Popular Outsourcing Models Compared - How to Choose the Best One in 2023?

How many types of outsourcing models are there? Can you list them all ??? Outsourcing, a savvy business strategy, involves hiring external experts to handle tasks typically managed in-house. This approach enhances cost-efficiency, boosts productivity, taps into specialized skills, and allows companies to focus on their core strengths.

The popularity of this strategy becomes evident when you observe the predicted global spending on outsourcing , which is expected to reach a substantial $731 billion in 2023. IT outsourcing, in particular, is expected to account for approximately $519 billion of that total.

Nevertheless, not all outsourcing strategies are of equal nature. The choice depends on project type, collaboration preferences, and desired outcomes. This can pose a significant challenge for small businesses that are considering the option of outsourcing.

Acknowledging this, the experts at Inapps software development and our team have explored various outsourcing models. We will discuss their benefits, disadvantages, and optimal use cases, all intended to assist you in making an informed decision for your business in 2023.

Join us and discover what these IT outsourcing models bring to the table!

What is Outsourcing?

Outsourcing involves seeking assistance from an external company to manage your IT requirements or develop digital products. It’s like having tech-savvy partners who help keep your business on track without the need to establish and oversee your own IT team.

When you outsource software creation or maintenance tasks, you can focus your energy on managing your business while technical experts handle the intricacies. This approach saves both time and money, enabling your business to maintain competitiveness by staying updated with the latest technological advancements and trends.

Why Do Companies Choose to Outsource?

Companies primarily opt for IT outsourcing to cut expenses, particularly for tasks like automated network administration. Furthermore, recent challenges like retaining skilled employees, fierce talent competition, and staying abreast of new technologies have driven businesses toward outsourcing.?

However, the motivations extend beyond these factors:

• Save money on operation, labor, overhead, and training costs: Outsourcing allows companies to hire external experts who can work for lower pay, with better efficiency and specialized skills.

• Focus better on what a company is good at: This approach helps businesses avoid getting sidetracked. It lets them put more resources into their main activities, making them better at what they do and keeping customers happy.

• Have more resources available and be more flexible: It lets companies tap into a bigger pool of talent and skills and adjust how many people they have working for them based on their needs. This approach prevents the issue of having an excessive or inadequate workforce.

• Achieve enhanced quality and innovation: IT outsourcing enables companies to learn from external experts with extensive experience and knowledge of the latest technologies.

• Compliance with regulations and reduced business risks: Outsourcing assists companies in adhering to laws, regulations, and ethical standards. Additionally, it equips them to manage unforeseen market changes, thanks to external experts’ expertise and resources in handling complex situations.

For further insights into IT outsourcing benefits, read: Diving into ODC vs IT Staff Augmentation: 11 Distincion Unveiled .

Now, let’s assess different IT outsourcing models and decide which fits specific technology requirements.

Types of IT Outsourcing Models: Two Main Points of View

When discussing software development outsourcing approaches, they are often categorized using two key aspects:

• The distance between teams (Location-based).
• The relationship between the client and outsourcer (Relation-based).

These interrelated aspects offer two perspectives to comprehend the diverse range of possible outsourcing arrangements.

5 popular location-based IT outsourcing models

A practical IT outsourcing approach looks beyond expenses and skills. It also takes into account important factors like time zones, cultural compatibility, and solid technology capabilities. We considered these factors while evaluating the top countries for outsourcing software development. That’s why the location of the IT outsourcing company is a critical factor to consider.?

The pivotal aspect is the proximity of your outsourced team to your location. We can categorize location-based IT outsourcing into five main types. Before delving into the details of each, let’s briefly compare these five location-based outsourcing models to provide an overview. Once you’ve figured out which IT model suits you, simply scroll to learn more.

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1. Onsite

Definition: Providers work in your office for a fixed period.

Advantages

• Direct collaboration
• Easy communication
• Local expertise

Challenges

• Higher costs
• Limited scalability
• Cultural differences

1. Onshore

Definition: Outsourcing within the same country

Advantages:

• Similar time zones
• Cultural compatibility
• Stable supply chain

Challenges:

• Smaller talent pool
• Integration challenges
• Limited options

1. Offshore

Definition: Outsourcing to a more distant country

Advantages:

• Cost savings
• Access to a larger talent pool
• ?24/7 support

Challenges:

• Communication challenges
• Security risks
• Time zone differences

1. Nearshore

Definition: Outsourcing to a nearby country

Advantages:

• Similar time zones
• Cultural compatibility
• Supply chain stability

Challenges:

• Smaller talent pool
• Integration challenges
• ?Limited options

1. Multisource

Definition: Using multiple providers simultaneously

Advantages:

• Risk reduction
• Diverse supply chain
• Innovation

Challenges:

• Supplier management
• Administration costs
• Communication issues

1. Onsite outsourcing

Onsite outsourcing, often referred to as ‘onsite,’ involves hiring a company to deploy skilled workers to your office for a specified period. This team works closely with your staff. Working collectively, they gather information, create plans, execute tasks, and ensure smooth operations. It’s like having extra team members, even though they’re not officially part of your company.

Pros:

• Save on training and recruitment costs, as skilled professionals are sent to your office
• Benefit from the provider’s expertise in the outsourced task or service
• Direct communication and collaboration with the provider’s staff in your office

Cons:

• Increased overhead costs like office space and equipment
• Potential loss of control over quality due to differing standards and methods
• The challenge in managing and integrating the provider’s staff with your employees

Ideal use cases:

• Filling a short-term or pressing skill gap in your team, such as specialized technology, complex projects, or a new product launch.
• Enhance oversight and communication with the provider’s team by directly supervising the outsourced work.
• Safeguard sensitive information and adhere to regulations by maintaining confidential data and processes within your premises.

2. Onshore outsourcing

Onshoring, or onshore outsourcing, refers to outsourcing services to a provider within your own country, although not necessarily in your city.

Besides, the primary difference between this approach and onsite outsourcing lies in collaborating with an external team located in different geographical areas.

Pros:

• Provide smooth communication due to shared language, time zone, and local connections
• Avoid cultural barriers, aligning holidays, views, and norms
• Provider understands the client’s market well, tailoring services
• Adhere to the same IP laws, reducing data breach risks

Cons:

• Pricier compared to offshore, as higher rates are often charged due to demand
• Might provide a smaller pool of top talents compared to offshore options
• Limit exposure to new ideas or technologies that are more readily available offshore
• More challenging with providers due to potential limitations in availability or capacity

Ideal use cases:

• Follow local laws and rules that might restrict offshore or nearshore outsourcing, such as data security.?
• Enhance communication and collaboration by partnering with providers who share your language and understand your region well.?
• Leverage your providers’ market knowledge to enhance customer satisfaction. This outsourcing model tailors services to align with your customer’s preferences.
• Help your local community and feel good about it. Onshore outsourcing creates jobs for people in your area and helps your country grow.

3. Offshore outsourcing

Offshoring, often known as offshore outsourcing, involves outsourcing services to a provider in a distant country.

On the other hand, there’s the offshore form of outsourcing, which involves hiring software engineers located more than 6 time zones away from your location.?

For example, when a US company outsources software development to a region like Southeast Asia, such as Vietnam, it exemplifies offshore collaboration.

Pros:

• Save money on labor, materials, and operations with potentially lower offshore costs
• Access a broader talent pool and skills, leveraging offshore expertise
• Focus on core competencies by outsourcing non-core tasks
• Offer 24/7 customer support with providers operating in varying hours

Cons:

• Security risks, like data breaches, intellectual property theft, or cyberattacks, may arise due to differing protection standards
• Communication challenges due to different time zones can impede collaboration
• Navigate foreign regulations, taxes, tariffs, fees, or currency fluctuations that may impact budget and profitability
• Potential hidden costs may emerge

Ideal use cases:

• Reduce costs by outsourcing to countries with lower expenses, such as Vietnam, India, China, or the Philippines. This enables you to hire external experts at more affordable wages.
• Access additional skills in areas like software development, customer service, or accounting. External providers often possess more expertise.
• Focus on what you do best by giving routine tasks to others.
• Provide 24/7 customer support to global clients by partnering with providers in various time zones.

4. Nearshore outsourcing

Nearshoring, often called nearshore outsourcing, involves outsourcing services to a provider in a neighboring or nearby country, typically within the same time zone.

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In today’s business landscape, companies are increasingly directing their attention towards expanding their external teams to neighboring regions such as Eastern Europe or Latin America rather than solely considering India. As a result, businesses are finding the nearshore outsourcing model attractive due to its potential for cost reduction and the facilitation of long-term innovation.

Delving into nearshore software development services is a wise decision, as this approach combines the advantages of onshoring and offshoring while mitigating the risks associated with the latter.

Pros:

• Save money with cheaper labor and operations from nearby providers
• Easier communication and teamwork due to similar time zones
• Avoid language and cultural issues by working with nearby providers who share values
• Benefit from local market knowledge and customer preferences of nearby providers

Cons:

• Limited talent options from nearby regions
• Risk of data exposure to competitors
• Communication challenges due to accents and slang
• Potential for missing out on innovative ideas from distant areas

Ideal use cases:

• Choose nearshore outsourcing to cut costs and enjoy shared time zones and cultural alignment.
• Follow regional laws (e.g., data privacy) by hiring providers with similar norms to avoid legal problems.
• Use IT nearshore outsourcing for a better understanding of local customer needs, leading to enhanced satisfaction.
• Contribute to the local economy and community, showcasing social responsibility through job creation and regional growth.

5. Multisource outsourcing

Multisourcing, also known as multisource outsourcing, involves simultaneously utilizing multiple outsourcing arrangements from various providers. This strategy is commonly employed by larger companies to secure the most suitable provider for each specific requirement.

Why confine yourself to a single approach when you can blend several? Multisourcing allows you to leverage the strengths of different providers in various locations, diverging from the conventional practice of engaging with a single company. When executed skillfully, multisource outsourcing enables you to assemble the right expertise for each facet of your project or IT service, all while optimizing costs and achieving favorable outcomes.

Pros:

• Less reliance on one supplier boosts supply chain flexibility during issues
• Diverse suppliers protect against problems from disasters or conflicts.
• More suppliers mean better products, services, and innovation.
• Exposure to various ideas, technologies, and practices fuels innovation
• More options enable better deals and terms with suppliers

Cons:

• Many suppliers strain relationship-building, monitoring, and quality control
• Numerous suppliers mean higher overhead expenses for communication, contracts, and payments
• Products or services from various suppliers bring extra costs and time
• Different languages, cultures, and time zones create communication challenges
• Sensitive data exposure to competitors or threats is possible due to overlapping interests

Ideal use cases:

• Use multisource outsourcing for varied products/services, reducing risks and adapting to change.
• Opt for multisource outsourcing when you aim to foster healthy competition among suppliers. It enables you to acquire high-quality products at competitive prices.
• Get diverse ideas and tech, boosting your work.
• Select multisource outsourcing when you seek enhanced control over your outsourcing operations.

Exploring the Three Relationship-Based IT Outsourcing Model

Another crucial decision revolves around the nature of the partnership with the outsourcing company. This decision entails determining how responsibilities related to management and ownership are shared between your organization and the outsourced team. In this section, you’ll also find a helpful comparison table outlining the three primary models of relationship-based IT outsourcing. Let’s delve into the distinctions among these models.

1. IT Staff Augmentation

Description: Lease professionals for specific tasks

Pros:

• Cost-effective
• Skill gap filling

Cons:

• Management overhead
• Quality assurance

1. Dedicated Team

Description: Exclusive team for your project

Pros:

• Domain expertise Increase flexibility

Cons:

• Integration challenges
• Communication issues

1. Project-Based

Description: The provider manages the entire project

Pros:

• Focus on core activities,?
• Continuous update

Cons:

• Less control
• Potential risks

1. Staff augmentation model

Staff augmentation models place most of the accountability on your side as the client. With this approach, you’re essentially leasing workers from an outsourcing partner to support your internal development initiatives.

Imagine you already have a team of dedicated experts working on a project, but you require a QA specialist to ensure the proper functionality of the product. Instead of undergoing a lengthy and expensive hiring process for a one-time requirement, you can opt for a staff augmentation model.

This approach allows you to ensure the continued progress of your project and effectively address skill gaps. It represents an innovative and cost-efficient method to expand your software development team, particularly beneficial for short-term collaborations.

Pros:

• Save costs on full-time employees by paying for needed hours and skills
• Access skilled professionals for tasks your team lacks expertise in
• Maintain control over projects as augmented staff follow your guidance
• Integrate and adjust increased staff seamlessly to your team’s needs

Cons:

• More management work as you coordinate expanded staff with your team
• Challenges with contracts, taxes, and rights if staff are abroad
• Possible communication issues due to language or cultural differences
• Need for extra quality checks due to varied expertise of augmented staff

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Ideal use cases:

• Fill temporary skill gaps, address urgent tech needs, or manage new launches by onboarding skilled professionals.
• Retain control over project management, enhance communication, and seamlessly integrate augmented staff.
• Swiftly adapt your team to changing projects, paying for the exact skills and hours needed.
• Ensure the security of sensitive data on-site with compliant increased staff.

2. Dedicated team model

The dedicated or managed team is an intermediary outsourcing solution positioned between staff augmentation and a complete outsourced strategy.

With this approach, your outsourcing partner creates a dedicated team of experts solely for your project. This team can encompass various roles, such as software engineers, QA specialists, business analysts, and project managers, tailored to your project’s demands.

By opting for the dedicated team model, you will share project risks and responsibilities with the outsourcing company. This IT outsourcing model is particularly advantageous for intricate, long-term projects requiring high expertise.

Pros:

• Save costs by paying for needed hours and skills, avoiding full-time hiring expenses
• Easily adjust team size, duration, and project scope to meet changing needs
• Access experienced professionals for complex projects within your specific domain or industry
• Establish a long-term partnership

Cons:

• Challenge to establish and maintain relationships with the service provider, affecting performance monitoring
• Pose challenges in integrating the dedicated team with current staff and aligning goals
• Language and cultural differences in cross-border communication may result in misunderstandings

Ideal use cases:

• Embark on complex and demanding projects that necessitate specialized skills and expertise exclusively dedicated to your tasks.
• Establish a committed and lasting partnership for projects that demand continuous development, adaptation, and enhancement.
• Harness domain-specific knowledge by forming a team with profound expertise in your industry, leading to superior project outcomes.
• Maintain direct control over project management, execution, and communication while leveraging external insights.
• Collaborate to distribute project risks, responsibilities, and accountability, resulting in more successful outcomes.

3. Project-based model

Unlike the earlier IT outsourcing models, in this approach, you entrust your software outsourcing partner with the complete product development and management process. The primary responsibility is to ensure that your requirements are well-documented and effectively communicated. You don’t require technical expertise, as the development company assumes responsibility for the project, freeing you to concentrate on your core business.

Under the project-based approach, you have a diminished level of control. The provider manages the project and makes decisions regarding the team and tools to be used for your project. However, you will receive regular updates on the progress of the work.

Pros:

• Save time and money by outsourcing a project with precise and stable requirements.?
• Ensure quality and delivery by setting clear expectations and milestones with the vendor.?
• Focus on core business activities while the vendor handles project management and execution.

Cons:

• Face challenges in changing project scope or requirements once the contract is signed.?
• Have less control and communication with the team during project development.?
• Encounter risks such as delays, errors, or disputes if the vendor fails to meet expectations or standard

Ideal use cases:

• Possess well-defined and stable project requirements, enabling you to clearly outline expectations and deliverables.
• Seek to delegate the entire project management and execution to an external team, thereby liberating your resources for core business activities.
• Lack the technical expertise or resources to manage the project internally and prefer to rely on a specialized outsourcing partner.
• Need to swiftly initiate and complete a specific project without committing to long-term engagements or ongoing collaboration.
• Value updates on project progress while also being comfortable granting the outsourcing provider control over the process and team composition.

Which IT Outsourcing is Good for You?

Choosing the right IT outsourcing model is a critical decision that demands careful consideration. Whether you’re leaning towards location-based or relation-based software development, each approach comes with its own advantages and disadvantages.

The choice you make should align with factors such as project size, budget, timeline, and communication preferences. By comparing your requirements with the strengths of the various styles outlined above, you can swiftly navigate the realm of IT outsourcing and make an informed decision that suits your organization.

Furthermore, if your business is in need of offshore development services, IT staff augmentation, or custom app solutions, I encourage you to explore InApps – the Top 1 Mobile App Development in VietNam . With a dedicated team of over 100 experienced developers, designers, and project managers, InApps is well-equipped to cater to your needs. Feel free to delve into InApps and share how we can contribute to your projects. Thank you for your time and attention!