IT Outsourcing Models: Types And Tips To Choose The Best One
Outsourcing your IT requirements brings an excellent opportunity to enhance efficiency and reduce costs. It can significantly contribute to improving overall business operations.
However, determining the most suitable IT outsourcing models for your specific business needs might pose some challenges. In this article, we will explore various types of IT outsourcing models to provide you with the insights necessary for making an informed and advantageous decision.
What Is IT Outsourcing?
Outsourcing is a strategic arrangement in which a company delegates specific operations, functions, or services to third-party providers, whether they are based domestically or internationally.
These providers possess the necessary expertise to efficiently handle the assigned tasks, enabling the company to leverage external capabilities.
This approach is particularly advantageous when businesses are looking for cost-effective solutions, or when internal resources need to focus more on core competencies.
Outsourcing includes IT services, customer support, and even intricate knowledge-based processes.
When Should You Hire An IT Outsourcing Provider?
Outsourcing is a wise decision when you lack in-house expertise or are facing financial constraints.
If your project requires resources for one-time use, it would be inefficient to assemble and train a complete team only to fulfill a single project requirement that is unlikely to recur.
So, what’s the solution? Simple: outsource!
According to Deloitte, 70% of businesses opt for outsourcing due to its cost-effectiveness, with flexibility holds the key factor for 40% of them.
Outsourcing has proven to be an effective approach for accessing high-quality services from a global talent pool. Moreover, it offers cost-efficiency as an added advantage.
Types Of IT Outsourcing Models
Let’s dive deeper and thoroughly analyze each of the IT outsourcing models.
IT outsourcing models: location-based
As your business expands, you may want to outsource specific areas of work. However, identifying the most suitable options can be challenging. Nearshore outsourcing, onshore outsourcing, and offshore outsourcing are the three predominant IT outsourcing models.
Each model comes with its advantages and disadvantages, so, businesses have to determine which one aligns best with their requirements.
Onshore outsourcing model
Onshore software development refers to outsourcing your software development to a company located in the same country or region as your company. With this model, your team is based in Maine, for example, while additional resources are outsourced from a company in Nebraska.
We call this approach local outsourcing and is the most convenient option. The advantages of onshore software development include
However, there are potential downsides to this type of outsourcing. If your goal is to reduce development costs, hiring an onshore team in the same country may not be the most cost-efficient option, especially if you are located in countries like Australia, Canada, the UK, or the USA.
These countries often have higher development hourly rates. Therefore, in some cases, onshore outsourcing is more expensive compared to offshoring or nearshoring your work.
Nearshore outsourcing model
The nearshore model involves outsourcing work to a neighboring country that is geographically close to your own. For instance, if you are based in Germany, you might consider hiring a team from Poland, the Czech Republic, the Netherlands, Belgium, Switzerland, Austria, or even France.
Why hiring a nearshore team is the best choice for business? Because the travel time difference between your company and the outsourcing company should ideally be approximately 3 hours.
Choosing nearshore software development offers distinct advantages, including:
Offshore outsourcing model
Offshore software development involves partnering with a company located in a different country, even on the opposite side of the globe, with a distinct time zone.
Offshore software development offers numerous advantages:
On the other hand, there are several downsides to the offshore outsourcing model:
Nearshore vs onshore vs offshore at a quick glance
IT outsourcing models: relationship-based
There are three different relationship-based IT outsourcing models: staff augmentation, dedicated team model, and project-based model.
Staff augmentation model
One of the most popular IT outsourcing models is the staff augmentation model. It entails expanding your existing team by bringing in additional IT specialists.
It’s a good idea when you already have a team in place but require additional expertise. The specific individuals hired may vary depending on your specific needs and requirements.
WHEN TO USE?
If your in-house backend developers can’t meet project deadlines, there’s an alternative to going through the costly process of recruitment and subsequent layoffs. You can have staff augmentation to fill the gaps effectively.
For instance, let’s say you have a full Android development team in place, but you lack sufficient iOS expertise. In such cases, staff augmentation allows you to augment technical staff to bridge the iOS skills gap.
This approach enables businesses to quickly onboard specialists without the need for long-term employment.
Similarly, if you have a complete ?ReactJS front-end development team but have recently lost senior-level experts, staff augmentation service is the optimal solution. By augmenting these experts, you can address the expertise gap and ensure your project’s success.
The staff augmentation model, also known as the extended team approach, aims to fill skill gaps without undergoing extensive recruitment processes. It’s particularly suitable when you require temporary expertise and don’t have a long-term need for specialists.
With staff augmentation, the outsourced specialists are your temporary in-house team members, so you can maintain full control over project management and processes while augmenting only the necessary positions.
The augmentation model can also serve as an effective solution for long-term commitments. When should you consider using staff augmentation in the long run? It’s helpful if you need to reduce recruitment costs, address skill gaps, or are unable to find in-house experts in a particular field.
Instead of waiting for the perfect candidate, you can augment your team with professionals from a reliable service provider.
Dedicated team model
A dedicated team model (or managed team), means hiring an entire development team to handle a specific scope of work.
While this outsourced team may not always collaborate directly with your in-house team (although they certainly can), they do provide regular progress reports to your project manager, CTO, or directly to the client.
This model is well-suited for complex and long-term projects that have the potential for future expansion. It’s particularly helpful when you are seeking a product-market fit and require a discovery stage to refine your project.
WHEN TO USE?
If you are an early-stage startup with clear project specification aiming for rapid growth, the dedicated team model can assist you in swiftly building a team while saving recruitment, hiring, and employee management costs. It allows you to focus on the core competency.
For complex, long-term projects, the dedicated team model is ideal. If you already have an in-house team for certain technologies but require a strong development team comprising design and/or development/QA experts, you can hire a dedicated team from an outsourcing partner to manage a development portion.
In cases you need support in a specific area of development, such as when you have a complete web development team with an in-house project manager and testers, but lack a team for mobile application development, a dedicated team can fulfill that need.
Furthermore, with a dedicated team, you can maintain full control over the development process and be involved in each aspect of decision-making. This model allows for a high level of project oversight.
Similar to the staff augmentation model, the managed team is assigned to your project, but they are not part of your in-house team. They work independently under your project manager or their own assigned project manager, depending on your specific requirements and arrangements.
The number of outsourced roles in the dedicated team will vary based on your project’s needs. Your outsourcing service provider should assist you in determining the necessary roles and their quantities based on your project requirements.
Project-based model
In contrast to the previous models, the project-based model involves outsourcing the entire project to a third-party company. Once you choose your development company, you will need to provide them with a comprehensive project requirements outline.
From there, the service provider assumes responsibility for assembling the development team and delivering the project based on your outline.
The key advantage of project-based model is that you can take off a big portion of the work, as the outsourcing team is in charge of end-to-end responsibility.
They handle tasks such as forming the development team, delivering project milestones in each sprint (typically following the Agile methodology), and managing project management and quality assurance aspects.
WHEN TO USE?
When you have a clear vision of a product but lack the workforce or prefer not to hire one, or when the project is not your core product, and you prefer to avoid managing it internally, or even when you are a startup and require an external service provider to assemble all the necessary resources for your project, the project-based model is highly advantageous.
This model is one of the most traditional forms of software development outsourcing, and operates on a straightforward premise.
As the client, you provide the project requirements, and once the service agreement is signed and the service provider initiates work, you can expect deliverables in a predetermined timeframe, depending on the chosen cooperation model or work methodology.
This outsourcing model offers the least time-consuming experience for the client, as the bulk of the development responsibilities rests with the outsourcing company.
However, with this model, you can less control your project, as all development aspects are handled by the external team. The frequency of meetings and discussions regarding the process, challenges, and progress of the software can be determined based on your preferences and the agreement with the development company.
Compare staff augmentation, dedicated team and project-based model
Outsourcing Pricing Models
As a discerning business owner, you recognize the significance of choosing a pricing structure that fits your organization’s requirements. Therefore, let’s explore the two primary types of IT outsourcing pricing models to help you find the best decision.
Fixed price model
In a fixed-price pricing model, the customer agrees to a predetermined price for the entire project, regardless of the duration it takes to complete. This pricing approach is advantageous for the service provider as it allows them to forecast their project revenue.
Customers prefer this pricing model because it assures them a fixed price for the services rendered. It’s is commonly employed for larger projects with well-defined scopes and timelines.
Pros:
Cons:
Time and materials (T&M) model
The time and materials pricing model is the most prevalent type of pricing model in outsourcing. In this model, the service provider invoices customers based on the hours spent on the project multiplied by an employee’s hourly rate.
This pricing structure is advantageous as it ensures they only pay for the services used.
The service provider favors this pricing model because it provides them with a guaranteed level of revenue for the project.
Pros:
Cons:
Tips To Choose The Best IT Outsourcing Model
You are searching for the ideal IT outsourcing models for your business? Let’s embark on a step-by-step journey together:
However, determining outsourcing form on your own can sometimes leave you hesitant and at risk of making inaccurate choices, resulting in wasted time and unnecessary expenses.
Professional IT outsourcing companies like LTS Group can help you cut down on the time spent deliberating which outsourcing model to choose. This allows you to allocate more time to focus on other core business tasks.
At LTS Group, we offer a comprehensive range of the aforementioned models. With our professional consultants, we will help you choose the most suitable model based on your business needs, project scale, and budget.
To make the optimal decision when outsourcing IT services, don’t miss the following article:
FAQ
Which outsourcing model is the best?
The project-based model, also referred to as full-process outsourcing, is widely regarded as the top choice in IT outsourcing. This model grants the IT vendor full control and accountability for the project, encompassing all stages of the process, team management, outcomes, deliverables, and risks.
How many outsourcing models?
There are two primary categories of outsourcing models: location-based and relationship-based.
What is the difference between offshoring and outsourcing?
Offshoring and outsourcing are frequently interchanged. However, there is a distinction between the two. Outsourcing refers to the act of entrusting business processes to another company or independent contractors. On the other hand, offshoring involves conducting a portion of business operations in a different country.
What are the benefits of outsourcing IT services?
IT outsourcing is a business strategy that entails enlisting the services of an external individual or company to handle specific tasks. It is significantly more cost-effective than building an in-house IT department.
How much does IT outsourcing cost?
IT outsourcing costs can vary depending on a couple of crucial factors: the hourly rates of developers and the size of the team involved.
IT outsourcing and IT outstaffing are not interchangeable terms. IT outsourcing means entrusting the entire project to an external company, whereas outstaffing allows you to hire remote developers as part of your team.
According to the 2023 Accelerance Global Software Outsourcing Trends and Rates Guide:
Conclusion
Outsourcing is a customized solution tailored precisely to suit your needs, objectives, and resources.
When you find the perfect fit, you open the door to an array of advantages, including cost savings, access to global talent, and, above all, the freedom to concentrate on your core business. Choose wisely, and you’ll position yourself to conquer the business world!
In case you have any questions about IT outsourcing trends, don’t hesitate to contact us at:
CEO at StaffWiz | Staffing & Recruiting Solutions | Outsourcing | Virtual Assistant/Staffing | Workforce Management | Driving Business Success with Innovative Strategies
1 周A great breakdown of outsourcing models and their applications! This makes the decision-making process clearer for businesses exploring outsourcing as a solution.
Content Marketing in Tech | Unleashing the marketing magic ?? to help businesses soar on digital product innovation??, and relentlessly leveling up my IT game! ??
7 个月Your article has deepened my understanding and knowledge of all IT outsourcing models. Thank you for sharing such valuable insights! ??