Detailed 8 Types of Software Development Outsourcing Models
03 May 2024
Navigating the complex landscape of software development outsourcing models can be daunting for businesses aiming to streamline their operations and enhance productivity. This article delves into the detailed exploration of eight distinct types of outsourcing models that cater to diverse business needs and objectives. From traditional project-based outsourcing to contemporary agile models, each approach will offer unique advantages and challenges.
Software Development Outsourcing Models Based on Relationship
When selecting a software development outsourcing model, businesses must consider which partnership style will best meet their project needs and strategic goals. Here, we break down three prevalent models based on relationship dynamics—Staff Augmentation, Dedicated Team, and Project-based Model—each offering distinct advantages and challenges.
Staff Augmentation Model
In the staff augmentation model, external professionals are hired to supplement the in-house development team, usually to fill specific skill gaps or enhance capacity temporarily. This model offers high control over the project as augmented staff work alongside the company’s existing team, following its processes and reporting directly to its management.
Example: A company needing specific expertise in AI might hire a specialized AI developer on a temporary basis to expedite a project phase.
Dedicated Team Model
The dedicated team model involves an outsourcing vendor providing a full team that is exclusively committed to the client’s project for a defined term. This team operates autonomously but aligns closely with the client’s business objectives and workflows. This model is flexible in staffing and project management, making it suitable for long-term projects with evolving scopes.
Example: Your company have already planned to develop a CRM application with detailed functions and requests but you don’t have an in-house team suitable for the job. In this case, you should outsource the development of the CRM application to an entire team that is dedicated to accompany you from the beginning to the end of the process with all requirements met.
Project-based Model
In a project-based outsourcing model, the entire project is handed off to an external vendor who manages all aspects of the project from start to finish. This model is less flexible as it requires defining all specifications at the outset of the project. It is well-suited for projects with clear deliverables and fixed deadlines.
Example: Your company has an idea about developing a mobile application for in-house operation but hasn’t figured out how to and what functions should it have. In this scenario, project-based outsourcing model would be the best choice when the outsourcing team will not only take care of the whole development process from start to finish but also participate in brainstorming and contributing ideas to build the best possible application.
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Aspect | Staff Augmentation | Dedicated Team | Project-based Model |
Control | High | Moderate | Low |
Flexibility | High | High | Low |
Communication | Direct with staff | Direct with team | Managed by vendor, outsourcing partner |
Cost Structure | Variable | Fixed + Variable | Fixed |
Project Complexity | Suitable for any complexity, depends on the augmented staff's skills | Best for complex, long-term projects | Suitable for projects with clearly defined scope |
Risk Distribution | Lower, as the client retains control over the project | Shared, as the dedicated team manages the project alongside the client | Higher, as the outsourcing provider mostly assumes full responsibility for project delivery |
Software Outsourcing Models Based on Geographical Location
In the realm of software development outsourcing, businesses often choose between onshore, nearshore, and offshore models. Each of these models has distinct characteristics in terms of geographical distance, time zone alignment, and cultural affinity.
Nearshore Outsourcing
Nearshore software outsourcing or nearshoring happens when you engage an IT developer from a location closer to your country, which is only 1 or 2 hours different from the local time zone. Of course, nearshoring is only feasible if the chosen country promises a lower development cost compared to your country.
Nearshoring gives you an economical approach to outsourcing while allowing the possibility for physical meetings.
Onshore Outsourcing
When you’re onshoring, you’re engaging an IT service provider within your country. Also termed as homeshoring, this method eliminates time zones and cultural differences, which give you a huge advantage when it comes to urgent situations. You and your IT partner can have an offline meet-up and directly discuss issues most conveniently and efficiently.
Furthermore, in events of kicking off the project or initial release of products, the whole outsourced development team can easily get together and set up the event. With everything within the country, you can have more control over the project and the development process as well as save up lots of effort in communicating and setting up working procedures.
Offshore Outsourcing
Also known as offshoring, this arrangement involves working with developers situated in countries with a large time zone difference. Offshore developers could be situated 6 hours or more apart from your local timezone.
By going offshore, you’ll have access to a larger pool of talents in countries with lower hourly rates. Besides the lower cost, some companies have opted to offshore some of their IT processes to ensure round-the-clock availability and support.
Here’s a comparative table that highlights the differences among these three outsourcing models:
Aspect | Offshore Outsourcing | Nearshore Outsourcing | Onshore Outsourcing |
Control | Lower control due to distance and differing business hours | Moderate control with easier collaboration due to closer proximity and similar time zones | High control with easy face-to-face meetings and alignment with business practices |
Flexibility | High flexibility in scaling teams and costs but may involve complexities due to jurisdiction | Good flexibility, benefiting from geographical proximity and fewer time zone differences | Highest flexibility with options for quick onsite visits and direct oversight |
Communication | Potentially challenging due to significant time zone differences and language barriers | Easier communication; smaller time zone differences and often shared languages | Easiest communication with same language and cultural understanding, facilitating clearer and quicker interactions |
Cost Structure | Generally lower costs due to economic disparities between countries | Cost-effective but generally higher than offshore outsourcing | Most expensive, reflecting domestic market rates but involves less overhead related to distance management |
Project Complexity | Suitable for projects where complex, less frequent updates are manageable | Ideal for projects requiring regular updates and coordination | Best for highly complex projects demanding continuous oversight and integration |
Risk Distribution | Higher risk due to distance, political climate, and legal differences | Reduced risk as proximity allows better response to changes and issues | Lowest risk, benefiting from local legal protections and straightforward logistics |
Understanding these differences is crucial for businesses to choose the most suitable outsourcing strategy based on their specific needs, such as project requirements, communication preferences, and budget considerations.
Explore Best Alternatives to Nearshore Software Development Outsourcing
Contract-Based Software Development Outsourcing Model
Time and Materials Model
The Time and Materials Model revolves around the correlation between time, resources and cost. Based on a specified timeframe, the more human resources you use, the higher cost you have to pay. The hiring price will depend on the position and level of developers. For example, if you want to hire 02 Front-end developers (middle level) full-time in 8 days, the unit price of hiring is 100 USD per person per day. It means your total hiring bill will be 02x8x100= 1600 USD.
Time and Materials Model is also known as Offshore Development Centre (ODC). ODC is the kind of IT Outsourcing where your company aims to build or hire a remote team in a different country, working under your direction, which helps reduce costs and allows your main office to concentrate on core business functions. It's like setting up a branch of your office in another country, where you can find professionals who are as skilled as the inland at a cheaper price.
Fixed-Price Model
On the other hand, within a fixed-price contract, also known as a project-based contract, the model focuses on outsourcing all efforts to an entire team. The team ranges from – project managers to developers (mobile developers, UI/UX designers, frontend and backend developers, testers, manual QA, etc.), all of whom can work on project from scratch.
Post-client communications and a thorough understanding of the vision and direction of the project, they start to scope the details of the work and the project’s timeline. These projects use offshore agile development services, breaking the larger project into smaller goals. Each of these sections lasts two weeks, which is called a sprint.
The cost will also increase with any increase in the scope or timeline. These risks are why it’s necessary to clarify the project requirements before the development phase. The time and budget estimation for the project must be proper.
Refer to these case studies to Explore how MOR Software uses ITO Models for different projects!
Here is the comparison table between these 2 models:
Aspect | Fixed-price Model | Time and Materials Model |
Control | High control over budget but lower control over modifications | Lower control over budget but higher control over changes |
Flexibility | Low; changes require contract modifications, often at extra cost | High; allows for adapting scope and adjusting requirements |
Communication | Structured; requires clear documentation and less frequent updates | Dynamic; often requires regular updates and meetings |
Cost Structure | Predictable cost; no financial surprises but potentially higher initial quotes | Variable; based on actual time and resources used, can be cost-effective |
Project Complexity | Suitable for projects with well-defined requirements and scope | Better for complex projects where requirements might evolve |
Risk Distribution | Risk is largely assumed by the vendor, who must meet the contract terms | Shared risk; client pays more if the project scope expands, but can adjust as needed |
Key Considerations to Choose the Best Software Development Outsourcing Model
When selecting the most suitable software development outsourcing models for your business, it is crucial to evaluate various factors that can impact the outcome of your projects. Each consideration plays a pivotal role in ensuring that your outsourcing strategy aligns with your business objectives and delivers optimal results.
Financial Efficiency
Financial efficiency is a primary concern. For instance, the Fixed-Price model can be beneficial for projects with well-defined scopes, offering predictable costs. However, for projects expected to evolve, a Time & Materials model might offer the flexibility to adjust the budget as requirements change. This allows startups to manage finances better without compromising on unforeseen needs.
Assurance of Quality and Expertise of the Service Provider
The quality of work and the expertise of the service provider are critical. For example, choosing a provider with a proven track record in Agile methodologies might be essential if your project requires rapid iteration. Companies like Ciklum offer deep insights and substantial expertise, ensuring that complex software projects are handled with the utmost proficiency.
Thorough Risk Assessment
Risk assessment involves understanding potential pitfalls in project execution. An offshore model might offer cost benefits but comes with higher communication risks and possible delays. Nearshore options, conversely, might offer fewer risks in these areas due to closer geographical and cultural alignment.
Scalability and Flexibility in Service Delivery
The ability to scale services as needed without significant delays is crucial. For example, if a startup experiences rapid growth, the outsourcing model should allow for quick scaling of the development team. The Dedicated Team model is particularly effective here, providing the flexibility to adjust the team size based on current project demands.
Technological Advancements and Innovation
Keeping pace with technological advancements is vital. Outsourcing to a vendor that stays on the cutting edge of technology, like those specializing in AI or blockchain, can provide a competitive advantage. This ensures that your project leverages the latest technologies for enhanced performance and innovation.
Security and Confidentiality
Finally, security and confidentiality are paramount, especially for projects involving sensitive data. Ensuring that the outsourcing provider has robust security protocols and complies with international data protection regulations is essential. This might involve regular security audits and adherence to standards such as ISO/IEC 27001.
Choosing the right software development outsourcing model requires a balanced approach to these considerations. By carefully evaluating each aspect, startups can select a model that not only fits their budget but also aligns with their project requirements, risk tolerance, and strategic goals, ensuring successful project outcomes and long-term benefits.
Choose a Suitable Software Outsourcing Model with MOR Software
Choosing the right software development outsourcing models is crucial for the success of your business. MOR Software, a leader in IT solutions, is here to guide you through this critical decision-making process.
At MOR Software, we understand that each business has unique needs. That's why we offer tailored consultation for both ODC and Project-based Model that fit every business’s requirements. We emphasize the importance of aligning business objectives with the outsourcing strategy to maximize efficiency and productivity.
In Project-based Model, we will analyze, plan, execute, and complete in a structured manner based on requirements and specifications from customers, with a clear timeline and defined goals.
The Project-Based Development model is highly recommended if you are looking to establish a new system development and already possess a detailed specification or design document. This model is particularly suitable if you lack an in-house development team and wish to focus on operating and expanding your business without the added burden of managing the technical aspects of project development. This approach allows you to leverage external expertise effectively while concentrating on core business activities.
Most frequently requested projects from customers for MOR Software’s Project-Based Development are Web/Mobile Application Development, System Development , Website Construction and Coding.
For ODC (Offshore Development), we exclusively offer dedicated teams for your software development project. You have a committed and flexible workforce at your discretion.
The Offshore Development Center (ODC) model is highly recommended if you aim to meticulously select and form a team tailored to your specific needs. This model offers unparalleled flexibility in labor arrangements and adapts swiftly to changes in project plans. It enables significant cost savings by reducing expenses related to recruiting, training, and managing administrative personnel.
With the ODC model, you can concentrate on project management rather than people management, working with dedicated and thoroughly vetted software engineers. Additionally, this model is ideal if you are looking to extend your in-house team with more experts or if you wish to outsource certain segments of your project, ensuring both efficiency and quality in your development efforts.
Understanding each type of software development outsourcing models is crucial for startups aiming to leverage external expertise efficiently. Each model offers distinct benefits and challenges, tailored to different business needs, budgets, and project scopes. Startups should carefully assess these models to identify the one that best aligns with their strategic goals and operational requirements, ensuring a partnership that fosters growth and innovation in the competitive tech landscape.
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