Drop in IT Outsourcing Seen in Survey

The IT outsourcing landscape is experiencing a significant transformation that challenges conventional wisdom about how organizations leverage external technology partnerships. Recent survey data reveals a striking paradox: while the global IT outsourcing market continues to expand, reaching an estimated $512.5 billion in 2024, a remarkable 70% of executives have selectively insourced previously outsourced functions over the past five years. This shift represents a fundamental recalibration of how businesses approach technology sourcing, moving beyond simple cost arbitrage toward strategic capability development and risk management.

Understanding the IT Outsourcing Paradox

The current state of IT outsourcing defies simple categorization. According to Deloitte’s 2024 Global Outsourcing Survey, which captured insights from over 500 executives worldwide, the market demonstrates both growth and strategic realignment. While overall spending on IT services is projected to reach $1.5 trillion in 2024 (an 8.7% increase), representing robust expansion, the nature of what gets outsourced and why has fundamentally changed.

The selective insourcing trend identified by Deloitte represents one of the most significant shifts in enterprise technology strategy in recent years. This isn’t a wholesale retreat from outsourcing but rather a sophisticated recalibration of which capabilities organizations maintain internally versus those they source externally. The survey findings indicate that 78% of organizations now leverage Global In-house Centers (GICs) as part of their sourcing strategy, creating hybrid models that combine the benefits of both approaches.

This evolution reflects a maturation of outsourcing strategy. Companies that rushed to outsource entire IT functions in the 2000s are now taking a more nuanced approach, carefully evaluating which capabilities deliver competitive advantage and require internal control versus those that benefit from external expertise and economies of scale.

Key Survey Findings Reshaping the Market

The data from multiple industry surveys paints a complex picture of transformation. Research from various sources including Deloitte, Gartner, and independent market analysts reveals several critical trends:

Spending Patterns Show Strategic Shifts

Despite talk of insourcing, spending on outsourcing as a proportion of IT operational budgets grew 45% between 2022 and 2023, jumping from 5.6% to 8.1%. This 2023 spending level eclipsed the five-year average by nearly 22%, demonstrating that organizations are spending more strategically rather than less overall.

However, the composition of this spending has changed dramatically. While 70% of businesses cited cost savings as their primary outsourcing driver in 2020, only 34% now identify cost as the primary motivator. This represents a fundamental shift from transactional cost reduction to strategic value creation.

Geographic Preferences Evolving

Offshore IT outsourcing still leads at an average of 45.13% of outsourcing arrangements, but nearshoring is experiencing rapid growth. The breakdown shows offshore at 45.13%, onshore at 33.48%, and nearshore at 21.39% for the 2020-2028 period. However, 2024 trends indicate accelerating nearshore adoption driven by geopolitical tensions, communication needs, and supply chain resilience concerns.

The shift toward nearshoring represents organizations balancing cost efficiency with risk management and operational effectiveness. Companies increasingly recognize that the lowest labor cost doesn’t always translate to the best total cost of ownership when factoring in communication overhead, time zone challenges, and geopolitical risks.

Function-Specific Outsourcing Patterns

Cybersecurity and IT infrastructure services lead outsourcing adoption at 77% each, followed by application development at 72%. These high percentages reflect the specialized expertise and continuous monitoring these functions require, making them natural candidates for outsourcing to specialized providers.

Interestingly, forecasts indicate that 60% of finance and accounting outsourcing contracts won’t be renewed by 2025, demonstrating how traditional Business Process Outsourcing (BPO) faces different pressures than technical IT outsourcing. This divergence highlights that the “drop” in certain outsourcing categories doesn’t apply uniformly across all functions.

Industry Adoption Varies Significantly

Banking, Financial Services, and Insurance (BFSI) leads IT outsourcing adoption with 30.29% of market activity, followed by Healthcare at 23.43%. These heavily regulated industries outsource to access specialized compliance expertise and scale infrastructure investments across larger customer bases.

The concentration in these sectors reflects both high technology demands and regulatory complexity that makes specialized external partners attractive. Healthcare organizations, for instance, must navigate HIPAA compliance, interoperability standards, and rapidly evolving digital health technologies, creating strong incentives for specialized outsourcing partnerships.

Primary Drivers Behind Selective Insourcing

The 70% of executives who have brought previously outsourced work back in-house haven’t done so randomly. Several consistent patterns emerge from the survey data and industry analysis:

Strategic Capability Control

Organizations increasingly recognize that certain IT capabilities deliver competitive differentiation and strategic value that shouldn’t be delegated externally. Customer-facing applications, proprietary algorithms, and core digital platforms increasingly remain in-house or get repatriated from outsourcing arrangements.

A Deloitte study documented this trend toward re-insourcing previously outsourced IT capabilities, with particular focus on strategic capabilities such as architecture and transformation. This followed the late 1990s and early 2000s trend of large organizations outsourcing as much IT operation as possible in an overly simplistic drive to reduce costs, without adequately considering strategic implications.

Control and Governance Requirements

As digital transformation makes IT central to business operations rather than a support function, organizations require greater control over technology roadmaps, development priorities, and change management. External vendors, even in long-term partnerships, introduce coordination complexity and potential misalignment between business priorities and delivery timelines.

Survey respondents consistently cited the need for tighter integration between business strategy and technology execution as a driver for selective insourcing. When technology capabilities directly impact customer experience, revenue generation, or operational efficiency, the additional control provided by internal teams becomes valuable despite higher costs.

Talent Strategy Evolution

The global competition for technical talent has transformed how organizations think about building internal capabilities. Rather than viewing outsourcing purely as cost arbitrage, companies now see decisions about where work gets performed as talent strategy decisions.

With 57% of hiring managers finding it difficult to recruit skilled IT talent according to industry surveys, organizations increasingly use selective insourcing to attract and retain key technical experts. Building centers of excellence for strategic technologies allows companies to compete for talent more effectively than when all technical work is outsourced.

Risk Management and Resilience

Recent years have highlighted supply chain vulnerabilities, geopolitical risks, and the strategic importance of operational resilience. Organizations that concentrated too much capability with single vendors or in single geographic regions discovered new risks that weren’t adequately priced into original outsourcing decisions.

The shift toward selective insourcing often focuses on creating resilience through diversification, maintaining baseline capabilities internally even while using external partners for capacity and specialized expertise. This hybrid approach provides flexibility and reduces dependency risks.

Technology Disruption Driving Market Evolution

Technological advances are simultaneously creating new outsourcing opportunities while enabling selective insourcing, contributing to the complex market dynamics revealed in surveys.

Artificial Intelligence Transformation

The Deloitte survey found that 83% of executives are leveraging AI as part of their outsourced services, and 20% are already developing strategies to manage “digital workers,” autonomous AI systems that perform tasks traditionally done by human workers.

This AI integration is reshaping outsourcing in contradictory ways. On one hand, AI capabilities are highly specialized, creating demand for outsourcing to providers with deep AI expertise. On the other hand, AI automation is reducing the labor arbitrage value that historically drove much offshore outsourcing, particularly for routine tasks.

Organizations are simultaneously exploring outsourcing for AI development and implementation while potentially reducing overall outsourcing needs as AI systems automate tasks previously performed by outsourced workers. This creates market churn as traditional outsourcing relationships get renegotiated around AI-augmented delivery models.

Cloud Computing Impact

Cloud platforms have democratized access to enterprise-scale infrastructure and services, reducing the infrastructure management outsourcing that was common in previous decades. Organizations can now deploy sophisticated cloud services directly without the large outsourcing contracts that characterized the hosting and data center management era.

However, cloud adoption has also created new outsourcing opportunities around cloud migration, optimization, security, and specialized cloud-native development. The net effect is transformation rather than simple reduction in outsourcing, with spending shifting from infrastructure management to higher-value cloud expertise.

Automation and Low-Code Platforms

The increasing sophistication of low-code and no-code development platforms enables organizations to build certain applications internally with smaller teams and less specialized expertise. This technology has enabled selective insourcing of applications that previously required outsourced development.

Many jobs that were subcontracted abroad have been replaced by technological advances that either automate the work entirely or make it accessible to less specialized internal staff through improved tools and platforms. This technological displacement affects routine development, testing, and maintenance work most significantly.

Geographic and Geopolitical Factors

Where work gets performed has become as important as whether it gets outsourced, with significant implications for traditional outsourcing destinations.

Nearshoring Gains Momentum

The movement toward nearshoring represents one of the clearest trends in recent survey data. Companies are increasingly outsourcing to geographically closer regions to improve communication, reduce time zone challenges, and mitigate geopolitical risks while maintaining cost advantages over fully onshore teams.

For US companies, this translates to increased outsourcing to Latin America. For European organizations, Eastern Europe and North Africa are gaining share. Asian companies are developing more sophisticated nearshore ecosystems within the region rather than looking to distant offshore locations.

This geographic shift doesn’t represent a drop in outsourcing volume but rather a redistribution of where outsourced work gets performed. Vendors in traditional offshore destinations like India and the Philippines are responding by establishing nearshore delivery centers to serve clients preferring closer geographic proximity.

Supply Chain Resilience

Geopolitical tensions and supply chain disruptions have elevated risk management in outsourcing decisions. Organizations that concentrated technology development in single countries or regions discovered vulnerabilities when trade tensions, pandemic restrictions, or political instability disrupted operations.

The response isn’t necessarily insourcing but rather diversification, with companies maintaining capabilities across multiple geographic locations and vendor relationships to ensure continuity. This diversification can appear as reduced reliance on any single outsourcing relationship even as overall outsourcing volumes remain stable or grow.

Data Sovereignty and Regulatory Compliance

Increasing data localization requirements and privacy regulations are constraining where certain work can be performed. GDPR in Europe, data localization requirements in China, India, and other markets, and sector-specific regulations in healthcare and financial services limit outsourcing options for certain functions.

These regulatory constraints sometimes force selective insourcing or nearshoring when offshore outsourcing would violate data residency requirements. Organizations are developing more complex sourcing strategies that account for regulatory boundaries, with certain data and workloads remaining in specific jurisdictions regardless of cost considerations.

Financial Models and Contract Structures Evolving

How outsourcing gets purchased and managed is transforming, contributing to survey findings that show both growth and strategic shifts.

From Cost-Plus to Outcome-Based Pricing

Traditional outsourcing contracts based on time-and-materials or cost-plus pricing are giving way to outcome-based and value-sharing models. This shift changes how outsourcing spending gets measured and reported, potentially contributing to perceptions of decline even when value delivered increases.

The forecast that 60% of finance and accounting outsourcing contracts won’t be renewed by 2025 specifically cites outdated pricing models that don’t drive digitization and process improvement. Organizations are rejecting traditional contracts in favor of arrangements that align vendor compensation with business outcomes and continuous improvement.

This contractual evolution means some traditional outsourcing relationships end not because work returns in-house but because it gets rebid under different commercial models that better align with current business needs.

Smaller, Specialized Engagements

Comprehensive IT services from single providers are declining as organizations move toward specialized vendors for specific capabilities. Rather than megadeals where one vendor manages entire IT functions, companies are assembling ecosystems of specialized providers for cloud, security, application development, and data analytics.

This fragmentation can appear as declining outsourcing when measured by large contract values, even though total spending across multiple smaller vendors may increase. Everest Group’s prediction of year-on-year revenue growth declining to as low as 1.9% for large traditional outsourcing providers reflects this shift toward specialized engagements rather than comprehensive outsourcing decline.

Flexible Capacity Models

Organizations increasingly use outsourcing for flexible capacity rather than wholesale function transfer. Internal teams handle core work and strategic projects while external partners provide surge capacity, specialized expertise for specific initiatives, and coverage for emerging technologies where internal capabilities haven’t yet developed.

This “core plus flex” model maintains higher baseline internal capability than traditional outsourcing while still leveraging external partners extensively. Survey data showing both high insourcing percentages and growing outsourcing spending reflects this hybrid approach becoming standard practice.

Industry-Specific Trends and Variations

The selective insourcing trend and outsourcing evolution manifest differently across industries, creating sector-specific patterns.

Financial Services Transformation

Banking and financial services organizations, representing 30.29% of IT outsourcing activity, face unique pressures. Regulatory requirements for operational resilience and third-party risk management are driving some selective insourcing of critical systems while outsourcing of specialized functions like cybersecurity and fraud detection increases.

Many financial institutions are building internal cloud and data capabilities while outsourcing security operations, application development, and emerging technology experimentation. This reflects a bifurcated strategy where strategic platforms remain internal while specialized capabilities leverage external expertise.

Healthcare Complexity

Healthcare organizations, comprising 23.43% of IT outsourcing activity, must balance patient privacy requirements, interoperability needs, and rapidly evolving digital health technologies. Many are insourcing patient-facing digital platforms while outsourcing infrastructure management, security monitoring, and specialized health IT functions.

The sensitivity of health data and stringent HIPAA compliance requirements create natural boundaries around what gets outsourced versus managed internally. Organizations are developing sophisticated data governance frameworks that determine appropriate outsourcing boundaries based on data classification and regulatory requirements.

Technology Companies’ Unique Position

Technology companies themselves present an interesting case. While they sell IT services and software, they also make outsourcing decisions about their own operations. Many tech companies are insourcing more development of core products and customer-facing platforms while outsourcing specialized testing, localization, content moderation, and customer support.

This reflects recognition that product development capabilities deliver competitive differentiation and should remain internal, while supporting functions benefit from specialized external providers who can achieve economies of scale across multiple clients.

Talent Dynamics Reshaping Outsourcing Decisions

The global talent market has transformed how organizations think about sourcing decisions, moving beyond pure cost considerations to capability development and access.

Skills Shortage Impact

With 57% of hiring managers reporting difficulty finding skilled IT talent, outsourcing increasingly serves talent acquisition and capability access rather than cost reduction. Organizations can’t hire specialized experts in AI, machine learning, blockchain, quantum computing, and other emerging fields in every geography, making external partnerships essential for accessing these capabilities.

This talent-driven outsourcing differs from traditional cost arbitrage. Companies are willing to pay premium rates to access specialized expertise unavailable internally or in local talent markets. Survey data showing cost dropping from 70% to 34% as the primary outsourcing driver reflects this shift toward capability and talent access.

Remote Work Normalization

The widespread adoption of remote work during the pandemic has blurred traditional distinctions between internal employees, contractors, and outsourced resources. Organizations now manage distributed teams regardless of employment relationship, reducing some traditional friction associated with outsourcing.

This normalization of remote collaboration makes geographic location less relevant for certain functions, enabling both insourcing (hiring employees in previously “offshore” locations) and outsourcing (engaging contractors and vendors distributed across geographies). The lines between traditional employment models have become more fluid.

Building Internal Capability

Organizations increasingly view selective insourcing as a capability-building strategy. By bringing certain functions in-house, companies develop expertise, establish best practices, and create career paths that help attract and retain technical talent.

This approach recognizes that maintaining competitive technical organizations requires offering employees opportunities to work on strategic, challenging problems. Outsourcing too extensively can make it difficult to attract top talent who want to work on interesting technical challenges rather than just managing external vendors.

Future Outlook and Strategic Implications

Survey data and industry analysis point toward several likely scenarios for IT outsourcing evolution over the next three to five years.

Continued Market Growth with Transformation

Despite selective insourcing trends, 40% of business and technology leaders expect to increase investments in third-party outsourcing according to Deloitte’s survey. The IT outsourcing market is projected to grow from $618.13 billion in 2025 to $777.7 billion by 2028, representing a CAGR of 10.99%.

This growth will occur alongside continued selective insourcing, creating apparent contradiction that reflects market maturation. Organizations will simultaneously insource strategic capabilities while increasing outsourcing spending on specialized expertise, flexible capacity, and emerging technologies.

The global software outsourcing market specifically is expected to grow from $585.5 billion in 2024 to $897.9 billion by 2031, driven by continued digital transformation, emerging technology adoption, and the persistent global talent shortage.

Hybrid Sourcing as Standard Practice

The future of IT sourcing is clearly hybrid, with organizations maintaining internal capabilities for strategic functions while leveraging external partners for specialized expertise, flexible capacity, and non-core activities. The 78% of organizations already using Global In-house Centers alongside external outsourcing represents this hybrid future.

Successful organizations will develop sophisticated sourcing strategies that evaluate each capability across multiple dimensions: strategic importance, differentiation potential, talent availability, cost effectiveness, risk tolerance, and speed to capability. Simple rules about outsourcing entire functions will give way to nuanced decisions about capability portfolios.

AI and Automation Disruption

The 83% of executives already leveraging AI in outsourced services represents early stages of fundamental transformation. AI will simultaneously reduce labor-intensive outsourcing (through task automation) while creating new outsourcing opportunities (for AI development, implementation, and management).

Organizations will need to continuously reevaluate sourcing decisions as AI capabilities advance. Work currently requiring skilled human experts may become automatable, while new specialized roles emerge around AI governance, ethics, and advanced model development.

The 20% of organizations already developing strategies to manage “digital workers” represents the cutting edge of this transformation. As AI systems become more capable, the traditional distinction between insourcing (human employees) and outsourcing (external human workers) may become less relevant than decisions about human versus digital labor and where specialized AI expertise gets sourced.

Ecosystem and Platform Models

Rather than choosing between fully insourced or outsourced approaches, organizations are building sourcing ecosystems with multiple specialized partners managed through platform approaches. This allows rapid assembly of capabilities as needs evolve while maintaining flexibility to bring work in-house or shift between vendors.

Platform companies like AWS, Microsoft Azure, and Google Cloud are increasingly offering marketplaces where organizations can access specialized services and expertise, blurring lines between technology platforms, outsourcing, and software licensing. This convergence creates new sourcing models that don’t fit traditional categories.

Strategic Recommendations for Organizations

Based on survey findings and market trends, organizations should consider several strategic approaches to optimize their sourcing strategies:

Conduct Regular Sourcing Assessments

The 70% of executives who have selectively insourced previously outsourced work didn’t do so randomly. Regular assessment of sourcing decisions against current business strategy, technology landscapes, and market conditions helps identify when arrangements that made sense historically no longer serve current needs.

Organizations should evaluate each significant capability across criteria including strategic importance, competitive differentiation, required control level, talent availability, total cost of ownership, and risk tolerance. These assessments should occur at least annually and whenever significant business or technology strategy shifts occur.

Develop Hybrid Sourcing Capabilities

Success in the current environment requires developing organizational capabilities to effectively manage hybrid sourcing models that combine internal teams, contractors, and multiple external vendors. This includes governance frameworks, management systems, security protocols, and cultural approaches that treat all contributors as part of an extended team rather than maintaining rigid internal/external distinctions.

Organizations should invest in tools and platforms that provide visibility across all contributors regardless of employment relationship, enabling effective coordination and collaboration across the extended enterprise.

Focus on Outcomes, Not Inputs

The shift from cost-based outsourcing drivers toward capability and innovation requires different contract structures and relationship models. Organizations should move toward outcome-based contracts that align vendor incentives with business results rather than time-and-materials arrangements that optimize for input costs.

This requires developing clear metrics for business outcomes, baseline performance understanding, and governance approaches that focus on value delivered rather than activities performed. While more complex than traditional contracts, outcome-based arrangements better support the innovation and transformation goals that now drive outsourcing decisions.

Build Strategic Technology Capabilities Internally

Even while maintaining robust outsourcing relationships for specialized expertise and flexible capacity, organizations should identify and build internal capabilities for strategically important technologies that deliver competitive differentiation. This might include customer-facing platforms, proprietary algorithms, or emerging technologies central to future business models.

Building these capabilities internally provides better control, enables faster iteration aligned with business needs, and helps attract technical talent who want to work on strategic challenges. External partnerships can still provide specialized expertise and capacity, but core strategic direction and implementation should remain internal.

Invest in Vendor Relationship Management

As sourcing models become more complex with multiple specialized vendors rather than comprehensive single-provider relationships, organizations need stronger vendor management capabilities. This includes contract management, performance monitoring, relationship governance, and the ability to orchestrate multiple vendors working on related initiatives.

Organizations should develop vendor management as an organizational capability rather than an administrative function, with clear accountability for optimizing the value delivered from external partnerships and ensuring effective coordination across the vendor ecosystem.

Conclusion

The surveys showing significant shifts in IT outsourcing reveal a maturing market moving beyond simple cost arbitrage toward strategic capability management. While 70% of executives have selectively insourced previously outsourced work, overall outsourcing spending continues growing, projected to reach $777.7 billion by 2028. This apparent paradox reflects sophisticated sourcing strategies that combine internal capabilities for strategic functions with external partnerships for specialized expertise, flexible capacity, and emerging technologies.

The future of IT sourcing is hybrid, with organizations maintaining carefully curated portfolios of internal and external capabilities optimized for current business needs. Success requires moving beyond binary insource/outsource decisions toward nuanced capability strategies that account for strategic importance, talent dynamics, risk management, and total value delivered. Organizations that develop sophisticated approaches to this complexity will gain competitive advantage through more effective technology capability management.

The selective insourcing trend represents organizational learning from earlier periods when outsourcing was pursued too aggressively without adequate consideration of strategic implications. Today’s approaches balance the benefits of external partnerships with the control, capability development, and talent attraction advantages of internal teams. This balanced approach, informed by the experience reflected in recent surveys, positions organizations for effective technology execution in an era where digital capabilities increasingly determine competitive success.

As artificial intelligence, automation, and emerging technologies continue transforming what’s possible, sourcing strategies will require ongoing evolution. The organizations that embrace this complexity, develop strong hybrid sourcing capabilities, and maintain flexibility to adapt as conditions change will be best positioned to leverage technology effectively regardless of whether capabilities reside internally or with external partners.