IT Outsourcing Models Explained: Find the Best for Your Business

Are you looking for a suitable IT outsourcing model for your business? Are you wondering whether to choose between models such as Onshore, Nearshore or Offshore? We will explain each model in detail and help you make the best decision.

3 Main Types of IT Outsourcing Models

IT outsourcing models can be classified into three main groups: Based on the relationship, geographical location, and contract. Each group has its characteristics and different submodels. Below is a brief concept and common characteristics of each group:

IT Outsourcing Models Based on Relationship

This group of models focuses on the way and level of cooperation between businesses and IT service providers, clearly defining the interaction and management methods between the two parties. Submodels in this group include: Staff Augmentation, Dedicated Team and Project-based Model

Forming an outsourced development team is a popular choice for businesses looking to leverage external expertise for their projects.

Staff Augmentation Model

The Staff Augmentation model involves hiring external professionals to work alongside your internal team on a temporary basis. This model is particularly useful when you need to fill skill gaps or increase workforce capacity for specific projects. 

When to Consider: Use staff augmentation for short-term projects that require specialized skills or to handle temporary increases in workload.
Recommendation: Ensure that the external professionals integrate well with your internal team by providing clear communication channels and defining roles and responsibilities. Use this model to quickly scale your team without long-term commitments.

Dedicated Team Model

The Dedicated Team model involves hiring an external team that works exclusively on your projects. This team operates as an extension of your in-house team, providing continuous support and development.

When to Consider: Opt for a dedicated team when you have long-term projects that require continuous development and maintenance.
Recommendation: Foster a strong relationship with the dedicated team by involving them in strategic planning and decision-making processes. Regularly review performance and provide feedback to ensure alignment with your business objectives.

IT Outsourcing Models Based on Geographical Location

This model is based on the service provider's geographic location relative to the business, which affects time zones, languages, cultures, and costs. Submodels of this group:

• Offshore Outsourcing
• Nearshore Outsourcing
• Onshore Outsourcing

According to Gartner, companies that utilize a strategic mix of onshore and offshore outsourcing can achieve up to 30% cost savings while maintaining high-quality standards. Gartner’s research emphasizes the importance of selecting the right outsourcing partners and aligning them with business goals.

Offshore Outsourcing

Offshore outsourcing involves partnering with service providers from distant countries, often to capitalize on lower labor costs.
Actionable insights and recommendations for businesses considering Offshore outsourcing:

• Time Zone Management: Implement overlapping work hours or shift schedules to ensure continuous progress and timely communication.
• Quality Assurance: Establish rigorous quality control processes and regular check-ins to maintain high standards.
• Cultural Sensitivity: Provide cultural training for your in-house team to better understand and collaborate with offshore partners.

Onshore Outsourcing

Onshore outsourcing involves hiring a service provider within your own country. This model minimizes language and cultural barriers and often allows for easier collaboration due to similar time zones.
Practical insights and suggestions for companies exploring offshore outsourcing:

• Communication: Leverage the proximity to ensure frequent face-to-face meetings or video calls, which can improve project outcomes.
• Cost Management: While onshore outsourcing might be costlier, negotiate contracts that include performance-based incentives to ensure high-quality work.
• Legal and Compliance: Since the service provider operates under the same legal framework, ensure that your contracts cover all necessary legal and regulatory requirements specific to your industry.

Nearshore Outsourcing

Nearshore outsourcing refers to hiring a service provider in a nearby country, often within the same or a similar time zone.

Actionable Insights and Recommendations:

• Cultural Compatibility: Choose nearshore partners with similar cultural and business practices to ensure smooth collaboration.
• Travel Considerations: Plan for occasional on-site visits to build a stronger relationship and address any critical issues promptly.
• Resource Allocation: Balance the cost savings with the potential need for additional management oversight to bridge any minor language or cultural differences.

Contract-Based Models

This group of models is based on the type of contract signed between the business and the service provider, clearly defining the conditions, scope of work, and payment method. 

Submodels include:

• Fixed-price Model
• Time and Materials Model

Fixed-Price Model

The Fixed-Price model involves agreeing on a set price for a project before work begins. This model is suitable for projects with well-defined requirements and scope.

When to Consider: Choose the fixed-price model for projects with clear, unchanging requirements and a well-defined scope.

Recommendation: Ensure that all project requirements are thoroughly documented and agreed upon before starting. Regularly review progress against the initial specifications to avoid scope creep. This model helps in maintaining budget control and minimizing financial risks.

Time and Materials Model

The Time and Materials (T&M) model involves paying for the actual time and resources spent on the project. This model is flexible and allows for adjustments as the project evolves.

When to Consider: Use the T&M model for projects where requirements are expected to evolve or are not fully defined at the outset.

Recommendation: Establish clear communication and reporting mechanisms to track time and costs effectively. Regularly review and approve the work to ensure it aligns with your evolving requirements. This model offers flexibility but requires careful management to control costs.

How to choose the appropriate IT outsourcing model?

Choosing the appropriate IT outsourcing model requires businesses to carefully consider factors such as business needs, understanding of outsourcing models, evaluating potential partners, costs and flexibility, and determining clear contracts.

Assess Your Business Needs

Assessing the specific needs of your business is the first and most important step. Please clearly define:

• Project requirements: Clearly define project goals, necessary functions and features.
• Scope of work: Define specific tasks that must be performed in the project.
• Completion time: Determine the time frame needed to complete the project.
• Budget: Set a specific budget and consider the financial ability of the business to pay for outsourcing services.

Understand the Different Outsourcing Models

Understanding the types of outsourcing models will help you choose the model that best suits your business. Below is a brief description of the main IT outsourcing models:

• Offshore IT Outsourcing: Outsourcing from remote countries, helps save costs but can encounter time zone and cultural difficulties.
• Nearshore Outsourcing: Outsourcing from neighboring countries, is easier to manage in terms of time zones and cultures, but costs may be higher than offshore.
• Onshore Outsourcing: Outsourcing within the same country, is easy to manage and control quality but costs are often the highest.
• Staff Augmentation Model: Add staff to the existing team, flexible and easy to manage, suitable for short-term projects or needing specific skills.
• Dedicated Team Model: A dedicated team that works long-term for the business, suitable for long-term projects or ongoing requirements.
• Project-based Model: The supplier undertakes the entire project, suitable for projects with clear scope and specific requirements.
• Fixed-price Model: Fixed price for the project, easy to predict costs but lacking flexibility if requirements change.
• Time and Materials Model: Payment based on time and resources used, flexible but difficult to control costs.

Understanding the differences between staff augmentation vs managed services can help businesses choose the most appropriate outsourcing strategy.

Evaluate Potential Partners

Evaluating potential partners is an important step to ensure you choose the right partner:

• Experience: Consider the service provider's experience and reputation in your field.
• Skills: Ensure that the partner has the necessary skills to execute the project.
• Reviews from previous customers: Read reviews and ratings from previous customers to understand the quality of service.
• Cultural compatibility: Ensure that the service provider can fit into your corporate culture, helping to minimize conflicts and misunderstandings.

When evaluating potential partners, refer to industry benchmarks and reports. For example, Clutch.co provides reviews and ratings of IT service providers, helping businesses make informed decisions based on real client feedback. One effective strategy is partnering with IT staff augmentation companies, which provide skilled professionals on a temporary basis.

Consider Cost and Flexibility

Cost and flexibility are two important factors that businesses need to consider carefully when choosing a suitable IT outsourcing model.

Make sure that the outsourcing model you choose is within your business's budget. Compare different models to find the most cost-effective option, and consider potential fees that may arise during the cooperation process.

Flexibility in the outsourcing model will help businesses easily adapt to changes and make the most of resources without encountering unnecessary barriers.

Define Clear Contracts

Finally, defining the contract is an element that cannot be overlooked:

• Contract details: The contract needs to be detailed and clear about the scope of work, completion time, responsibilities of each party, and payment terms.
• Scope of work: Defines the specific tasks that the service provider will perform.
• Completion time: Identify important milestones and project completion deadlines.
• Responsibilities of each party: Clearly state the responsibilities of the business and service provider to avoid misunderstandings and disputes later.
• Payment terms: Clear regulations on payment method and time to avoid financial problems.

Case Study: E-Medical - Online Healthcare Consultation

E-Medical is an online healthcare consultation platform developed by MOR Software for a prominent Japanese clinic. For this project, we chose hybrid outsourcing model as our development roadmap with the combination of T&M model, Offshore Outsourcing and Dedicated Team model to maximize external resources, tech-stack as well as ensure the ongoing growth of the project in the future. As a result, the platform enhanced the clinic’s service offerings and increased patient satisfaction with seamless communication between patients, doctors, and pharmacists and streamlined process from consultation to prescription. 

Client Testimonial: 
"MOR Software's expertise and efficient development process enabled us to launch our online healthcare consultation platform ahead of schedule. Their attention to detail and innovative solutions made a significant impact on our ability to offer superior telehealth services." - Naohiro Itoyama, CEO, E-Medical’s Clinic.

In conclusion, choosing the right IT outsourcing model brings many benefits to businesses, but requires careful consideration of needs, partners, costs, flexibility and contracts to optimize business operations.

FAQs about IT outsourcing model

1. What is the difference between onshore and offshore outsourcing?

Onshore outsourcing is the outsourcing of IT services from the same country, which is convenient in management and quality control but has higher costs, while offshore outsourcing saves costs but may encounter time zones and cultural difficulties due to distant countries.

2. What are the benefits of nearshore outsourcing?

Nearshore outsourcing offers benefits such as ease of management due to similar time zones, greater cultural and language compatibility, and often low costs.

Partnering with reputable outsourcing companies can significantly enhance your business operations by providing access to global talent and expertise.

3. What are the common challenges faced in IT outsourcing?

Common challenges in IT outsourcing include time zone and cultural differences, service quality issues, contract ambiguity, and difficulty managing and monitoring the outsourcing partner.

4. How can I ensure quality control in IT outsourcing?

To control quality in IT outsourcing, businesses need to establish quality standards in contracts, monitor and evaluate work regularly, and maintain regular contact with service providers.

5. What are some successful examples of IT outsourcing?

IBM, Microsoft, and Mor Software have successfully used IT outsourcing, outsourcing software development, and IT infrastructure management services to overseas partners, helping to focus on core business activities and reduce costs fee.