Swedish IT Outsourcing Intelligence Report 2011

IT Sourcing Europe

European IT Outsourcing
Intelligence Report 2011:
Sweden

March 2011

European ITO Intelligence Report 2011: Sweden

European IT Outsourcing Intelligence Report 2011: Sweden

Contents

Executive Summary _________________________________________________________ 3

Respondent Profiles_________________________________________________________ 5

Outsourcing Behaviors_______________________________________________________ 7

Outsourcing Drivers & Factors_________________________________________________ 10

Outsourcing Challenges & Solutions_____________________________________________12

Client – Vendor Relationships__________________________________________________13

Outsourcing Costs___________________________________________________________ 15

Impressions of Outsourcing____________________________________________________ 16

Future Outsourcing Plans______________________________________________________ 17

In-House Software Development Trends & Challenges_______________________________ 18

Key Findings’ Highlights________________________________________________________24

Conclusions__________________________________________________________________27

2|Copyri ght IT Sourcing Eur ope 2011 | All Rights Reserved



Executive Summary

This Intelligence Report is based on a February - March 2011 survey of the 479 Swedish companies that
either outsource their Software Development (SD) / Information Technology (IT) function(s) or develop
their software/IT solutions within own house.

The Report aims to help Swedish outsourcing companies:

Get an in-depth understanding of the current Swedish IT Outsourcing (ITO) demands and trends
See what challenges are facing their market peers and how they respond to them
Revise / improve their current ITO engagements / business models based on the industry best
practices

The Report aims to help Swedish non-outsourcing companies:

Better understand modern SD/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 SD/ITO and how they are / will be preparing for
adoption of the outsourced development in the future

Survey Overview
The Swedish ITO survey 2011 was conducted between February 21 and March 14, 2011, in the frames of
the All-European ITO research.

Survey goals:

Explore factors that drive Swedish companies to outsource their SD/IT functions in 2011
Explore challenges associated with offshore/nearshore outsourcing and the most effective problem
solving strategies
Explore the use of different business models in ITO engagements and find out which model works
best for different types of companies and industries
Explore factors that keep Swedish companies away from outsourcing their SD/IT function(s)
Compare and contrast the 2011 and future ITO demands in Sweden

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 Swedish companies as possible, IT Sourcing Europe used its own
database of business contacts and sent out a survey invitation letter to each company’s decision makers (C-
level executives, IT 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, XING, Facebook, Mobile
Monday Stockholm, 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 open-end 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 Swedish 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)

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

The key takeaways from the survey:

In Sweden, companies that do not outsource their SD/IT outnumber those that outsource by 13.2%
Most of the Swedish outsourcers have been outsourcing their SD/IT for 37+ months now
Most of the Swedish outsourced projects are valued at €0-49K
Most of the Swedish outsourcers partner with their ITO service providers via the Dedicated / Own
Team Model
Web is the most outsourced area of expertise in Sweden, followed by Mobile Computing and
Enterprise 2.0
Most of the Swedish companies single-source their solutions
Nearshore is the most preferable outsourcing destination in Sweden
Top three drivers of ITO decisions in Sweden are: reduction of operating costs, shortage of
domestic IT skills and resources and focus on core competence



Respondent Profiles

Company Size (Headcount)

Primary Industry




Currently Outsourcing?

Revenue Growth Expectations in 2011: In-House Developers vs. Outsourcers

In-House Developers Outsourcers




Outsourcing Behaviors

Overall SD/ITO Experience

Size Of The Outsourced Team(s) (Headcount)




Value Of The Outsourced Project(s) (In €)

Business Models Used To Partner With ITO Provider(s)




Multi-Sourcing?

Outsourced Areas of Expertise




Current Outsourcing Destinations

Outsourcing Drivers & Factors

Drivers Of Decisions To Outsource SD/IT

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 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 Outsourcing Destination

Factors’ Rating In Terms Of Their Importance In The Choice Of The Outsourcing Partner




Outsourcing Challenges & Solutions

Main Challenges Of The Outsourced Software Development

How Companies Respond To The Challenges




Client – Vendor Relationships

Size Of ITO Service Providers

Who Selects IT Specialists To Be Involved In The Project?




Do Companies Know Exact Salaries Of Each Of Their Developers On The Outsourced Teams?

Satisfaction With ITO Service Providers




Outsourcing Costs

How Actual Annual Incurred Costs Of SD/ITO Compare To The Expected (Contracted) Costs

Actual Savings From The Outsourced SD/IT




Impressions of Outsourcing

outsourcing saves operating costs, but inevitably increases management costs

outsourcing our software development has been the right decision

costs are higher than expected

overall, provider’s work is of higher quality compared to in-house capabilities

it is important to have the supplier's team working within or close to the same time zone

providers have more disciplined methodologies, which can lower costs further in a longer-term
perspective
it is critical to have backup providers available in case the primary provider is unable to meet
deadlines and/or commitments
providers are unreliable and not focused on mid- and long-term cooperation

overall, provider’s work is of lower quality compared to in-house capabilities

we are very dissatisfied with the decision to outsource our software development

generally, the outsourced development meets our company’s expectations




Future Outsourcing Plans

Do Companies Plan To Continue Outsourcing In the Future?

Future Outsourcing Destinations




In-House Software Development Trends & Challenges

How Swedish Companies Develop / Manage Their Software

Size Of Internal IT Department/Team(s)




Part Of Corporate Budget That Swedish Companies Spend On IT

Level of Satisfaction With The In-House Development / IT




Key Challenges Of The In-House Software Development

How Companies Respond To The Challenges




Factors Keeping Swedish Companies Away From SD/ITO

we want to have 100% managerial control of our software project(s)

we are too small and immature to outsource

we're afraid that outsourcing will eventually cost us more money and ‘headaches’ than in-
house development
we think that the outsourced development will result in poorer software product quality

we do not want to create any shared environments

we're totally satisfied with our in-house development results

we don't want to put our intellectual property at risk

we don't get any pressure to cut costs from customers/investors/executive management

we had some negative experience with the outsourced development in the past

we think that outsourcing is unethical and work should be kept within own house




Circumstances In Which Companies Would Consider Outsourcing Their SD/IT In The Future

Where Companies Will Outsource If They Make Such a Decision In The Future




How Non-Outsourcers Will Rate Destination Selection Criteria If They Decide To Outsource In
The Future

How Non-Outsourcers Will Rate Provider Selection Criteria If They Decide To Outsource In The
Future




Key Findings’ Highlights

In Sweden, software development / IT outsourcing gradually penetrates into different industries, but is
most actively used by IT and software companies, followed by mobile apps development companies and
iGambling/betting providers and games studios.

In 2011, the Swedish non-outsourcing companies outnumber those that outsource their SD/IT by 13.2%,
while in 2010 the non-outsourcers outnumbered the outsourcers by 22.1%. This finding proves the
extremely rapid dynamics of outsourcing penetration into IT and/or business operations in Sweden.

Regarding the value of the outsourced projects, the following trends are observed in 2011 compared to
2010: the number of the €0-49K projects increased by 34.9%, the number of the €50-199K projects
dropped by 23.7%, the number of the €200-499K projects dropped by 3.9% and the number of the €500+K
projects dropped by 7.2%. The finding proves 2011 to be the year of smaller ITO contracts in Sweden.

In 2010, the vast majority of the Swedish outsourcers (52%) partnered with their ITO service providers via a
Dedicated Development Center (DDC) model. In 2011, only 28.9% of the companies use this model, while
the vast majority of outsourcers – 34% - use Dedicated/Own Team model to engage with providers. Fixed
price projects are outsourced by 31.5% of companies, down 16% from last year.

In 2011, the majority of the Swedish companies outsource Web solutions (up 26% from 2010), followed by
Enterprise (up 0.5% from 2010), Mobile (up 9% from 2010), SaaS/Cloud Computing solutions (up 13.1%
from 2010) and Embedded development (up 6% from 2010). Two percent of the Swedish companies
outsource solely their QA and testing function, which is down 3% from 2010. Significant growth of the
outsourced mobile development and cloud solutions in 2011 proves the rapid dynamics of outsourcing
penetration into the most innovative areas of expertise that require very fast time to market, access to the
global resources and the ability to meet the rapidly changing market / consumer demands.

In 2011, the outsourcing destinations of the Swedish companies haven’t changed much, compared to 2010.
Most of companies continue to transfer their SD/IT function(s) nearshore – up 3% from 2010. More
companies begin to outsource within Sweden (up 5.3% from 2010), while fewer companies go offshore
(down 2.5% from 2010). A significant greater number of Swedish companies currently multisource both
nearshore and within Sweden (up 7.5% from 2010), while fewer companies outsource offshore and within
Sweden (down 3.5% from last year). On the other hand, more companies multisource nearshore, offshore
and within Sweden in 2011 – up 6.5% from 2010. The least preferred mix of destinations for the Swedish
companies still remains nearshore plus offshore – up 0.5% from 2010. These findings generally hallmark a
clear trend that in 2011 more Swedish companies tend to either transfer their development / IT nearshore
to be able to have a better face-to-face communication with ITO service providers on a regular basis or
distribute development among 2 and/or more providers in different locations to be able to secure the
project(s) with back-up providers in case the primary one fails to deliver properly.

In 2011, the top three drivers of corporate decisions to outsource IT / SD in Sweden are: 1) reduction of
operating costs (up 33.5% from 2010), 2) shortage of domestic IT skills and resources (up 33% from 2010)
and 3) necessity to focus on core competences such as product marketing, business development,
infrastructure setup/upgrade etc (up 21.3% from 2010). In contrast, the top three outsourcing factors in
2010 were: 1) reduction of operating costs, 2) acceleration of time-to-market and 3) difficulty finding
qualified resources within Sweden.



When choosing SD/ITO destinations in 2010, the highest rated selection criteria among the Swedish
companies were low rates and taxes, an available talent pool and positive references from the peer
companies. In 2011, the highest rated criteria are: language skills, an available IT talent pool and political
stability. The latter may be explained by the current uprise in social protests and armed rebellions in North
Africa and the Middle East that most of the European businesses in general and Swedish businesses in
particular are concerned about. The ongoing political restlessness in the above regions has already hit many
European investors and, therefore, Swedish companies want to make sure that the hubs where they
transfer their SD/IT are politically stable to avoid possible financial and security risks.

Regarding the highest rated criteria of the ITO partner selection, in 2010 they were positive references, low
service fees and available IT resources. In 2011, the highest rated partner selection criteria are: innovative
and flexible business / service delivery model (s), successful pilot project completion, and sound experience
in the similar projects. This finding mirrors well the current situation at the global ITO market. Traditional
outsourcing models such as fixed price projects, Build-Operate-Transfer (BOT) or Offshore Development
Center (ODC) prove to be failing to meet today’s market demand for agility, scalability, fast time-to-market
and predictable ITO costs. Therefore, more Swedish companies begin to realize the importance of having as
much managerial control of their outsourced projects and resources as possible and use outsourcing as a
long-term strategy to improve software/IT products’ quality and respond proactively to pressing customers
and rapidly changing market demands rather than just a short-term tactic to reduce costs. Thus, they tend
to partner with those ITO service providers who are able to offer engagement via innovative business
models such as Client Own/Dedicated Team, Virtual Operating Subsidiary, SCRUM Team and other likewise
models allowing transparent pricing and no hidden agenda, access to resources and skills that is not limited
to a single geography, extensive knowledge sharing beyond Service Level Agreements and easy / flexible
exit terms.

In 2010, the key challenges of the outsourced SD/IT were: delayed deliveries and /or missed project
milestones, poor project management on vendor’s side and ITO overheads (when actual annual incurred
costs far exceeded the contracted ones). In 2011, the Swedish outsourcers continue to face delayed
deliveries and hidden agenda, but also point to the poor communication with ITO provider’s project
management as a third most critical challenge. This challenge can be linked to / explained by the size of ITO
vendors that most of the Swedish outsourcers partner with. Almost 50% of the Swedish companies partner
with providers that are less than 50 in headcount, while only 18.1% partner with mid-sized and large
providers (500+ in headcount). Many small ITO vendors are startups themselves and, thus, can be missing
project management expertise and/or focused on short-term profit generation goals rather than
establishing long-term partnerships with the shared risks. Larger providers usually care more about their
reputation as reliable, responsible and responsive business partners and, as a result, put more efforts in
getting an in-depth understanding of each client’s business needs, have a regular face-to-face
communication with clients’ PMs, launch live knowledge sharing events and activities and provide different
value-added services to achieve the highest possible client satisfaction rates.

To respond to their major challenges in 2011, the Swedish companies increase face-to-face communication
with vendor’s project management and development teams (up 39.2% from last year), dedicate more
management resources (up 23.5% from last year) and consider partnering with different vendors (up 15.3%
from 2010). In contrast, in 2010 the top three responses to outsourcing challenges in Sweden were
extension of projects’ deadlines, re-sourcing to different vendors and increase in face-to-face
communication.




In 2011, more Swedish ITO buyers know exact salaries of each of their developers on the outsourced teams
– up 27.8% from 2010.

Overall, in 2010 the vast majority of the Swedish ITO buyers were somewhat satisfied with their ITO
partners and services provided (40%), while in 2011 the majority of outsourcers are very satisfied with their
partners – 31.1%. In 2011, the number of totally dissatisfied ITO buyers is almost the same as in 2010 –
4.4%, which is up 0.4% from the last year’s indicator.

Regarding the actual annual incurred versus the contracted costs of ITO, in 2011 more Swedish outsourcers
report actual costs to be up to 25% higher than expected (up 21% from 2010), but fewer companies report
the actual incurred costs of ITO to be 25-49% higher than expected (down 6% from 2010). Like in 2010, in
2011 most of the Swedish companies report the actual incurred costs to be about the same as the
contracted ones – up 8.5% from last year.

Regarding the actual savings from the outsourced SD/IT, in 2011 the situation is significantly different,
compared to 2010. This year, a prevailing majority of Swedish outsourcers manage to save less than 10% of
operating costs from their ITO engagements, which is up 38.5% from 2010 (when only 2% of companies
saved less than 10%). On the other hand, more Swedish companies save 10% - 24% of their costs due to
ITO, which is up 7% from last year’s figure. Fewer companies save 25% - 39% of corporate IT/SD spending in
2011, which is down 13% from 2010. While in 2010 the vast majority of outsourcers reported saving 40% -
59% of their costs through the outsourced development / IT, the 2011 number dropped by almost 30%.
Regarding those that save 60% and more, a decline in their number is also observed in 2011, compared to
2010 – down 3%.

This trend can in part be attributed to the fact that many Swedish outsourcers choose to partner with very
small ITO service providers who, unlike their mid-sized to large peers, do not have an appropriate access to
the qualified IT workforce, do not invest enough in the training and professional advancement of their
employees and do not have any well-developed best practice in / long-term strategy for staff retention.
Also, since only very few small ITO providers are able to afford to pay competitive salaries (in terms of their
home countries’ market rates) to their employees, the risk is high that the clients get insufficient and
unqualified personnel involved in their outsourced projects. In addition, some small nearshore ITO vendors
practice outsourcing some of their clients’ tasks to even lower-cost offshore destinations due to the lack of
domestic resources they have access to / financial inability to outbid competitors’ staff. The mix of such
circumstances inevitably leads to the situations when the ITO buyers are overcharged in order to cover new
hires / employee replacement in case of vendor’s staff turnover, “secret” re-outsourcing / outtasking
practices as well as fixing product’s bugs and errors at the post-release stages due to vendor’s low-qualified
resources. These obstacles typically prevent most of Swedish outsourcers from saving more from their ITO
engagements.

Comparing the overall impressions that the Swedish companies have towards SD/ITO in 2011 versus 2010,
significantly more companies say that outsourcing their development / IT has been the right decision - up
16.5%; many more companies believe that provider’s work is of higher quality compared to the in-house
capabilities - up 25% from 2010; more companies think it is important to have the provider’s team working
within and/or close to the same time zone as Sweden - up 14.7% from 2010. On the other hand, more
Swedish outsourcers point out that the actual costs are higher than expected – up 25%, and more
companies report a very high level of dissatisfaction with the decisions to outsource – up 6% from last year.




And finally, comparing annual revenue growth expectations of Swedish companies in 2011, the majority of
companies that develop IT/SD solutions within own house anticipate 1% to 9% growth (almost 39%), while
most of IT/SD outsourcers expect to increase their revenue by 10% to 19%. In addition, 10% of in-house
software development companies expect to gain more than 50% revenue growth versus 16% of
outsourcers.

Conclusions
The 2011 Swedish ITO survey demonstrates the rapid dynamics of outsourcing evolution in the country.
Outsourcing is gradually becoming a commodity practice that the Swedish companies adopt to reduce
operating costs, get access to the qualified IT resources missing within the home country and free in-house
staff for business development and other core competences.

The positive trends of the Swedish ITO market observed in the course of the research are as follows:

• There is a growing demand for the outsourcing services from both ‘traditional’ sectors such as IT
and telecom, professional and financial services, construction and hospitality etc and innovative
lucrative niches such as mobile computing, digital media and gambling
• More Swedish outsourcers realize the importance of engaging with their ITO partners through
innovative business models that are able to provide agility, scalability and pricing transparency and
predictability
• Most of the outsourced projects are small in value and require only 1–3 IT specialists to complete,
which generally destroys the myth that outsourcing is for large companies only and is likely to drive
more Swedish innovative startups and SMEs to adopt SD/ITO in the near future (today, almost 60%
of Swedish companies do not outsource, because they mistakenly think they are yet too small and
immature for such an undertaking)
• Almost 90% of Swedish outsourcers plan to continue with their outsourced operations in the next
12 to 25+ months, while only slightly more than 10% plan to terminate their ITO contracts in 2011

The negative trends of the Swedish ITO market observed in the course of the research are as follows:

• Many Swedish outsourcers still underestimate the importance of careful and proactive planning of
their SD/ITO strategies and, as a result, are focused on immediate short-term savings instead of
establishing long-term “win-win” relationships with their ITO service providers. Such attitudes and
insufficient outsourcing strategy planning often result in the failed outsourced projects, increased
dissatisfaction and back-sourcing, which could have been avoided if the right steps had been taken
at the pre-engagement and vendor selection stages
• Many companies prefer to outsource within Sweden. Considering the fact that the scarce local IT
resource pool is the second and high cost of domestic IT resources is the third most frequently cited
challenges of the in-house SD/IT in Sweden, it makes sense to assume that the on-shore ITO service
providers outtask their clients’ projects near- or offshore and, thus, surcharge ITO buyers to be able
to make a profit. Using the proper business models, Swedish on-shore outsourcers would be able
to extend own IT teams to lower-cost locations without paying any overheads and intermediary
fees.

Overall, the Swedish ITO landscape looks more mature in 2011, compared to 2010.




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 ITO market research and fieldwork services
• Evaluation of Central and Eastern Europe's ITO 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 ITO strategy / engagement
• Ad-Hoc ITO strategy development and full-cycle support

Our Contacts:

Address:
The Meridian, 4 Copthall House, Station Square
Coventry, West Midlands,
CV1 2FL United Kingdom
Email: info(at)itsourcing-europe.com
Tel.: +44(0)2476992505
Web: www.itsourcing-europe.com
Blog: http://itsourcingeurope.wordpress.com
Follow our tweets @ITSourcingEurop

Registration at the UK Companies House: 07217899

You are free to use, share and/or remix any part of this work as long as you attribute it to IT
Sourcing Europe.


Swedish IT Outsourcing Intelligence Report 2011

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