Some companies offer a turn-key service, while others will help you to grow your team by providing programmers. Some companies will assign you a project manager, while others won't. This blog will explain the different types of IT outsourcing models, their pros and cons, and how to choose the best model.
What is IT Outsourcing?
Using external vendors to deliver IT-based services is known as outsourcing IT. Custom software development is one illustration. Assume you want to create a mobile app to improve client experience while they are on the go. You might also wish to develop a digital environment for your business that streamlines internal processes. Outsourcing may be a smart choice if you don't have the internal resources to deliver these results.
The Benefits Of It Outsourcing
Deloitte stated the top three benefits of outsourcing for businesses include enabling companies to focus on core functions and providing cost-cutting tools.
Back-End Operations
The back-end operations of a business expand during periods of high growth. This can lead to a significant expenditure of resources. If you dedicate more resources to secondary activities, you will have money, less time, and human resources. High-quality front-end services. Outsourcing is an excellent option to:
- Flexibility in resource allocation allows you to use more of your resources for practical purposes.
- External assistance can multiply the company's performance in a shorter time.
- As a boss or chief, you can reduce the stress on employees and yourself. This will increase the happiness rate within the company as well as improve the productivity of the employees.
Cost Cutting
If you have a clear vision, borrowing is usually cheaper than buying something. Hiring talent from an outsourcing company is usually cheaper than hiring your staff. Outsourcing companies can also offer lower prices and a competitive advantage over businesses that rely on in-house software development solutions. There are some costs that outsourcing could reduce:
- Labor cost
- Rent cost (capturing your engineering staff also allows you to reduce the office size and potentially save money on renting a large headquarter).
- Cost of recruitment (head-hunting and promotion, commission for intermediaries or interview-related expenses, etc.
- Equipment and other supplies
While cost efficiency is an essential benefit of outsourcing, it's important to remember that not all software developers are equally quality. This is why it is essential to balance affordability and quality.
Capability Enhancement
You may not be able to access a large talent pool when you hire an employee. You may have to compromise. Many companies have discovered that outsourcing allows them to access talent from other parts of the globe. Searching for software developers with the most expertise and knowledge is a good idea if you require specialized help.
Types of IT Outsourcing: Nearshore, Onshore, and Offshore
There are three types of IT outsourcing: nearshoring, (onshoring) and offshoring. Your service provider's physical location makes the difference between these approaches.
- Onshoring: is when you outsource IT services for a team that operates in your country. This approach has the downside that you may pay a lot for development services in your country. Many companies consider outsourcing IT services overseas because of this.
- Nearshoring: is when you outsource development services to a neighboring nation - Nearshoring can be viewed as a compromise between quality and cost-effectiveness.
- Offshoring: refers to the outsourcing of IT services to companies based abroad. Although this is the most cost-friendly option, you must consider the time difference and possible communication problems. Many nations outsourcing services in India.
Many factors will affect how you approach outsourcing IT projects for your company. You need to evaluate the cost, determine if you require a close geographical partner, and find one that matches your requirements. Are you unsure how to choose the right IT outsourcing partner? This guide will help you find the perfect software vendor.
Technology outsourcing is not solely done for financial reasons. Yet they continue to be crucial. Depending on the country, software development expenses may vary significantly. It could be challenging to evaluate the candidates because of this. The cost of software production in India is vey low one can hire Indian software developers.
Pricing Models for IT Outsourcing
Three models will be considered for outsourcing software development:
- Calculating price based on time and materials
- Hiring a dedicated outsourcing team
- Agreeing on a fixed fee (project fee)
1. Time & Materials
You pay for the work hours and materials when you use the Time & Materials (often referred to as T&M) method. The quality of your finished product is stressed by this outsourcing model. As the product is being developed, user feedback begins to flood in. The final product frequently differs slightly to entirely from your early designs. This is not a problem. The final result should completely satisfy the potential customer.
T&M with caps is another type of T&M pricing model. This means there is a limit on the number of hours you can work each month or week. This gives you an idea of the project's size and can be used as a guideline for your first project with a particular software house.
2. Fixed Price
Fixed-price IT outsourcing is a model in which you agree to pay a set amount for a project. This may seem like the best option. After all, it will meet your budget. But here's the catch. Fixed price options will not work on projects that have specific requirements. This means that it is unsuitable for products developed according to agile principles. Flexibility is the priority.
Three Types Of It Outsourcing Models That You Should Know
Dedicated Team Outsourcing Model
According to this model of IT outsourcing, also known as per team, the vendor will send a focused team to work on your project. This concept might provide a remedy for the ambiguity surrounding T&M-based cooperation. An internal expert team is similar to a dedicated development team.
The outsourcing company should select a team who can work together well and deliver the project successfully. This team could include software developers, analysts, testers, and project managers. Based on the expertise and roles of each member of your team, the project budget will be calculated.
The Dedicated Team Model:
- Because this is their primary focus, you will work with people who can understand the project and your business goals.
- It may feel like the outsourced team is part of your in-house team.
- Transparency is high in all project-related activities.
- The team can provide value to your project.
Cons of the Dedicated Model Team:
- For concise projects, it is not sustainable.
- A backlog of tasks is essential for your dedicated team.
- You might have to wait for the outsourcing firm to assign (or hire) the appropriate individuals. Teams with a wider variety of talents don't have a problem with this.
Suitable For:
- Longer projects.
- These are projects that have preliminary demands and presumptions. These are required to choose the appropriate team members.
- Agile development process.
This model is the most suitable for close collaboration between the client (you) and the outsourcing company. Your dedicated team will likely notice improvements over time. This is not just for the project but for the overall context of your company. For larger companies going through digital transformation, this outsourcing model could be very beneficial.
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Full Process Outsourcing Model
The entire development process will be managed by an IT provider. They are also full responsibility for the team's organization, management, product quality, and any associated risks. This team should be able to cover all stages of development, including business analysis and support.
When to Outsource the Full Process:
If your development team is inactive, you need a specific software product developed, or if the team is already overwhelmed with other projects.
Full Process Outsourcing:
- You will need to manage your business with minimal or no effort. This will allow you to concentrate on other business activities.
- The IT Provider & Services Provider guarantees high-quality deliverables and timeline alignment (with penalties if not achieved on time).
- Access to the vendor's best practices and expertise in development.
- Vendors are responsible for managing project-related risk.
Cons Of Full Process Outsourcing:
- The setup is slower than other models.
- Compared to other IT outsourcing models, this strategy gives you less control over the development process.
How to make the cooperation work:
Requesting transparent reporting and designating a representative to keep active communication with your IT provider is essential. Cisin, as a vendor, offers daily communication on demand and weekly status checks within this outsourcing model.
Model for Staff Augmentation Outsourcing
Vendors, often known as IT Outsourcing Partners, offer independent contractors you can supervise yourself. Staff augmentation is the best choice if your development process is sluggish, you lack specialized or advanced knowledge, or you simply require a small number of professionals to assist you with the project.
Pros and Cons of Employee Augmentation :
- Flexibility: You can get the experts you need at a price that often 0.5 and 100 full-time equivalents (FTE). The dedicated team option is more efficient, starting at 10 FTE.
- It is easy to scale up or down to adapt to changing business requirements.
- For example, you may need to be able to meet the needs of both short-term and long-term partners if you are faced with a problem that requires specialized skills.
Cons Staff Augmentation:
- You are fully responsible for all project-related risks.
- You can help outsource professionals by managing them and onboarding them.
- Possible communication gaps or collaboration problems
How Do You Set It Up Correctly:
While management may be supportive, I recommend choosing a vendor who tracks employee performance and helps resolve any issues. This will significantly improve the quality of the services you receive.
Read More: What are Different Types of Software Outsourcing in 2023?
Which Outsourcing Model Should You Choose For Your Business?
This is the one question that we cannot answer. This question is not easy to answer. However, we can help you find the correct answer.
Look at the following to determine which outsourcing model is best for your business.
What Are Your Project Requirements?
Understanding your project requirements is essential before you think about outsourcing. It will help you avoid any confusion during the development and outsourcing of your project.
Here are some questions you should answer:
- What are your goals for project completion?
- What is your project's scope?
- What are your core features for the final product?
- Are you defining milestones for your project?
- What deadlines do you have in mind for your project?
Finding the ideal form of outsourcing for your needs will be simpler after you better understand your project's requirements. To ensure the success of product development, you should then assemble the best team. By doing this, you can steer clear of expensive product development mistakes.
Which Pricing Model Would You Like to Use?
First, you need to establish a budget and then consider the pricing model you would like to use for the outsourced services.
Do you prefer a fixed, value-based, or competitive pricing model?
Once you have established your budget, you can narrow your search for professional outsourcing agencies within your budget.
How Dependent Is Your Outsourced Project On Your Core Team's Performance?
Software development projects are no easy task. Project management is no simple task.
All your teams should work together under one roof to achieve the goal. Communication and coordination between members of the team are essential.
Your core team and outsourcing partner must have an equal stake in the project's development. You should avoid outsourcing in such cases as it will be difficult to coordinate due to the differences in time zones.
However, suppose your core team is not involved in your outsourced project other than tracking progress. In that case, your potential outsourcing partners will increase.
Once you've identified the role of your core team in the project, you can determine which type of outsourcing model is best suited for your project.
What Kind of Relationship Do you Want to Have with Your Outsourcing Entity?
Excellent customer service is a high priority for outsourcing entities since client satisfaction is the deciding factor in their next source of bread or butter.
Deciding how much interaction you would like with your outsourcing company is essential.
Are you happy to delegate your project work and wait until it's complete before initiating contact? Are you interested in being involved in the development of your project?
You can also decide which type of relationship with your outsourcing company you want to have. This will help you choose the best type of outsourcing for your project management.
Read More: Common sources you may come across while software development outsourcing
Software Development Outsourcing: Hard Facts
1. Many Agencies Are Available, But It Can Be Challenging To Find The Right Fit
Hundreds of companies are operating in every country, making the market saturated. It will be difficult and time-consuming to sort through all the sales pitches and colorful designs of companies that claim to be experts in every aspect. Do not get distracted. Instead, focus on finding the right partner who will not treat your project like another in their "assembly" line.
2. Software Development Goes Beyond Writing Code
Software developers have many responsibilities. Software developers can impact customer experience, revenue flow, and brand identity. They also may impact the content and other aspects of a company's business. Good software development companies will do more than just create a product. They also contribute to its design and help with deployment.
3. The Competition Is Fierce
Mobile app development is a field that requires both experienced and skilled developers. Many become frustrated when they learn that 60% of mobile coders have delivered less than five apps and 20% between 5 and 9.
4. It Is Better To Create An Exclusive Product/Service.
With all the organizational challenges that come with it, you have to create a unique product that stands out from others. It is not wise to copy a competitor's product and expect similar results. It is better to have a custom-designed product.
5. Software Projects Can Be Expensive
Most of these projects go over budget by up to 50%. The average project cost is between $15,000 and $150,000. An average project takes approximately 1,000 hours. Hourly rates range from $50 to $400. Although outsourcing software development has been seen as a solution to cut expenses, most low-cost development firms are weak. Poland and other central European nations can provide a reasonable price-quality ratio.
6. Software Outsourcing Could Fail
A failed software update caused millions of RBS customers to lose access to their accounts and rendered the bank unable for a few days to perform any transactions. This is only one example of the importance of software today. According to various estimates, 25% to 50% fail software outsourcing companies projects.
This could result from many things, including business operations not in line with project requirements, management failures, poor specifications, and poor measuring metrics. Many companies create a lot of documentation and hire junior coders who blindly follow it without creativity.
These questions are: How can we make hiring a software development company easier? How can you avoid costly mistakes? How do you avoid making costly mistakes when hiring a software development firm? It is essential to choose the right company to work on your project.
These are some basic facts to remember.
Before You Hire A Company For Software Development
Every approach has its pros and cons. Onshore development is an excellent fit for large projects with large budgets that last between 4-12 months and have large budgets. Companies with well-defined projects looking for a cost-effective option will find offshore development more beneficial.
Prepare For Close Collaboration And Frequent Communication
Next, you should be ready for close collaboration and open communication lines. Although it may sound cliché, building software is similar to building a house. You have a plan and must communicate it to the contractor. Good relationships will help you get started. You'll not only be working with technical aspects but also people. Talented developers are not limited to coding but can also develop innovative solutions and ideas.
Communicate Your Expectations Clearly
Have you ever thought there are many ways to code the same thing? It's not uncommon for non-programmers to be unaware of this and may even believe that they know every technology.
There are two sides to the coin. There are two sides to the coin: problems when several individuals are involved with diverse coding styles, frameworks, and tools on the one side and creativity and flexibility on the other. Here, working with a software development business might be highly advantageous. They will have a particular area of expertise (e.g., JavaScript development team, as they would have a single command over all processes.
This gets us to the second consideration: to choose the appropriate technology, you must be aware of the features your ideal app will offer. You only need a few specifics regarding your program's design, functionality, and features to know precisely what kind of business to seek.
A better-prepared and clearly defined project will make hiring and selecting companies easier. Identify your strategy by asking questions such as what purpose your application serves, who it will be used for, how it will help, which industry it will be used in, and what competitors it will run on. Make a list of features and prioritize them. Annotate design and technical requirements. Outline UX, user flow, and navigation.
Prices Can Vary
What will the price be? If you Google the cost of producing software/application, you'll see the general answer that goes something like this: "Apps produced by huge top companies are likely to cost between $500,000 and $1,000,000, apps built by onshore agencies cost somewhere between $150,000 to $450,000". A professionally built app should cost between $100K and $500K. It typically takes 4-6 months to do this.
Important Points To Be Aware Of
What should you look for in a software development company hiring? After going through the options, you have found online, or from personal recommendations, you can narrow down your list to 10-15 companies. Look at their websites to get a general impression of their work, knowledge, and content quality. Red signals like negative reviews, complaints, or litigation should be taken seriously. Find out how the problems were fixed.
Then, you can narrow down your list to just 3-5 companies. You can request a quote to help you choose the best one for you.
Next, negotiations will take place, and then a contract will be drawn. This could be a series of contracts, including a master's service agreement (MSA), non-disclosure agreements (NDA), and a statement of work (SOW). Include intellectual property rights and a non-compete clause in any contract. These outsourcing contracts will most likely include payment terms.
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Conclusion
Even if you work with one provider, you don't need to rely solely on one outsourcing model. Many IT companies allow you to choose the best collaboration model that suits your needs. A hybrid pricing model is also possible. You can create a T&M contract with a monthly limit of hours.
The budget of your project will influence the choice of outsourcing model. Other than that, consider the following factors when making your decision:
- The scope of your project.
- The estimated duration of this project.
- The preferred method of project management.
- Consider whether the team may need to be scaled up during the development process.
- The project's technical innovation.
These are all essential aspects to consider when you sign a contract with an outsourcer. When making this decision, getting support from potential tech partners is a good idea.
