IT Outsourcing models and things to know

In today's rapidly evolving business landscape, companies are constantly seeking ways to optimize operations, reduce costs, and gain a competitive edge. IT outsourcing has emerged as a powerful strategy to achieve these goals, allowing organizations to delegate IT-related tasks and responsibilities to external service providers.

This comprehensive guide will explore the various IT outsourcing models, their benefits and drawbacks, and key considerations for selecting the right model for your specific needs.

What is IT Outsourcing?

IT outsourcing involves delegating a business's IT functions to an external provider, including transferring staff, processes, and assets. These services integrate hardware, software, and operations. While traditionally complex, with challenges like staff transfer and asset sales, modern developments like cloud-based solutions and offshore centers add new dynamics.

Companies opt for IT outsourcing to cut costs, access specialized expertise, boost efficiency, scale operations, and focus on core activities, minimizing the need for in-house IT resources.

Types of IT Outsourcing Services

The location of the service provider primarily distinguishes the three main types of IT outsourcing services:

• Onshore Outsourcing: IT services are outsourced to a service provider located in the same country. This model offers benefits such as similar time zones, cultural compatibility, and easier communication.
• Offshore Outsourcing: Contracting with a service provider located in a different country. This approach often provides cost advantages due to lower labor costs in certain regions but may introduce challenges related to time zone differences, language barriers, and cultural variations. For example, outsourcing to Vietnam is about 90% cheaper than developing software in the United States of America. Compared to India, developing software in Vietnam costs between one-third and one-seventh times cheaper.
• Nearshore Outsourcing: Partnering with a service provider in a neighboring or nearby country. This approach aims to strike a balance between cost savings and proximity, offering advantages such as cultural similarity, easier travel, and potentially reduced time zone differences.
• Cloud-based Outsourcing: With cloud computing, organizations can outsource IT functions to service providers that deliver services over the internet. Cloud-based solutions also play a significant role in reducing IT outsourcing costs, offering scalable resources without significant upfront investments.

IT Outsourcing Pricing Models

IT outsourcing pricing models determine how costs are calculated and charged for IT services provided by an external service provider. These models can vary based on the specific nature of the services being outsourced and the preferences of both the client and the service provider. Here are some commonly used IT outsourcing pricing models:

• Fixed Price Model: The service provider offers a fixed price for a predefined scope of work or project. The price is agreed upon upfront, regardless of the actual effort or resources expended by the service provider.
• Time and Material (T&M) Model: The client pays for the actual time spent by the service provider’s resources and the materials or resources used. This model is suitable for projects where the scope is not fully defined or may change over time.
• Dedicated Team Model: The client hires a dedicated team of IT professionals from the service provider.
• Outcome-Based Model: This model focuses on delivering specific outcomes or results rather than individual tasks or hours worked. The service provider and the client define the desired outcomes and agree on a pricing structure based on achieving those outcomes.
• Value-Based Model: The value-based model aligns pricing with the business value delivered to the client. The service provider and the client agree on key performance indicators (KPIs) or business metrics that reflect the value generated by the services.
• Subscription-Based Model: This model involves paying a fixed recurring fee for access to specific IT services or a suite of services provided by the service provider.

Popular IT Outsourcing Models

Here are some of the most popular IT outsourcing models:

Dedicated Team Outsourcing Model

The vendor provides you with a dedicated team of employees to work on your project. Having a dedicated development team at your disposal is as close to having an in-house expert team as possible.

The team may include not only software development specialists but also testers, analysts, or project managers. The project budget is calculated based on the roles and expertise of people who are a part of your team.

Pros:

• You’re working with people who understand your project well (together with business goals and customer needs), as this is their primary focus.
• The outsourced IT solutions provided by this IT outsourcing model feel like an in-house team.
• High transparency of all project-related activities.
• You can rely on the team to provide value for your project.

Cons:

• It’s not sustainable for very short projects.
• Your dedicated team needs to have something to do, so a backlog of tasks should be in place.
• You might need to wait for your outsourcing vendor to allocate (and potentially even hire) the right people. It is not an issue for teams with a broader roster of talents.

Project-Based Model

The client entrusts the entire software development process, from planning to release, to an outsourcing company.

Two main methods exist for payment. The first involves a fixed price, calculated by multiplying the number of hours needed to complete the project (agreed upon in advance) by the hourly rate. The second, time & material, uses the same formula but applies to the scope of work instead of the entire project.

Pros:

• Defined Timelines and Outcomes: Working with your outsourcing partner, you establish timelines and deliverables upfront, providing clarity about what you’ll receive at the end of the scope.
• Minimal Time Commitment: While your approvals are required at times, the Project Manager ensures timely and quality work, leaving you free to focus on higher-priority tasks.
• Vendor Accountability: While you’re responsible for documenting project requirements and specifications, the execution and delivery rest on your vendor’s shoulders. Your cooperation with the vendor’s Business Analyst (BA) team is essential in this regard.

Cons:

• This IT outsourcing model gives you limited control over your project and developers.
• With extra services such as project management, business analysis, and quality assurance, it can cost a lot.
• It also requires you to define the full specifications of your project at the beginning, which may be very hard.
• Moreover, misunderstandings with project requirements can result in significant mistakes that delay project completion.

Staff Augmentation Outsourcing Model

A vendor, aka IT Outsourcing Partner, provides you with remote professionals that you manage directly. Staff augmentation is perfect if your development process is too slow, you have a shortage of rare or advanced expertise, or when you need just 1-3 experts to accompany you with the project, not a complete team.

Pros:

• Flexibility: getting the exact number of experts you need.
• Easy to scale up and down for adapting to the changing business needs.
• Suitability for both long-term and short-term engagement, for example, when you run into a problem that requires specific skills to solve, and you don’t have the expertise to handle it.

Cons:

• Full responsibility for project-related risks on your side.
• Onboarding and managing outsourced professionals are on your side.
• Possibility of communication gaps and collaboration difficulties.

Software as a Service (SaaS)

SaaS allows organizations to outsource software management while enjoying lower costs and quick deployments.

Pros:

• Cost-Effective: Eliminates upfront costs for hardware and licenses. Offers a pay-as-you-go model based on users or usage, reducing initial expenses and aiding budget management.
• Quick Deployment: Accessible via web browsers, requiring no complex installations. Enables rapid setup and supports remote work.
• Scalability: Easily adjusts to changing needs by adding/removing users or features. Suitable for growing or fluctuating demands.
• Automatic Updates: Providers handle updates and maintenance, ensuring access to the latest features without user effort.
• Collaboration-Friendly: Cloud access from multiple devices fosters teamwork, real-time sharing, and efficient communication.

Cons:

• Limited Customization: Customization options are often constrained, potentially requiring process adjustments. Additional customization may cost more.
• Provider Dependence: Relying on third parties can lead to disruptions during downtime and raises data security concerns.
• Data Compliance: Trusting providers with data demands strong privacy measures and adherence to regulations.
• Integration Issues: Connecting SaaS to existing systems may involve compatibility and data synchronization challenges.

How to Select the Right IT Outsourcing Model

Selecting the right IT outsourcing model is a critical decision that can significantly impact the success of your project. Consider the following factors when making your choice:

• The scope of your project.
• The estimated duration of the project.
• Your preferred project management methodology.
• Whether the team might need to be scaled during the development process.
• The level of technical innovation in the project.
• The budget of your project.

Here are some guidelines for choosing the most suitable model:

Choose the Staff Augmentation Model when:

• You have an existing in-house team.
• In-house tech leadership exists.
• Specialist expertise is needed.
• Rapid team expansion is required.

Choose the Dedicated Team Model when:

• In-house project management exists.
• Specific tech expertise is required.
• You want to be involved in decision-making.

Choose the Project-Based Model when:

• You have limited resources.
• You’re a startup.
• Your in-house team is occupied with the core product.
• You have a clear product vision.

Consider IT Outsourcing? Choose Icetea Software

If you're looking for a reliable IT outsourcing partner, consider Icetea Software for:

• Diverse expertise: Blockchain, web/mobile, AI, QC.
• Stable team: Low turnover rate, bilingual communication.
• Flexible models: Staff augmentation, cost optimization.
• Proven experience: Successful projects, high client ratings.
• Innovation commitment: Pioneers in blockchain, AI.
• Comprehensive support: End-to-end project assistance.

Icetea Software can be the strategic partner to help you thrive in the digital era.

Conclusion

IT outsourcing can be a strategic decision for organizations, driven by various factors such as cost reduction, access to specialized skills, scalability, and a focus on core business functions. However, it’s crucial for organizations to carefully evaluate their requirements, select reliable service providers, and establish clear communication and governance frameworks to ensure successful outcomes from IT outsourcing engagements.