 14% save 25%-39% of operating

costs. In 2010, most of Norwegian outsourcers managed to save 10%-24% of

operating costs from ITO (down 22.7% in 2011), while only 12% saved more

than 60% (up 16.6% in 2010). This finding marks a significant increase in

overall savings from ITO in 2011.

When asked to assess their level of satisfaction with the current ITO partners,

their work quality, ability to meet deadlines and general attitudes, more than

85% said they were very satisfied, somewhat satisfied or just satisfied (up

9.8% from 2010) and only around 15% said they were very dissatisfied (up

3.3% from 2010). This finding generally reflects the Norwegian companies’

impressions of the ITO engagements: cumulative 43% believe that providers

have more disciplined methodologies that can lower costs down in a longer-

term perspective, outsourcing their software development has been the right

decision and it is important to have the vendor’s team located onshore or

nearshore.

The fact that almost 86% of the Norwegian companies plan to continue with

their outsourcing engagements in the next 12 to 24 months proves IT

outsourcing to be an effective cost reduction, TTM acceleration and overall

business development strategy improvement solution.

Conclusions and Predictions

Based on the results of the Norwegian ITO and In-House Software

Development Survey, several obvious trends were identified:

More small and mid-market actors start using ITO services in search

of innovation and differentiation

There is a growing demand for ITO services from innovative lucrative

niches such as mobile computing and digital media

Compared to the in-house development companies, more IT

outsourcing companies manage to increase their annual revenue by

1%-9% and 50%+ in 2011

Norwegian ITO contracts become smaller in value and so do project

teams

Most of the Norwegian ITO buyers outsource their projects to a

single service provider, so multi-sourcing is not yet a megatrend in

Norway




Cost advantage is no longer the major factor considered in the choice

of the ITO locale. What is most considered, however, is the

availability of the appropriate foreign (English) language skills

When choosing their ITO partners, companies are still over-

influenced by the references from their market peers and

underestimate such important criteria as vendor’s realistic HR scaling

capability and flexible and innovative business models allowing

companies to have predictable costs and plan their ITO engagements

as a long-term corporate IT strategy

The prevailing majority of the ITO buyers partner with small service

providers. This trend explains why some companies are missing

resources on vendor’s side, facing the hidden agenda, poor project

management and poor quality of deliveries. Small providers are, as a

rule, not mature and structured enough to properly manage ITO

relationships, innovate and put all of the critical processes in place.

Nor are they able to hire and retain the most highly-qualified IT

personnel that prefer to work in stable companies with a well-

established track record and able to meet high salary expectations. In

order to “keep head above the water” and withstand tough

competition on local IT headhunting markets, small and mid-sized

ITO service providers should consider the option of cooperating with

the local higher education institutions and universities and creating

in-house tech labs to incubate own IT talent pools from students and

graduates. However, such initiatives will inevitably lead to the extra

investments and, as a result, will lead to the service fee increase

(today, low fees are the only advantage that small providers have

over their larger competitors)

Compared to 2010, this year more Norwegian ITO buyers make final

HR decisions and select IT specialists on vendor’s side to be involved

in their outsourced projects. It hallmarks the origination of the next-

generation outsourcing mindsets when it no longer suffices to just

offload the project to the 3d party and wait for the turn-key delivery.

Now companies strive to have a greater control of their outsourced

operations

On the other hand, the grand majority of the Norwegian ITO buyers

are still unaware of the actual salaries their members on the vendor’s

project team(s) are paid, which marks a negative trend and suggests

that companies do not know their vendor’s price formation and are,

thus, incapable to avoid extra costs and have predictable costs for

future ITO planning

The analysis of the above findings as well as the findings of the non-

outsourcing companies’ survey allows making some forecasts for the future

development of the Norwegian ITO market:

The fact that the grand majority of current outsourcers plan to

continue with their outsourced operations in the next 12 to 24

months suggests that the level of ITO adoption across the Norwegian

industries will not decrease in the near future

In addition, the fact that there is an obvious demand for ITO services

from SMEs and innovative niche players suggests that the level of ITO

adoption is likely to increase in the future. This prediction is

supported by the finding that more than 33% of today’s in-house

development companies in Norway openly indicated considering

outsourcing as a response to their current IT challenges in the future

Considering that high cost / occupancy of domestic IT personnel and

pressing customers are some of the main barriers in the way of

successful and efficient in-house development / IT management,

more companies are expected to be forced to adopt ITO in the

months to come




The fact that cumulative 58.3% of the non-outsourcing survey

participants admitted their reluctance to outsource due to the fear of

losing own project control and stereotypical belief they are yet too

small and immature for such an undertaking suggests that more ITO

service providers will have to innovate their engagement models to

allow more benefits to SMEs as well as maximum project control

retention.

The future drivers of ITO decisions in Norway may slightly change

with more companies beginning to outsource in order to share risks,

respond to the internal and external pressures to reduce IT budgets

and speed up TTM. This trend will result in more ITO buyers focusing

on establishing long-term strategic and shared-service partnerships

with their service providers

Geographic preferences of the Norwegian ITO buyers are likely to

alter in the forthcoming months, as the majority of today’s non-

outsourcing companies indicated their intentions to focus on

nearshoring rather than offshoring if they make such a decision in

the future

Choosing their ITO locale, Norwegian companies will look at legal

system / intellectual property law maturity, geographic proximity,

foreign language skills’ availability and vast IT resource pool. Thus,

intellectual property protection in ITO engagements is likely to

become a hot topic in the future outsourcing debate

Regarding the choice of the ITO partner, the future criteria will most

probably remain the same as in 2011: most of Norwegian ITO buyers

will still rely on the market peers’ vendor references and ignore the

availability of formal quality and process maturity certifications such

as ISO/CMM or likewise




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Norway's IT Outsourcing Intelligence Report 2011

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