Danish IT Outsourcing Intelligence Report 2011

IT Sourcing Europe

European IT Outsourcing European IT Outsourcing Market
Intelligence

Intelligence Report 2011:
Denmark

July 2011

European IT Outsourcing Intelligence Report 2011: Denmark

European IT Outsourcing Intelligence Report 2011: The UK

Contents

Executive Summary .......................................................................................... 3
Survey Overview ............................................................................................... 3
Profile of Outsourcers....................................................................................... 5
IT Outsourcing Drivers and Factors ................................................................ 10
IT Outsourcing Challenges .............................................................................. 12
Client – Vendor Relationships ........................................................................ 13
IT Outsourcing Costs ....................................................................................... 16
Impressions of IT Outsourcing ........................................................................ 17
Future Adoption of IT / Software Development Outsourcing
by Current Outsourcers……………………………………………………………………………….18

Challenges of the In-House IT / Software Development ................................ 19
Factors Keeping In-House Development Companies Away
From Outsourcing……………………………………………………………………………………….20

Future Adoption of Outsourcing by In-House Development Companies……..21
Key Findings’ Discussion ................................................................................. 23
Conclusions ..................................................................................................... 27

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Executive Summary

This Intelligence Report is based on the survey of the 674 Danish companies that either outsource their Software Development / Information Technology
function(s) to an external service provider onshore (within Denmark), 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 Danish 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 Danish 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 Danish IT Outsourcing (ITO) and In-House Software Development (SD) survey was conducted between May 17 and June 30, 2011, in the frames of the All-
European ITO research.

Survey goals:

Explore factors that drive Danish 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 Danish companies away from outsourcing their SD/IT function(s)
Compare and contrast the 2011 and future ITO demands across diverse Danish 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 Denmark-
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 initiative, the
following steps were taken:

Online press releases and survey announcements distribution;
Survey localization and optimization in social media such as LinkedIn, 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 Danish ITO Intelligence 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)

The following categories fall under this activity: These categories further fall under the five key areas of expertise:

Application (app) development and maintenance; Web (Web 2.0, .NET, Java, PHP, open source etc);
Website / ecommerce systems; Enterprise 2.0 (J2EE, J2SE, C#, MySQL etc);
Data warehousing; Mobile development (J2ME etc);
IT security; Embedded development;
Data / voice network operations; Software as a service (SaaS) and Cloud Computing
Remote IT infrastructure management




10 | 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 L i m i t e d 2 0 1 1 | A l l R i g h t s R e s e r v e d



Factors’ Rating In Terms of Their Importance In the Choice of the Factors’ Rating In Terms of Their Importance In the Choice of the
Outsourcing Destination Outsourcing Partner




Business Model Used In the ITO Engagements Who Hires IT Talent To Be Involved In the Outsourced Project
Execution?




IT Outsourcing Costs

How Actual Incurred ITO Costs Compare To the Contracted Ones Actual Savings From ITO




Impressions of IT Outsourcing




Factors Keeping In-House Development Companies Away From Outsourcing




Key Findings’ Discussion projects at €0-49K (up 15.5% from 2010). The number of companies with
projects valued at €500K and more has dropped by 3% in 2011.

Danish IT Outsourcing and In-House Software Development Survey 2011 Web remains the most demanded area of expertise and is outsourced by
has been conducted for the second year running and allows tracing ways more than 70% of Danish companies (up 36% from 2010). Mobile
the Danish ITO market has changed over a one year period. development follows being outsourced by 40.5% of companies (up 24.5%
from 2010). Although SaaS and Cloud solutions remain the least outsourced
In 2011, more questions were added to the survey and some questions ones, the demand for cloudsourcing is growing at a steady pace:
asked in the 2010 survey were modified for the purpose of getting a more enterprises that cloudsource their solutions in 2011 outnumber those that
objective outlook of the ITO trends and behaviors. Because of this, only cloudsourced in 2010 by 5%. This finding is demonstrative of the general
those indicators were compared and contrasted that had remained trends that are currently observed on the global ITO and shared services
unchanged from the 2010 research. markets: companies are more eager to outsource solutions that require
very fast time-to-market and immediate responding to rapidly changing
As the survey shows, in 2011, more Danish companies indicate having 37
customer needs and are less eager to outsource more complex IT processes
and more months of overall IT/SD outsourcing experience (up 2% from
that are highly dependent on the internal IT infrastructure and strategy.
2010) and more companies indicate having started their ITO engagements
Regarding the cloudsourcing, many companies are very much concerned
less than 12 months ago (up 6% from 2010).
about the data privacy issues and therefore bide their time to see other
The ratio of small, mid-sized and large outsourcing companies has not companies’ “pioneer” experiences with this type of outsourcing.
changed much from 2010: of all outsourcers surveyed, 56.5% are small (less
The survey further finds that this year the number of multisourcing
than 50 employees), which is up 6.5% from 2010; 23.5% are mid-sized
companies dropped by 8.5%, compared to 2010, and the prevailing
(more than 50 and less than 600 employees), which is up 0.5% from 2010;
majority of Danish companies still choose to outsource their solutions to a
and 20% of companies are large (600 and more employees), which is down
single provider.
5% from 2010.
In 2011, the top three ITO destinations remain the same as in 2010: most of
In 2011, the greatest demand for the outsourcing services comes from IT
companies still prefer to transfer / continue with their IT/development
(software development) sector, followed by government and professional
nearshore (up 3% from 2010), a smaller segment outsources offshore (up
services sectors. Telecommunication companies demonstrate the smallest
9% from 2010) and another smaller segment - onshore (up 1.5% from
demand for the external IT resources. Overall, ITO services are used to a
2010). Asked to hypothetically think over the locales they would transfer
certain extend across all of the major Danish industries.
their IT/development if they make such a decision in the future, the
The majority of Danish outsourcers have only 1 to 2 persons in project majority of Danish non-outsourcers indicated a very high likelihood to
teams on ITO vendor’s side (up 19% from 2010) and value their outsourced



outsource within Denmark (up 23.5% from 2010) and nearshore (up 23.5% with each and every specialist involved in the project execution. The
from 2010), while less than 15% would go offshore (up 3.5% from 2010). majority of outsourcing enterprises begin to realize that the better the
mutual understanding between the in-house and vendor’s management
As the survey shows, the top three drivers of ITO decisions have slightly
and IT teams, the better the quality and timeliness of delivery. Some of
changed in 2011, compared to 2010: today’s companies still outsource to today’s Danish outsourcers agree to pay for the outsourcing services at
reduce operating costs and access IT skills and resources that are hard to higher rates as long as they have all of their critical milestones met and do
find / costly within Denmark, but they are also driven by necessity to focus
not have to pay extra to fix bugs and errors emerging at the post-release
on core competences and business development, while in 2010 they were
stage.
urged to accelerate time-to-market. If to compare these ITO drivers with
the challenges facing today’s in-house software development companies, it As the survey shows, challenges facing Danish outsourcers in 2011 are
is possible to see a clear interdependency: non-outsourcing companies totally different from those in 2010. This year, companies “suffer” from the
suffer most from the scarce local IT resource pool, high cost of domestic IT shortage of sufficient resources on vendor’s side, change management and
resources and product development, and slow time to market. vendor’s inability/reluctance to understand their business concept, goals
etc. In 2010, the major ITO issues were related to the delayed delivery,
According to the 2010 survey findings, the highest rated factors influencing
poor communication with vendor’s project management and a cultural
companies’ choice of the ITO destination were low costs, available IT talent difference. This finding is basically linked to the previous one: once
pool, positive peer references and cultural proximity. This year, a “low cost” companies begin to adopt outsourcing as a strategic step forward towards
factor has moved down and been replaced by “appropriate foreign
more efficient business growth rather than a tactic to reduce costs in a
language (English) skills”. short-term perspective, they face difficulties introducing and managing the
As per the 2010 survey findings, the most influential factors in companies’ change related to operations’ transfer within their corporate networks.
choice of the ITO partner were: low service rates, positive peer references Outsourcing does require some adjustments and modifications of the
and specific skills that are hard to find / too expensive within Denmark. In internal processes as well as “buy-in” from all of the company’s
2011, Danish outsourcers value innovative and flexible service stakeholders.
delivery/business models (so-called “Outsourcing 2.0”) and sound Two other ITO issues most likely relate to the choice of the wrong ITO
experience in similar projects as the most decisive factors, while low service partner. According to the survey, the most popular steps companies make
rates are considered even less important than flexible contract terms,
to find ITO service providers are doing own online research and asking peer
successful pilot project completion and peer references. This finding companies/partners for references. Another interesting finding is that
demonstrates a significant shift in the way today’s companies in Denmark almost 25% of Danish outsourcers engage with those service providers who
perceive IT/SD outsourcing. In 2011, companies are more concerned about
reach out to them via sales/telemarketing/direct email campaigns. Public
the effectiveness of communication with their ITO partners and project RFP/RFQ release/project bidding and cooperation with outsourcing
teams and, therefore, it is important for them to ‘be on the same page” consultants are used equally by 15% of Danish outsourcers each. Also,


almost 2% of survey respondents admitted finding their ITO partners However, a project-based model is the most popular one and used by over
through the Danida Initiative’s Technical Advisory Services. Asking fellows 45% of outsourcers. Dedicated/managed and Own Software Team models
for vendor references as well as doing online research may not be enough are used by 35% of companies, while once famous Dedicated Development
for choosing the vendor with the best capability to match own software/IT Center (DDC) model is currently used by less than 15% of all outsourcers
project requirements. What is good for one company may in fact be surveyed. This finding explains well the next findings that almost 50% of
insufficient or even destructive for another. The fact that the prevailing companies are not involved in the process of interviewing and/or selecting
majority of Danish outsourcers partner with small ITO vendors (being small candidates to be involved in their project execution teams and that almost
themselves) explains again why companies are challenged with the lack of 80% of Danish outsourcers do not know exact salaries of each and every IT
resources to be supplied by ITO vendors as well as vendors’ specialist on their project team on vendor’s side (down 37.8% from 2010).
misunderstanding of their clients’ business concepts. The problem with
small vendors is that they usually do not have a strong competitive The survey results underscore that 35% of Danish outsourcers are
advantage in the local IT headhunting and are unable to hire specialists who somewhat satisfied (down 7% from 2010), while slightly more than 10% are
are qualified enough to complete challenging tasks (just because these somewhat dissatisfied with their current ITO vendors and the quality of
specialists cost above the average local workforce market rates). Plus, such services provided (up 7% from 2010).
specialists prefer to work for companies with a well-established track Regarding ITO costs, the survey finds that the grand majority of Danish
record and well-developed infrastructure, which is not the case of most of outsourcers face the hidden agenda with their actual incurred annual costs
small ITO service providers. To fill in their internal resourcefulness gaps, being up to 25% higher than contracted (up 32.5% from 2010). Almost 20%
many small and mid-sized providers choose to re-outsource their client’s of survey respondents admit that the actual incurred costs match or nearly
projects to lower-cost locales with vaster and cheaper talent pools. These match the contracted ones (down 34% from 2010).
practices result in unclear and messy relationships and hidden costs that
unsuspecting clients are charged with. Regarding the actual savings, almost 30% of companies manage to save less
than 10% (up 13.9% from 2010) and another 30% - 10% to 24% from their
As the survey further shows, the most popular steps that Danish outsourced operations (up 5% from 2010). In 2010, the number of
outsourcers make to overcome some of their most critical challenges in companies saving 60% and more from their ITO engagements outnumbered
2011 are dedication of more management resources, increase of face-to- this year’s number of “huge savers” by only 1%.
face communication with vendor’s project managers and/or execution
teams and project deadlines’ extension. Today, more Danish companies The survey allows comparing and contrasting companies’ overall
consider changing their current ITO vendor(s) (up 6% from 2010) and back- impressions and attitudes towards the outsourced development/IT in 2011
sourcing (up 5% from 2010). versus 2010. As the survey shows, 50% of companies believe that
outsourcing their development/IT function(s) to an external provider has
The 2011 research shows that Danish companies use diverse been the right decision (up 24% from 2010) and almost 45% of companies
business/service delivery models to engage with their ITO partners.


point out that although outsourcing allows saving operating costs and Today’s in-house development companies indicate a very high likelihood of
lowering down development budgets, it inevitably leads to the increase of outsourcing some elements of their IT / software development in the future
management costs. A bit more than 25% of companies claim that costs are in order to respond to internal pressures of lowering down IT budgets and
higher than expected (up 16% from 2010) and slightly more than 20% of operating costs and access resources and skills that are in short supply
survey participants complain about the poor quality of vendor’s work. within Denmark. Just like their outsourcing peers, Danish in-house
Almost the same number of companies says that ITO vendor’s work is of developers rate language skills and available IT resource pool as the most
higher quality compared to the in-house capabilities (up 1.5% from 2010) important factors in their hypothetical choice of the ITO destination.
and more companies regret having made a decision to outsource (up 4% However, non-outsourcers will also scrutinize locales with mature legal
from 2010). systems and intellectual property legislation if they make a decision to
outsource in the future.
The following survey finding provides an optimistic outlook of the future
adoption of the outsourced services across diverse Danish industries: most Regarding the choice of the ITO partner, future outsourcers will challenge
of current outsourcers plan to continue with their outsourced operations in their prospective service providers with test/pilot projects, check
the next 12 to 24 months, more than 30% - in the next 25+ months and only companies’ experience in similar projects, make sure the ITO contract has
3% plan to terminate their ITO contracts and back-source in-house. In the flexible terms (for scalability, exit, pricing etc) and will ask their peer
future, more than 50% of current outsourcers plan to continue with companies and partners for positive vendor references. The least attention
nearshoring, 30% plan to go offshore and less than 20% will be sourcing will be paid to companies’ presence on Denmark’s ICT market.
within Denmark.
The latter finding denotes that many of today’s outsourcers in Denmark are
Both in 2010 and 2011, the key reason keeping most of the in-house focused on strategic use of outsourcing and think proactively about their
development companies away from adopting the outsourced development project/team scaling while planning their ITO engagements. Vendor's global
is fear of losing managerial control of own software projects. Nearly 50% of footprint and reputation, level of quality certification (e.g., ISO, CMMI etc)
companies do not outsource due to negative ITO experiences they had in and physical presence in Denmark are the least important factors in Danish
the past and around 40% of companies are afraid of the hidden costs of companies’ future choice of the ITO partner.
ITO. In addition, almost 35% of companies think they are yet too small and
immature for such an undertaking and only 5% of Danish businesses regard
outsourcing as an unethical practice responsible for the risen
unemployment within the country (up 2% from 2010). Overall, only 9.5% of
companies report total satisfaction with the outcomes of their in-house
software development.




Conclusions outsourcing domain, 5 and more years ago, but fail to meet today’s market
trends and customer needs that change at a very fast pace.

Summing up the key findings of the 2011 Danish ITO and In-House Software Be this as it may, the survey findings do not expose any premises for a
Development survey, there is an increasing demand for ITO services from slowdown in the future adoption of ITO services across diverse Danish
high-tech startups and enterprises in the SME sector as well as diverse market sectors. In-house development companies continue to face the
industry niches, both “traditional” such as finance and construction and same challenges that drove/drive their peers and/or competitors to
innovative such as digital media, online gaming and mobile computing. outsource: scarce local IT talent pool, high cost of domestic resources, slow
Many Danish businesses adopted the outsourced IT / software time-to-market, pressing customers and investors etc. While they try to fix
development at the time of the economic meltdown in order to “keep the these issues by improving software development methodology and project
head above water” via the decreased IT budgets and operating costs and management processes, and/or adding freelance resources to their in-
continue using it now, both for cost leverage and enhanced business focus house processes, most of them will inevitably opt to outsource earlier or
purposes. On the other hand, there is another huge segment of companies later, especially those who are focused on growth and competitiveness. The
that adopted ITO less than 12 months ago driven by the shortage of key issue that needs being solved by these prospective outsourcers is how
appropriate resources within Denmark. This segment is mostly filled by to retain maximal managerial control of their outsourced projects. And this
innovative startups and SMEs from lucrative and rapidly evolving niches. As is where the innovative Outsourcing 2.0 models will step in allowing
for the large companies using outsourcing services, their number has companies to simultaneously outsource development of solutions and
shrunk in comparison to 2010. However, it does not necessarily mean that insource knowledge and expertise to add significant value to their in-house
they are no longer in need of external resources. What it may mean, capabilities.
however, is that some of the large companies acquired / merged with their
ITO partners or opened own IT subsidiaries in lower-cost locales.

Close-up analysis of the survey findings suggests that although a lot of
Danish outsourcers seem to be positive about the essential use of
outsourcing, there is still the evidence of inconsistency in what they tend to
achieve via the ITO engagement. On one hand, they realize the importance
of preparing for change management caused by IT/development transfer
and value barrier-free communication as a key driver of the ITO project’s
success. On the other hand, they rely too much on own vendor selection
expertise and use service delivery models that worked well within the




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consultancy, market research and analysis. The Meridian, 4 Copthall House, Station Square
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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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Danish IT Outsourcing Intelligence Report 2011

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Danish IT Outsourcing Intelligence Report 2011