Solving IT Shortages: Outsource vs. Insource
More firms outsource to fix IT labor shortages, but relying solely on it often hurts speed and quality. This article explains the pitfalls of outsourcing and how to balance in-house and external development.
Contents
※Please be noted that this blog is translated automatically by AI
Why IT outsourcing is rising
With severe IT talent shortages, hiring alone cannot sustain development teams.
More firms rely on external resources like SES, outsourcing, and freelancers.
However, increasing outsourcing without addressing structural issues risk permanent dependency.
Hiring Difficulties Threaten Dev Teams
The competition for skilled engineers rises annually in the Japanese IT market.
Small and local firms struggle to attract talent as candidates flock to major tech corps, especially in Web, cloud, AI, and data.
Consequently, firms rely on SES and outsourcing even for core development areas.
While this secures resources short-term and avoids delays, it risks losing technical ownership.
Over-reliance prevents internal engineers from understanding specifications and making decisions.
For example, using external vendors for a new product launch can leave architecture reasons unshared.
When entering the maintenance phase, internal staff cannot judge requirements, increasing vendor dependency.
The core issue of the IT talent shortage is not just a lack of headcounts.
Rather, it is the inability to maintain internal decision-makers.
Simply adding external resources cannot solve the underlying instability of the dev team.
DX Demand Drives Outsourcing Dependency
The push for DX has spiked system development demand even in non-traditional tech firms.
With digitalization in sales, inventory, and data, IT talent demand expands across all industries.
However, the domestic engineer supply remains stagnant.
Government data indicates a growing talent gap, especially for highly skilled IT professionals.
Metric | Details | Impact on Hiring & Dev |
|---|---|---|
IT Talent Gap | Shortage of ~790k projected by 2030 | Full-time hiring alone cannot sustain dev teams |
DX Promotion Demand | Firms scale up digital investment | Non-tech firms enter the hiring race |
Engineer Job Opening Ratio | Persistently higher than other roles | Leads to salary inflation and longer hiring cycles |
Cloud Demand Rise | Demand for AWS/GCP talents expands | Staffing costs concentrate on top talents |
[Sources]
・Survey on IT Human Resources (METI)
URL: https://www.meti.go.jp/
・DX White Paper (IPA)
URL: https://www.ipa.go.jp/
・Job Opening Ratio Report (doda)
URL: https://doda.jp/
Under these conditions, relying on external resources is logical.
However, the issue is outsourcing without defining what must remain in-house.
Immature organizations often outsource as a quick fix for failed hiring.
This halts internal knowledge growth, creating a cycle of hiring struggles and vendor dependency.
Why outsourcing fails: common mistakes
Using external resources is not bad in itself.
Issues with quality, cost, and decision-making usually arise when expanding development teams without clear boundaries or responsibilities.
With IT talent shortages, "just getting more hands" often overrides careful team design.
Relying on Vendors for Requirements
Many failed outsourcing projects rely on vendors even for defining requirements.
Requirements definition is a strategic business decision about "what to build."
However, companies without an internal IT lead often hand over specification design and prioritization to external vendors.
In this state, you cannot evaluate the vendor's proposals.
Consequently, prioritized features become those "easy to implement" rather than "needed."
For example, a company upgrading its sales management system lacked an internal technical decision-maker.
The team met vendors weekly but repeatedly approved changes without understanding their validity.
This led to post-release mismatches with actual workflows, constant costly modifications, and a massive budget overrun.
This is not just about the vendor's capability.
The issue lies in the client not defining their own responsibilities.
Particularly amid IT talent shortages, it is easy to add external heads without internal technical leads.
This may temporarily boost speed but degrades decisions and increases long-term maintenance costs.
No Internal Technical Knowledge
Long-term vendor dependence creates another major problem:
lack of technical knowledge accumulation within your company.
For businesses relying heavily on external IT contractors, high turnover is common.
This leads to undocumented design reasons and technical constraints tied to specific individuals.
Consequently, researching past history takes longer for each new feature or issue.
Without an in-house team, changing vendors also becomes highly difficult.
Outsourcing should complement missing resources.
Yet, companies often externalize core decision-making functions they should retain.
This structure poses a major risk, especially in areas driving competitive advantage.
Product improvements, data utilization, and customer responses require closely linked technical and business decisions.
Simple outsourcing to fill gaps can eventually bottleneck your business speed.
"Without clear in-house development responsibilities and standards, adding vendors will only repeat the same issues."
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What to insource and outsource
With IT talent shortages, full insourcing or outsourcing is unrealistic.
Crucially, separate tasks based on what drives your competitive advantage.
Without this clarity, outsourcing costs will rise without building internal expertise.
Insourcing for Competitive Advantage
Areas directly impacting business growth must be insourced.
Product strategy, UX, and data utilization require closely aligned business and technical decisions.
For SaaS feature updates, customer prioritization and development speed drive competitiveness.
Fully outsourcing this creates communication overhead and slows down improvements.
Without an in-house team, you cannot evaluate vendor proposals.
This leaves system design as a black box, increasing future maintenance burdens.
Insourcing does not mean making everyone a full-time employee.
The goal is keeping decision-making, like architecture and priorities, in-house.
With internal ownership, you can still leverage external talent while retaining knowledge.
Outsourcing Operations & Maintenance
Standardized tasks are highly suitable for outsourcing.
Infrastructure monitoring, testing, routine maintenance, and help desks are easy to define.
24/7 monitoring has high staffing costs, making outsourcing highly efficient.
However, avoiding complete delegation is key.
Vague response standards lead to unclear ownership and stall critical decision-making during outages.
Item | Good (OK) | Bad (NG) |
|---|---|---|
Requirements | Business defines priorities | Fully outsourced to vendor |
Tech Ownership | Internal technical owner | Solely dependent on vendor |
Operations | Clear SLA & responsibility | Vague incident response |
Team Structure | Clear internal/external roles | Outsourcing just for headcount |
Crucial external sourcing relies on what you retain, not just what you delegate.
Shortages tempt quick outsourcing fixes.
Yet, outsourcing core advantages risks slowing down your organization's future decision speed.
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Why domestic hiring is no longer enough
Even when in-housing is valued, maintaining a dev team with domestic recruitment alone is increasingly difficult.
Mid-sized and small firms struggle to reach candidates who meet their requirements due to intense hiring competition.
As a result, many cannot build the teams they want and must rely on outsourcing.
Shortage of Experienced Talent
The current IT recruitment market suffers from a critical shortage of experienced engineers.
Competition is fierce for mid-to-senior levels in cloud, AI, backend, and security.
Simply boosting recruiting efforts no longer solves this.
Too many companies are competing for the exact same talent pool.
Revising job descriptions or adding recruiting agencies rarely generates enough applicants.
Furthermore, large corporations dominate the talent market.
They attract candidates with high salaries, brand recognition, and large-scale projects.
Startups and regional firms face a huge gap between "ideal hires" and "actual applicants."
Many must compromise on required skills, which worsens the workload on their existing teams.
Thus, the assumption that domestic hiring alone can sustain development is failing.
Simply stepping up hiring activities will not stabilize dev teams if the core approach does not change.
Rising Salaries Harden Recruitment
A shortage of IT talent naturally triggers salary competition.
Mid-career engineer salary expectations are rising faster than typical corporate budgets can handle.
For instance, cloud or AI roles that paid 6 million JPY a few years ago now command 8 to 10 million JPY.
Engineers are concentrating at firms that can meet these higher rates.
However, not all businesses can join this salary war.
Small and mid-sized firms face major financial burdens from rising hiring costs.
This leaves them locked in a cycle of unfilled positions.
Even worse, hiring someone does not guarantee they will stay.
In-demand engineers change jobs often, and salary alone cannot secure long-term retention.
Consequently, firms cycle from hiring shortages, to outsourcing, and back to hard recruiting.
The real issue is not temporary hiring difficulties, but the unsustainability of a purely domestic team.
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Needs hiring-friendly structure design
With domestic hiring harder, companies must change their mindset.
The key is deciding which markets to tap, beyond just "hire full-time or outsource."
Focusing only on the domestic market limits hiring, cost-efficiency, and development speed, especially in advanced IT fields.
Limits of Domestic-Only Hiring
Traditional IT hiring relied on local full-time staff, using outsourcing only to fill gaps.
However, this model is no longer effective.
The issue is the gap between growing IT demand and domestic talent supply.
DX, AI, and cloud migration boost demand, but experienced engineers remain scarce.
Consequently, companies often lower hiring standards, outsource more, or delay projects.
These are merely short-term fixes.
Lowering standards increases training burdens.
Outsourcing too much prevents building in-house tech expertise.
Delaying projects slows overall business growth.
Relying only on local hiring leads to constant compromise.
Thus, companies are expanding their talent channels and rethinking which core functions to keep in-house.
Separating Hiring from Outsourcing
In a tech shortage, simply outsourcing is not enough.
Options include SES, contract work, freelancers, side-gigs, and global hiring, each serving a different role.
It is crucial to distinguish "task outsourcing" from "team strengthening."
Use SES or contract work for short-term resources.
To retain technical knowledge long-term, choose hiring-based models.
Increasing outsourcing without this distinction creates a team that cannot make decisions.
For product companies, separating business goal understanding from technical implementation slows improvement.
Thus, planning must address both "what to outsource" and "who to integrate into the team."
For advanced tech roles, selecting the right country and talent pool determines difficulty, making strategic global market choice essential.
Why choose Indian talent?
Phinx supports cross-border recruitment of Indian talent. Based on our practical experience, we summarize the key points here.
As securing advanced IT talent domestically becomes harder, more companies are designing organizations for overseas hiring.
Indian talent is key, not just for cost, but due to supply, tech skills, and global dev experience.
Large Supply of Advanced IT Talent
The biggest reason to focus on India is the supply of advanced IT talent.
In engineering, huge numbers of STEM graduates enter the market annually, creating a deep pool of software talent.
In Japan, hiring experienced talent in advanced areas like cloud, AI, and data is highly competitive.
Conversely, India has a large pool of active professionals in these fields, easing continuous access to qualified candidates.
It is not just about numbers.
With major global tech hubs and projects concentrated there, many have experience in distributed, agile, and cloud-native dev.
Japanese firms struggle with how to secure talent in advanced areas unavailable domestically.
Thus, more firms now view hiring in India not as a local substitute, but as a way to expand their advanced IT talent pool.
The key is not viewing them as "cheap labor."
The key decision driver is that, depending on the tech stack, building a candidate pool is easier than in Japan.
Rich in Global Development Experience
Another key feature is their experience in global development environments.
In India, overseas projects are common, making dev communication in English the standard.
Thus, many are used to distributed dev with global teams, written specs, and remote collaboration.
Japanese firms often struggle not with candidates' tech skills, but with assessing their adaptability to global dev.
For example, Japanese firms often develop products based on verbal alignment and tacit knowledge.
In contrast, global dev requires documented spec definitions, clear ownership, and review standards.
Thus, simply hiring overseas talent is not enough; the organization will not function.
Employers must reorganize their evaluation criteria, English workflows, and onboarding processes.
However, once designed, companies are no longer limited to the domestic market.
In advanced IT, more firms are shifting from "outsourcing domestic shortages" to "integrating global talent in-house."
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Summary
Solving the IT talent shortage isn't just about hiring more or outsourcing.
Fundamentally, it is an organizational design challenge of deciding what to keep in-house versus what to delegate.
Outsourcing without this clarity risks losing in-house technical expertise, harming long-term speed, quality, and productivity.
Securing highly skilled IT talent domestically is increasingly difficult.
Success lies not just in hiring, but in maintaining evaluation standards, responsibilities, and technical judgement.
Companies keeping core competitive areas in-house while outsourcing routine tasks build more stable development systems.
However, relying solely on internal resources is highly challenging.
Global hiring requires managing technical screening, English operations, visa/COE handling, and onboarding simultaneously.
Furthermore, personalized evaluation standards hurt hiring accuracy and retention.
Phinx features experts who built global teams at Rakuten and Mercari. We offer development organization design, not just recruitment.
Using India's Tier 1-3 university networks, we provide technical screening, visa/COE support, and onboarding services.
We help firms stuck in outsourcing or struggling with domestic hiring design practical, high-skilled IT recruitment strategies.
If you face hiring difficulties or excessive outsourcing dependency, contact Phinx for a consult.
[Sources]
・Study on IT Human Resources (METI)
https://www.meti.go.jp/
・DX White Paper (IPA)
https://www.ipa.go.jp/
・Jobs-to-Applicants Ratio Report (doda)
https://doda.jp/
・India Skills Report
https://wheebox.com/
・NASSCOM Strategic Review
https://nasscom.in/
・Stack Overflow Developer Survey
https://survey.stackoverflow.co/
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