IT-Outsourcing – Why leading companies rely on external IT service providers in 2023

Reading time: 8min | Author: Lukas Dubiel | 30.03.2023

A recognizable trend in the course of digitalization is the outsourcing of IT services and expertise to external IT companies. Due to the leap and unprecedented campaign of cloud technology, it has become increasingly easy to move data and applications up to an entire infrastructure to the cloud. Since this is a very complex and complicated process, it may be worthwhile to consult external IT experts.

Below, we explain why outsourcing IT offers huge growth opportunities and how it can give you a competitive edge for your business.

What is IT-outsourcing and what purpose does it serve?

IT-outsourcing is the contracting of an external service provider (or a so-called managed service provider) for the management and support of a company’s IT systems and processes.

IT-outsourcing can include a wide range of IT services, such as mobile device management, network management, cloud solutions, help desk support or cybersecurity. Companies gain access to specialized expertise and advanced technologies and resources they may not have in-house thanks to IT outsourcing, leading to cost savings and increased efficiency in the best case scenario.

IT-outsourcing relationships are often governed by service level agreements (SLAs). An SLA defines the terms and objectives that are contractually agreed with the IT service provider to enable the highest level of service quality. It usually contains measurable parameters such as availability, performance, response times and turnaround times for problems.

Why more and more companies are opting for IT-outsourcing

Cost savings: IT-outsourcing can help companies reduce the cost of hiring and training IT staff, purchasing and maintaining IT infrastructure and software.

Access to expert knowledge: IT-outsourcing allows companies to benefit from the experience and expertise of external IT experts and service providers, who typically have extensive knowledge of specific technologies and applications.

Focus on core competencies: IT-outsourcing allows companies to focus on their core competencies while relying on external IT specialists to take care of their IT infrastructure and applications.

Increased security: external IT service providers can often provide a higher level of security for IT systems and data because they have specialized knowledge in areas such as cybersecurity and data protection.

Access to the latest technologies: IT-outsourcing can allow companies to access the latest technologies more quickly and cost-effectively by accessing the expertise and IT services of an IT services provider.

Improved efficiency: External IT service providers can often provide more efficient and automated IT processes that allow companies to focus not only on their core competencies, but also on growth and expansion.

The trend is toward outsourced IT

The figures show a steady increase in global spending on IT-outsourcing. This also applies to the figures in Germany. The demand for managed services and IT expertise is growing faster than the market for IT specialists can meet it. As a result, vacancies advertised in the IT sector in particular remain unfilled for a long time.

A logical consequence of this is that companies are increasingly relying on the services of external IT experts. Small and medium-sized enterprises (SMEs) in particular are dependent on IT outsourcing, with over half of all SMEs now using external IT services.

In the case of large companies and corporate groups, for example, just under a quarter of companies make use of external IT services. In many cases, companies also operate a hybrid model in which the majority of IT tasks are handled in-house and an external service provider is only called in for specific issues.

Is single-vendor or multi-vendor outsourcing important to your business?

Single-vendor outsourcing means that a company contracts out all its outsourcing requirements to a single service provider. The single-vendor service provider is thus responsible for all aspects of the outsourcing services, from planning and implementation to management and operation of the services. In this model, the IT service provider usually provides a single point of contact for the customer, which can facilitate communication and management.

Multi-vendor outsourcing, on the other hand, means that a company hires multiple service providers for its outsourcing needs. In this model, each company can cover different areas of outsourcing services, depending on their skills and competencies. This can give the company more flexibility and control as it is not dependent on a single service provider. However, the downside is that managing and coordinating multiple service providers is more complex and it can be more difficult to define and monitor all responsibilities.

Is there a difference between a Managed Service Partner and an IT-Outsourcing Partner?

A managed service partner (MSP) and an IT-outsourcing partner (ITO) both provide IT services, but differ in the way they structure their services and build the relationship with the customer.

An MSP typically represents a broad range of IT services, including network monitoring, data management, help desk support and cyber security. In addition, with an MSP, services typically run on a monthly subscription basis, where the customer pays a monthly fee to use the MSP’s services. The MSP typically works closely with the customer to implement a flexible, scalable solution that meets the customer’s needs.

An ITO partner, on the other hand, provides a comprehensive IT-outsourcing solution in which the company outsources all or part of its IT infrastructure to the ITO partner. In doing so, the ITO partner assumes full responsibility for the management and maintenance of the customer’s IT infrastructure and, in the best case, not only ensures compliance with targets but also a high level of service quality through a service level agreement (SLA). In contrast to an MSP, the relationship between an outsourcing partner and the customer is usually more formal and designed for long-term cooperation.

IT-outsourcing with data storage in Germany

Contracting an IT operation in the DACH region, especially in Germany, brings with it the aspect of having to consider compliance with the GDPR. Companies that process personal data in Germany must ensure that they meet the requirements of the GDPR, including compliance with data protection principles, the provision of data protection declarations, and the implementation of security measures.

In addition, companies must generally conclude order processing contracts with their service providers to ensure that the IT services booked comply with the regulations.

In Germany, there is also the option of obtaining certification if a certain data protection standard can be guaranteed. For example, companies can get certified with the help of ISO/IEC 27701:2019. This is also known as the Privacy Information Management System (PIMS).

The strategic role of IT-outsourcing for digitally advanced companies

IT-outsourcing can play a decisive role in the digital transformation for companies. The advantages mentioned offer a number of opportunities to be strategically advantageously positioned.

The more an organization is able to move processes, data and applications to the cloud, the more flexibly it can respond to changing circumstances.

In addition, companies that fully rely on cloud can enable their employees to work in a more flexible way. For example, end devices in the corporate network can be set up and access granted more quickly, guaranteeing work that is independent of time and location. IT-outsourcing service providers help a company set up a secure and scalable cloud infrastructure and maintain it in the long term.

IT service provider abroad: potential risk?

IT service providers abroad can bring benefits for companies, but also some risks. Communication difficulties and more difficult monitoring of the service can lead to delays, increased costs and legal consequences.

In addition, international regulatory and compliance requirements can pose another risk. For example, when a company transfers personal data or other confidential information to an IT service provider in a foreign country, it must comply with applicable data protection laws and other regulatory requirements. If the service provider is unable to meet these requirements, this can lead to data protection breaches and thus to heavy fines.

Apart from that, complications can quickly arise if a problem arises directly on site. Not all IT services can be handled digitally. For an IT partner abroad, an emergency intervention at the customer’s site can be very difficult.

Companies should therefore carefully consider and take appropriate measures to minimize these risks. As a company based in the DACH region, it is therefore advisable to choose an IT service provider that also comes from the DACH region in order to rule out the aforementioned risks.

Which IT functions are outsourced the most?

There are many different IT services that can be outsourced by a company to an external service provider. The most commonly outsourced IT services include:

Cloud Services: Cloud computing is one of the fastest growing outsourcing areas. Companies can use cloud services to rent storage space, computing power and applications.

Network administration: often the management of the company’s network or networks is outsourced. This helps to better focus on the actual core business.

Cybersecurity: A common practice for companies is to outsource their cybersecurity, i.e. IT security. The reason for this is usually that most companies do not have the expertise available.

Database management: In order to manage immense amounts of data more effectively, many companies use an external IT service provider.

Often, certain business processes are also outsourced. In this context, one speaks of business process outsourcing.

jemix can support you as a possible IT-outsourcing partner in all these services. Thanks to our experts in the respective fields, you can rely on fast expert help in case of emergencies and questions.

What does onshore, nearshore and offshore IT-outsourcing mean?

Onshore, nearshore and offshore are terms used in the context of business processes and the choice of location for business activities. jemix, for example, headquartered in Germany, is an onshore outsourcing partner of other German companies.

Onshore refers to business activities that take place in the same country where the company is located. Thus, an IT partner company that is located in Germany is the onshore partner of a German company.

Nearshore refers to business activities that take place in a neighboring or nearby country. This means that the company is outsourced to another country, but located in the same region.

Offshore refers to business activities that take place in a country that is geographically far away from the company’s home country. Offshore outsourcing in IT is carried out to achieve cost savings, for example, electricity costs are cheaper, or the appropriate cloud service is operated through a data center abroad.

Service level agreements (SLA): contractually define services and expectations

A service level agreement (SLA) is an agreement between a service provider and a customer that specifies the provision of services in terms of quality, availability and performance.

A well-designed SLA ensures that the customer’s expectations regarding the quality and reliability of the IT service provider’s IT services are met.

To be successful when outsourcing IT with a service level agreement (SLA), service level requirements should be clearly defined and quantified to create clear goals and measurements. The SLA should include escalation procedures, penalties and bonuses, and should be regularly monitored and updated to ensure the service is meeting the customer’s needs.

It also provides a basis for monitoring and evaluating the IT service provider’s performance and can be used as a tool to negotiate prices and services. An SLA can also help improve customer service by defining clear goals and responsibilities for the IT service provider.

Components of a service level agreement in IT typically include:

1. a clear description of the services that will be provided.

2. availability: a definition of the guaranteed availability of the services within a certain period of time, for example “around the clock” or during business hours.

3. response time: the maximum time required by the service provider to respond to the customer’s requests.

4. escalation procedure: A procedure that specifies how issues will be escalated if they cannot be resolved within the specified time.

5. responsibilities: A division of responsibilities between the service provider and the customer.

6. disclaimers: a statement that limits or excludes the service provider’s liability if problems are due to unforeseen circumstances.

A well-designed and transparent SLA is therefore an important component of a successful IT-outsourcing relationship.

Data protection in IT-outsourcing

It is clear that before a contract is concluded with an international partner, care should be taken to ensure that the IT company to be selected as the outsourcing partner is located in a country that provides for legal regulations on data protection.

In addition, the IT-outsourcing provider should make a trustworthy impression. If, for example, one finds incidents about problems and failures of the company regarding data security, this is rather a reason not to enter into a partnership.

ISO certifications and premium partnerships are a valid way of finding out whether the partner has the necessary expertise within its own ranks to guarantee data protection during the IT project.

Companies should also generally check whether the data protection standards of the IT outsourcing partner are complied with. This can be done by having another company or an internal data protection department review the IT systems and processes.

As previously mentioned, it is very important to establish clear contractual regulations that ensure the protection of personal data and compliance with data protection laws. The contract should also contain regulations that restrict access to data and ensure data protection in all phases of the IT-outsourcing process.