It’s tough to decide whether or not to outsource because there are a bunch of different outsourcing models to choose from. With so many options, it’s no surprise that this decision can be really difficult and has a huge impact on how well outsourcing works for your business. Your choice can make or break your outsourcing strategy and affect how much you benefit from working with a vendor.
Each model has its unique advantages and disadvantages. The choice of the right model will help you:
So, done correctly, software development outsourcing can become a powerful strategy for achieving your business goals.
In this guide, we’ll compare different types of outsourcing services to help you decide on the best option for your business needs. We’ll review the benefits and drawbacks of each model, explain why and when each is used, and show how they can help advance your digital initiatives and improve the bottom line. So, let’s dive in and explore all the nuances of outsourcing.
Table of Contents
Essentially, IT outsourcing means hiring a third-party company to handle your IT needs or developing digital products. It’s a way to get access to the technology and expertise you need to keep your business running smoothly without building and maintaining your own IT department.
By outsourcing such processes as software development or maintenance, you can focus on running your business while leaving the technical details to the experts. This can save you time and money and help you stay ahead of the competition by keeping up with the latest software solutions and technology trends.
Despite the looming recession, the forecasts for the global IT outsourcing market anticipate an increase at an annual growth rate of 8.07% between 2023-2027. The industry was worth $395 billion in 2022 and will climb to $430 billion in 2023. So, we can see the tendency toward more businesses opting for outsourcing, but what makes them decide to do so?
Outsourcing has become popular as a strategy for SMEs and larger companies alike. Instead of building capabilities internally, business leaders increasingly leverage IT outsourcing to support their business and technology operations. We can confidently name cost saving as a primary reason for 57% of business owners. Other most common motives are:
It can be difficult juggling everything in-house. That’s why, as a business model, outsourcing allows you to allocate the time and resources you need to focus on core business aspects while still providing customers with high-quality service.
Now let’s evaluate various IT outsourcing models and determine which to choose for particular technology needs.
A successful outsourcing model goes beyond cost and expertise and considers such crucial aspects as time zone, cultural similarities, and strong tech infrastructure. We took it into account when comparing the best countries to outsource software development to. Hence, the location of the IT outsourcing services company is one of the most important considerations. The main deciding factor here is how far your outsourcing team will reside from you. Let’s review the options.
This delivery model refers to hiring an external company or contractors that provide services or perform tasks in the physical location where your company operates. As such, the vendor will select and send qualified IT experts to work in your office for a fixed period of time.
The onsite team directly coordinates and collaborates with your internal team. Together, they collect information and develop, implement, and maintain the project. Basically, an onsite team functions like your in-house staff. The difference is that they are not technically your employees, which leads to the following benefits.
When to choose:
With proper planning and understanding of the risks, close cooperation between your specialists and the development team can bring amazing results. But it’s just one of the outsourcing models. Let’s move further.
Onshoring means partnering with an IT service provider within your country but not necessarily in your city. The main difference between this approach and onsite outsourcing is that you work alongside your external team from different physical locations. So, why consider this software outsourcing business model?
When to choose:
The other end of the spectrum is an offshore type of outsourcing, which implies hiring software engineers overseas, 6+ time zones away from you. For example, your company from the US outsourcing software development to Eastern Europe or India illustrates offshore cooperation. So, what will bring you this outsourcing model?
When to choose:
Today, organizations are looking to expand their external staff to neighboring regions such as Eastern Europe or Latin America instead of India. In other words, businesses found the nearshore outsourcing model attractive for cost reduction and long-term innovation. So, as you might guess, nearshoring is when you contract with an IT service provider located in a nearby country or region. Nearshore software development services are worth your closer consideration as this model can give you the best of onshoring and offshoring while reducing the risks of the latter. So, let’s dive deeper.
When to choose:
More details on this outsourcing model you can find in our in-depth guide on nearshore software development.
Why limit your choice to one model when you can combine several or all of them? Multisourcing leverages the benefits of numerous vendors residing in various locations, unlike traditional sourcing, which deals with a single company. If done properly, multisource outsourcing helps you partner with the best-fit talents for each part of your project or IT service while reducing costs and getting real value.
When to choose:
Our summary table highlights the most crucial aspects of IT outsourcing models to help you make the final decision.
|Talent pool||Very limited||Limited||Broad||Sufficient||Broad|
|Time zone difference||Same||Same||Significant||Slight||Depends|
|Communication efficiency||High||High||Low||Quite high||Low|
We provided a detailed review of the most popular types of IT outsourcing, where the location is the main deciding factor. As you can see, the proximity of your outsourced team influences numerous aspects vital for effective collaboration. Also, it’s worth noting that different projects require different solutions and different outsourcing models.
But wait, we are far from ending our review. Just keep reading to get an overview of other options that will define the partnership and pricing models of your cooperation with a vendor.
Another critical decision is determining the type of partnership with the outsourcing company. It all goes down to management and the distribution of ownership and responsibility between your organization and the outsourced team. So, let’s see how it works.
Imagine you have a team of experts working on a project but lack a QA specialist to ensure proper product functioning. It makes no sense to go through a lengthy and costly hiring process if this is a one-time requirement, and you’d be right. That’s where a staff augmentation model will help you complete your project on time or fill a skill gap. It’s one of the cost-effective ways to extend your software development team, especially beneficial for short-term cooperation.
Using this engagement model, your outsourcing partner will provide specialists that will become a part of your in-house team onsite or remotely. Basically, it’s similar to hiring an employee but with the added benefit of not having to worry about onboarding and training. In this model, you have full control over the team and project management as well as the responsibility for the deliverables. Thus, you can maximize the efficiency of your in-house team while maintaining control over your project.
By choosing this cooperation model, your outsourcing partner will set up a team of experts exclusively dedicated to your project. The dedicated team may consist of various roles as per your project needs, including software engineers, business analysts, designers, QA specialists, and project managers. The size of a team is also up to you. Consider it some sort of staff extension, yet it doesn’t involve direct collaboration with your internal team.
Opting for a dedicated team model, you will share the risks and responsibility for project results with the outsourcing company. You will find a dedicated team the most beneficial for complex, long-term projects that require a high level of expertise.
We recommend you check our article on how to find and hire a dedicated software development team to learn all the nuances of this outsourcing model.
Unlike previous outsourcing models, you delegate the whole product development and management to your software outsourcing partner. All you need to do is ensure your specifications and requirements are well-documented and communicated. You don’t necessarily need any technical expertise because the development company completely takes over the project and lets you focus on your core business operations.
With a project-based approach, you have the least control over the process. It’s the provider who carries out the project management and decides on the team members and tools to complete your project. But, of course, you will get updates on the progress of the work.
Let’s summarize the main points for a quick reference:
|Staff augmentation||Managed team||Project-based|
|Client involvement||High||Minimum to no||Low|
|Control||High||Minimum to no||Low|
Understanding these basic models will help you adequately strategize the process and avoid potential roadblocks.
Now, we will cover the possible price structures of the outsourcing deal. It’s an important decision because you should select the payment scheme that makes sense for your organization. So, we highlighted two main types of outsourcing pricing models to help you with the choice.
When choosing this price structure, you pay a fixed price for the services of your vendor agreed upon at the beginning of the project. Your partner will evaluate the scope of work and set the rates based on the estimated resources and time needed to complete the project.
This simple pricing model helps you avoid overpayment. But here’s the trick. You won’t be able to make any changes and adjustments to the project’s scope during product development, which usually happens. Well, actually, you can, but changing them will require a lot of conversations, timelines, and budget changes. As such, projects under fixed price lack flexibility. So, you may choose it for projects with well-defined requirements.
Using this model, you only pay for the actual time and resources spent on your project. The cost will depend on the hourly rates of software developers and the hours they spend working on your product.
It’s one of the most flexible options among outsourcing pricing models, as you can adjust the process, shift the scope, and make any necessary changes to requirements. That’s why our clients choose the T&M model for most large-scale development projects where the requirements will likely change. Yet keep in mind that there is a possibility of going over your budget due to the project alterations. So, make sure your partner is transparent in their billing to eliminate the potential surprise costs.
Though these are the most popular payment schemes, you can also encounter the following pricing models:
Speaking about pricing, you may find it helpful to learn how to estimate the cost of software application development.
Now that you have a grasp of the different types of outsourcing models, we approached the main question: How to select the one that fits your business needs? As a business owner, you should analyze all the aspects of the project that will influence the outcomes. Below we outlined the steps to help you with that.
The decision of which functions to keep in-house versus outsourcing should balance the efficient use of augmented staff while leveraging the existing workforce. That’s why you should start by identifying the key issue you want to address through outsourcing and project requirements. Since different needs may fit different outsourcing models, be as specific as possible about the main ones.
As different types of outsourcing services offer different levels of control, you should understand how much of it you may require. For example, you may be comfortable giving up control except for ensuring the outsourced company delivers in line with your requirements. Or you may need more control over the project while leaving the management of the tasks and processes to the external team. Finally, you may want complete control and management responsibility.
Take the models that potentially fit your business needs and the desired level of control and thoroughly evaluate the pros and cons as well as the risks. Thus, you will clearly understand what you get and what is at stake. And be aware that underestimating possible risks may lead to costly mistakes, so check these tips to avoid IT outsourcing failures.
Now, what is left is finding a trustworthy company. As your project specifications are ready, search available options and narrow down the list to companies that best meet your needs. Learn about their tech and business domain expertise, examine portfolios, and read customer reviews. Choose the most relevant companies and ask them to estimate the project. Comparing the estimates will help you select the one. A more detailed guide on the software outsourcing vendor selection process will help you do it more effectively.
If you are still unsure which type of outsourcing to choose, engage Relevant Software. With the right outsourcing partner, the right outsourcing model usually follows. We work with two collaboration models: a dedicated team and end-to-end development to meet the needs of various projects. Tell us about your software development requirements, and we will guide you through the collaboration and pricing models to find the perfect solution for you.