Savvycom All-in-one Guide To IT Outsourcing Models & Pricing

Establishing an in-house development team is a viable option when your company possesses substantial capital and the ability to draw in high-caliber specialists. Yet, for a myriad of scenarios, outsourcing stands out as a pragmatic, efficient alternative. The landscape of IT outsourcing models has become increasingly diverse and complex, making it a challenge to select the appropriate one for your needs. From comprehensive “turn-key” solutions to the expansion of your internal team with external programmers, the range of options is extensive. Some outsourcing providers even supplement their services with a Project Manager, adding another layer of variability.

This guide will clarify the array of IT Outsourcing Models, delineating their respective strengths and weaknesses, and provide strategic guidance on choosing the model that best matches your project’s requirements.

1. What Is IT Outsourcing?

IT outsourcing employs external service providers to proficiently execute IT-enabled business processes, application services, and infrastructure solutions, aiming for optimal business outcomes.

This practice, encompassing utility services, software as a service (SaaS), and cloud-enabled outsourcing, assists clients in formulating effective sourcing strategies and visions. It aids in the selection of fitting IT service providers, structuring advantageous contracts, and managing deals for sustainable, mutually beneficial relationships with external providers.

Through outsourcing, enterprises can diminish costs, expedite time-to-market, and capitalize on external expertise, assets, or intellectual property.

• According to Deloitte’s 2020 Global Outsourcing Survey, 78% of businesses worldwide feel positive about their outsourcing relationships, indicating the prominence and effectiveness of this practice.
• The IT outsourcing market size was valued at $333.7 billion in 2020 and is expected to grow at a CAGR of 7.7% from 2021 to 2028

All types of IT Outsourcing Services:

• Offshore Software Development
• IT Outsourcing Trends Softwares 
• Custom Software Development
• Digital Banking Solution
• QA Outsourcing & Software Testing
• Healthcare IT Solutions
• Web Application Development
• Cloud Migration Services
• Mobile App Development
• Offshore Software Testing Services
• AI Development Service

2. The Benefits Of It Outsourcing

Deloitte stated that the top 3 benefits of outsourcing realised by businesses are enabling focus on core functions, providing cost-cutting tools and solving capability issues.

Enabling focus on core functions

In periods of rapid growth, the back-end operations of business expand and require a high expenditure of resources. When you allocate more resources to performing secondary activities, you have less time, money, human resources, etc. to provide quality front-end services. Therefore, outsourcing is an optimal choice to:

• Be more flexible in resources allocation and frees up more of your resources for more practical uses.
• Multiply the company’s performance with less time through external assistance
• Reduce the pressure on your employees and yourself – as a manager or a chief. Therefore, increasing the “happiness rate” within the company and improving the overall productivity of employees.

Cost cutting

In a foreseeable vision, the cost of “borrowing” is often lower than actually “buying” something. Therefore, hiring talents from outsourcing companies is, in most cases, cheaper than having your own in-house team. This also creates a competitive edge for the companies as they could bring down the cost of goods sold and offer a lower price compared to other businesses that are loyal to in-house software development. Some costs that could be cut down thanks to outsourcing are:

• Labour cost.
• Rental cost (capsuling your engineering team also allows you to trim down the office size and possibly the cost of renting a big headquarter).
• Recruitment cost (head-hunting, promotion, commission for intermediaries, interview-related expense, etc).
• Equipment and other supplies.

Although cost efficiency is a key benefit of outsourcing, keep in mind that hiring the cheapest software developer doesn’t always translate to quality services. For this reason, one has to find a balance between quality and affordability.

Capability enhancement

When hiring an employee, you may only have access to a small, local talent pool. This often means you have to compromise. Many companies have found that outsourcing gives them access to talent in other parts of the world. If you need specialised help, it often makes sense to expand your search to find software developers with the best know-how and skills.

• Access to the latest technologies, tools, and software without heavy upfront investments.
• Ability to leverage emerging technologies for innovation and competitive advantage.
• Service providers can stay updated with technological advancements, enabling faster adoption and implementation.

Continuous Improvement and Innovation

• Collaboration with service providers to drive innovation and explore new opportunities.
• Leveraging the provider’s expertise, research, and development efforts to stay ahead in the market.
• Access to insights, analytics, and recommendations for process improvement and optimization.

Risk Mitigation and Security

• Improved data security, compliance, and risk management through the expertise of service providers.
• Implementation of industry-standard security measures and best practices.
• Reliable disaster recovery plans and business continuity strategies to minimize risks and ensure operational resilience.

Business Agility and Adaptability

• Increased agility in responding to market changes, industry trends, and customer demands.
• Faster time to market for new products, features, or services.
• Ability to quickly adapt to technological advancements and regulatory requirements.

3. IT Outsourcing Types: Onshore, Nearshore, Offshore and Cloud

There are three main types of IT outsourcing: onshoring, nearshoring, offshoring. The difference among those approaches are explained by the physical location of your service provider.

1. Onshore Outsourcing: In this model, the organization outsources IT services to a service provider located in the same country. This may offer benefits such as similar time zones, cultural compatibility, and easier communication.
2. Offshore Outsourcing: Offshore outsourcing involves 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 it may introduce challenges related to time zone differences, language barriers, and cultural variations.
3. Nearshore Outsourcing: Nearshore outsourcing refers to 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.
4. Cloud-based Outsourcing: With cloud computing, organizations can outsource IT functions to service providers that deliver services over the internet. This allows businesses to leverage scalable and on-demand IT resources without the need for significant hardware investments.

The way you go about outsourcing your company’s IT projects depends on several factors: you have to consider the costs, decide whether the geographical proximity (or lack thereof) is crucial for you, and finally, find an outsourcing partner that meets your criteria. Not sure how to select an ideal IT outsourcing partner for you? Here’s our guide to finding the right software vendor.

While budget concerns are no longer the only motivation for IT outsourcing, they’re still important. The differences between countries in terms of software development costs can be so huge that it makes a break in the evaluation process. For example, CIO magazine suggests that 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. 

Given the high level of programming expertise displayed by software development companies in Vietnam, the cost for these labors is incredibly cost-effective, which motivated many companies to outsource software development to Vietnam nowadays.

4. 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:

1. Fixed Price Model: In this 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. This model provides cost certainty for the client but may require a well-defined and clearly understood scope of work.

2. Time and Material (T&M) Model: With the 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. The client is billed based on hourly or daily rates for the resources utilized.

3. Dedicated Team Model: In this model, the client hires a dedicated team of IT professionals from the service provider. The client pays a fixed monthly or hourly rate for the resources allocated to their project or tasks. The team works exclusively on the client’s requirements and provides ongoing support and expertise.

4. 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. The payment is tied to the successful delivery of the agreed-upon results.

5. 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. The pricing is then based on achieving or exceeding those performance targets.

6. Subscription-Based Model: Similar to a subscription, this model involves paying a fixed recurring fee for access to specific IT services or a suite of services provided by the service provider. The fee is typically charged monthly or annually, and the client can utilize the services within the subscribed package as needed.

It’s important to note that these pricing models can be combined or customized to meet the specific requirements and preferences of the client and the service provider. Each model has its advantages and considerations, and organizations should carefully evaluate the scope of work, budget, and desired outcomes before selecting a pricing model for IT outsourcing.

5. Most Popular Types Of IT Outsourcing Models

5.1. Dedicated Team Outsourcing Model

This IT outsourcing model (also known as fee per team) means that the vendor provides you with a dedicated team of employees to work on your project.  This model could be an answer to the uncertainty that comes with T&M-based collaborations. Having a dedicated development team at your disposal is as close to having an in-house expert team as possible.

It’s in the best interest of the outsourcing company to handpick a group of individuals that work well together and can successfully deliver your project. 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 that are a part of your team.

Pros of the dedicated team model:

• 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 team may 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 of the dedicated team model:

• 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.

Suitable for:

• Longer projects.
• Projects with initial requirements and assumptions (they’re needed in order to allocate appropriate people to your team).
• Agile development process.

Out of all IT outsourcing models, this one is probably the best for close cooperation between the client (you) and the outsourcing company. With time, your dedicated team may notice improvement areas not only in the project itself but also in the broader context of your company. This is why this outsourcing model may turn out to be extremely beneficial for larger organizations that are undergoing the process of digital transformation.

5.2. Project-Based Model

• How it works: In a nutshell, the client entrusts the entire software development process, from planning to release, to an outsourcing company.
• Payment: 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.

The project-based model stands as a classic in the industry. It’s highly prevalent in software development, and for good reason.

In this model, the client agrees to the project requirements, which are then formalized into a specification. The frequency of updates from the project manager is also decided by the client.

The outsourcing company provides a Project Manager (PM) responsible for overseeing the entire workflow. From ensuring adherence to the agreed specifications and timeline, the PM shoulders the responsibility of delivering the final product.

Under this model, the client’s control is limited. The vendor’s Project Manager leads the development team, while the client stays informed through regular updates, demos, etc.

The frequency of meetings with the PM and the team is flexible, depending on your availability and project specifics. It could range from sparing one hour every Thursday to meeting twice a week.

Your approvals are often sought, specifically for documentation and design. For instance, if UI/UX design is done on our end, we always seek client approval for wireframes before delving into concepts and detailed screen designs.

Pros of the Project-based model:

1. 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.

2. 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.

3. 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.

5.3. 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 or 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 of Staff Augmentation:

• Flexibility: getting the exact number of experts you need, from 0.5 full-time equivalents (FTE) to 100 FTE and above. Note that the dedicated team option becomes more effective starting from 10 FTE.
• 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 of Staff Augmentation:

• 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.

How to set it right:

Although management is on your side, I advise choosing a vendor who also tracks the performance of their employees and helps them resolve issues, if any, as it significantly raises the quality of services you get.

5.4. Software as a Service (SaaS)

The Pros of SaaS

1. Cost-effective: SaaS eliminates the need for upfront investments in hardware, software licenses, and infrastructure, as the service provider manages these aspects. It offers a pay-as-you-go model, where organizations pay for the software on a subscription basis, often based on the number of users or usage levels. This reduces initial costs and allows for better budget management.

2. Easy and Quick Deployment: SaaS applications are typically cloud-based and can be accessed through a web browser, eliminating the need for complex installations and configurations. This enables rapid deployment and allows users to access the software from anywhere with an internet connection, facilitating remote work and collaboration.

3. Scalability and Flexibility: SaaS solutions can easily scale up or down to meet changing business needs. Organizations can add or remove users, increase or decrease storage capacity, and access additional features or modules as required. This scalability provides flexibility to adapt to business growth or fluctuations in demand.

4. Continuous Updates and Maintenance: Service providers handle software updates, maintenance, and security patches, ensuring that users always have access to the latest features and enhancements. This frees organizations from the burden of managing software updates and enables them to focus on utilizing the software rather than maintaining it.

5. Accessibility and Collaboration: SaaS applications can be accessed through various devices with an internet connection, enabling users to work from different locations and devices. This promotes collaboration among teams, facilitates real-time data sharing, and simplifies communication and project management.

The Cons of SaaS

1. Limited Customization: SaaS applications may offer limited customization options compared to on-premises software. Organizations may have to adapt their processes to fit the available customization options provided by the service provider. Customization requests may also incur additional costs or require development resources from the provider.

2. Dependency on Service Provider: Organizations rely on the service provider for software availability, performance, and security. If the provider experiences downtime or service disruptions, it can affect the organization’s operations. Reliance on a third-party also means potential data privacy and security concerns, as sensitive information is stored and processed outside the organization’s premises.

3. Data Governance and Compliance: With SaaS, organizations entrust their data to the service provider, which raises concerns about data governance, privacy, and compliance. Organizations need to ensure that the service provider has robust data protection measures, complies with relevant regulations, and provides adequate data backup and recovery mechanisms.

4. Integration Challenges: Integrating SaaS applications with existing on-premises systems or other cloud services can pose challenges. Organizations need to ensure that the SaaS solution can seamlessly integrate with their existing infrastructure and data sources. Data synchronization, security, and compatibility issues may arise during integration efforts.

When to choose SaaS

1. Limited IT Resources: Organizations with limited IT staff or infrastructure may benefit from SaaS as it reduces the need for extensive hardware and software management. SaaS allows organizations to leverage the expertise of the service provider for software maintenance and updates.

2. Quick Deployment: When time is a critical factor, SaaS offers rapid deployment and eliminates the need for lengthy installation and configuration processes. It enables organizations to start using the software quickly and efficiently, especially when speed-to-market or immediate functionality is essential.

3. Scalability and Flexibility: If an organization anticipates fluctuating user demands or plans for growth, SaaS provides scalability and flexibility. Organizations can easily add or remove users, adjust storage capacity, and access additional features or modules as needed, without major investments or disruptions.

4. Cost Efficiency: SaaS eliminates upfront hardware and software costs, reducing initial investments and providing predictable recurring costs. This cost structure is particularly advantageous for organizations with limited budgets or those seeking to avoid large capital expenditures.

6. How to select an outsourcing model that fits your needs

You don’t have to rely on a single outsourcing model, even if you’re working with one service provider. Most IT companies offer some flexibility when it comes to choosing the collaboration model. You may also end up with a hybrid pricing model. For example, you can develop a T&M contract, but with a monthly cap of hours.
Your choice of which outsourcing model to go with will likely be influenced by the budget of your project. Apart from that, try to base your decision on the following factors:

• 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.

Choose the Staff Augmentation Model when:

1. You have an existing in-house team: Staff augmentation only works if there’s a team to ‘augment’. If you have an in-house development team and need a few more specialists, even temporarily, this model is ideal.
2. In-house tech leadership exists: Management of an augmented team is handled on your end, so having a tech lead or a CTO with sufficient experience and domain knowledge is a must.
3. Specialist expertise is needed: If your business requires specific expertise not available in-house, such as Android development, DevOps, or automated quality assurance, consider staff augmentation.
4. Rapid team expansion is required: In-house recruitment can be time-consuming, especially for unique skills like Flutter development. Staff augmentation streamlines the process–you contact a preferred company, review developers’ CVs, and conduct interviews. This is significantly quicker than a local recruitment process that could take months.

Choose the Dedicated Team Model when:

1. In-house project management exists: This could be a Project Manager, a CTO, or a CEO with relevant domain experience. In other words, you need an in-house team familiar with the project domain.
2. Specific tech expertise is required: If your in-house team has gaps that need filling, a dedicated team is useful. For instance, if your in-house team is developing a mobile app and you need someone to create its web version.
3. You want to be involved in decision-making: With a dedicated team, you remain an integral part of the development process – deciding on features, functionality, and prioritization.

Choose the Project-Based Model when:

1. You have limited resources: If you have a small in-house engineering team or none at all, this model works well.
2. You’re a startup: Even the least tech-savvy businesses can develop a custom software product from scratch with this model. The tech vendor provides all the specialists you need to kickstart a project, including Business Analysts, designers, developers, and QA experts.
3. Your in-house team is occupied with the core product: You can outsource the development of secondary products without the additional management burden.
4. You have a clear product vision: Even if you lack the documentation, having a precise list of features and tech requirements (platforms, languages) is sufficient.

When drawing up a contract with an outsourcing company, take all of these aspects into account. Ideally, you should get some support from your potential tech partner when making that decision.

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.