How to Choose the Right IT Outsourcing Model in 2023
In the current decade, tech-savvy businesses rely on software to stay competitive and succeed. And while many of them still choose in favor of employing IT staff in-house, a growing number are opting for more affordable alternatives that offer additional advantages.
Software outsourcing has been actively gathering steam in the past decade, with more and more vendor companies emerging around the globe. Just look at the recent outsourcing trends. But which collaboration types are there and what are the possible outsourcing models? This article goes into the details.
What Is IT Outsourcing?
Put simply, IT outsourcing means delegating your software creation needs or development work to third-party providers.
Some of the main reasons for the growing demand for IT outsourcing services include:
- flexibility and agility;
- quicker time-to-market;
- accessibility to global talent and expertise.
Notably, IT insourcing vs outsourcing greatly differ in the overall investment of time and money. With in-house, you'll need resources for developer recruitment, onboarding, salaries, taxes, and other things.
According to recent statistics, the global IT outsourcing market volume revenue is forecasted to reach almost 587 billion USD by 2027.
Whether it's building an application, website, custom software, or anything else, the agreement between the vendor and client may differ based on numerous factors. This is why many software development outsourcing models exist, and we'll go over them in this article.
Types of IT Outsourcing
There are multiple approaches to classifying the different types of IT outsourcing. Generally, the models are categorized based on the:
- client-vendor location;
- relationship between the client and the service provider;
- agreed payment type (hourly or fixed-price contracts).
While the latter category is quite self-explanatory, on this page, we'll explain the first two classifications in more detail. We'll go over what is location-based and relationship-based IT outsourcing, as well as the advantages and disadvantages of all the models.
Location-Based IT Outsourcing Models
What does the classification of outsourcing by location imply? In simple terms, it defines how far a client company is from its outsourcing provider geographically.
Onshore (Local) Outsourcing Model
Onshore outsourcing is all about hiring locally. This means that you'll employ individuals or IT outsourcing companies from the same country as yours.
This approach may simplify numerous processes. Some of the onshore outsourcing pros include:
- you usually share the same time zone;
- you speak the same language;
- you have the same laws, legal system, and governmental regulations;
- your banks are in one country, so you don't have to deal with additional correspondent banks, international transaction fees, and extra taxes when issuing payouts.
On the other hand, you might also face some downsides of onshore outsourcing, and pricing is usually the biggest one. To give you a comparison, based on the data provided by Clutch, the average hourly rate of a freelance front-end developer from the USA is 65-130 USD while one from Estonia will charge 40-60 USD per hour.
Therefore, if delegating work to people from your own country is a matter of importance to your company, onshore hiring is the way to go. If not, there's a big chance that you'll find a more affordable partner to collaborate with.
Nearshore Outsourcing Model
This model presupposes finding an IT outsourcing partner who is located not too far away. For instance, you can consider hiring developers for a startup from a neighboring country or one in your time zone.
The pros and cons of nearshore IT outsourcing are as follows:
- Pros: your partner isn't many time zones away from you while the cost of development services may be much lower.
- Cons: there might be a language barrier, as well as possible additional obstacles due to international banking and legal matters.
It may make sense to team up with nearshore developers and outsourcing vendors for cutting costs. At the same time, you won't worry about the partner being unavailable because of large time difference gaps.
Offshore Outsourcing Model
The third model based on location implies outsourcing IT work to people or firms from far-away countries. They can be on another continent or in a completely different time zone.
While the cons are exactly the same here as with the nearshore outsourcing model, does being in one time zone matter that much in the 2020s?
Cost-efficiency is among the undeniable benefits of offshore outsourcing provided that it doesn't compromise quality. A super cheap workforce isn't worth settling on if the quality of the delivered work will be poor. So, you need to find a great solution that would fall somewhere in the middle of cost that fits your IT budgeting plans (including all required hardware and software tools) while not sacrificing the high level of expertise needed to complete your projects fully functional and on-time.
For example, IT outsourcing in Europe has greatly scaled in the past ten years. The continuously growing number of world-class software development companies may surprise you. And numerous client firms from the USA, Australia, Canada, and other countries are happily reaping the benefits of European expertise and high-quality custom software development services that come at compatible prices (e.g., when compared to hiring in the US).
Plus, the overwhelming majority of European developers are certified pros who are experienced in their fields and have a great command of English. They've adapted their working hours to match and overlap their clients' time zones, making the partnership just as convenient as it would be if it were onshore.
In essence, if the IT offshore outsourcing partner is experienced, provides quality services, has good pricing, and is flexible about adjusting its working hours and processes to match the client's needs, distance fades into insignificance. After all, access to global talent is a benefit.
Relationship-Based IT Outsourcing Models
Okay, so location might be considered a secondary factor. But how do the types of IT outsourcing differ based on the relationship?
It all goes down to management and the distribution of responsibility between the client and the outsourced developers. Below we describe several main types: staff augmentation, hiring a dedicated team, or choosing project-based outsourcing.
What is staff augmentation? This employment model implies hiring an outsourced specialist to fill a gap in the existing team. It's a way to scale the team by extending your current workforce.
When Is the Staff Augmentation Model Worth It?
It is handy when you're missing specific talent, so you team up with someone who assists you with certain tasks or takes on a role. Frankly, it can be any talent needed to complete your web development team structure:
- an additional front-end developer;
- an outsourced CTO;
- a UX/UI designer;
- a Business Analyst;
- a Digital Marketer;
- among others.
Staff Augmentation Use Case
For example, let's assume your in-house development team is working on building custom software. But at the moment the team is short on a Quality Assurance Engineer (say, the person left the company, or there's too much QA testing work for the current team to handle, or maybe you didn't include a QA Engineer in the structure in the first place). In this case, you can improve and reinforce your staff by augmenting a code tester to help you with the project.
Of course, you can think about how to find a web developer on your own. You may look for freelancers on specialized freelance web developer sites like Upwork, hire someone in-house, or choose outsourcing.
Several Staff Augmentation Peculiarities
- Ultimately, staff augmentation is a fast solution: you turn to your IT outsourcing partner and "rent" the qualified specialist you're lacking from their talent pool.
- Notably, staff augmentation agreements are flexible. Most of the time, they are short-term and project-based, and the payments are usually issued according to hourly rates. As such, Upsilon provides team augmentation services for growth-stage businesses and uses the sprint-based pricing model.
- In any case, in such IT outsourcing models, the client-side is in the lead of the project. So you control this outsourcer's work just like the rest of your employees.
Staff Augmentation Pros and Cons
The main staff augmentation benefits include:
- The fact that you quickly get to fill a "void" in your startup team structure by turning to an IT outsourcing provider.
- You don't have to spend time on recruitment and get ahold of the due expertise and lacking talent.
- Therefore the development process speeds up, and you retain full project control.
- If you need this person's help for a set task scope or short period, say, 1 month, it's possible.
Some of the disadvantages of the model imply:
- That you are responsible for managing the employee and getting the desired results. That said, it makes sense to augment a team member if you have a project manager and/or tech lead or already hired CTO.
Also referred to as managed, this IT outsourcing model presupposes hiring a dedicated software development team. This is the case when a software outsourcing provider "lends" a client company its talent and assembles a team specifically for the project.
Several Peculiarities of a Dedicated Team
- It's as if these people become part of your company for some time but all the additional operational expenses (like recruitment, taxes, insurance, etc.) are the provider's area of responsibility.
- "Dedicated" also means that the assembled team will be working solely on your project (not multitasking on several others simultaneously).
- To a certain extent, both parties will work on the project together. That's why this model is common when a client company wants to build an MVP, which requires agility.
In Which Cases Does a Dedicated Partnership Make Sense?
Let's assume you want to create a web application but:
- your company doesn't have an in-house development team;
- your in-house team can't take on the project (eg., they don't have experience in building web applications or are too busy with existing projects);
- you don't want to go through the trouble of finding suitable staff.
Apart from that, you should opt for a dedicated team instead of a project-based collaboration if:
- your vision of the project isn't final;
- you don't have a clear understanding of what the project should be like in the end;
- you aren't sure about the designs, functionality, scopes, timeframes, and deliverables (meaning all of them will most likely change);
- you need some time to figure it all out with a team to support you the entire way.
Who's Responsible for the Project?
Well, in this scenario, both parties are. The outsourcing provider and client agree on how to split the responsibilities. The client company:
- communicates with the dedicated team as if it's their own for the time of the project;
- is highly involved in decision-making and the project in general, shaping, controlling, and changing it throughout the process.
Although both sides have access to the project management tools, most of the work is handled on the provider's end. This includes planning the workflow, distributing tasks, and executing them. Usually, the dedicated team:
- stays in touch all the time;
- provides timely reports;
- communicates with the client on the progress or needed changes to the tasks;
- amends the composition of the team if necessary;
- among other things.
The Pros and Cons of a Dedicated Team
The dedicated approach advantages:
- It is perfect for aspiring startups or companies that want to create a side project.
- It is an ideal way to obtain missing in-house talent or not overload your own team with extra work.
- You get access to the needed expertise and closely work with the dedicated team during the project's full life cycle.
- Moreover, the cost of IT outsourcing often turns out to be much lower than having people employed internally. As such, teaming up with a third party can bring visible savings and result in a lower MVP development cost.
- Plus, such IT services outsourcing models are all about customization and flexibility. The team composition can be changed, so if you need to add on roles at some time, say, more Front-end Developers or a Business Analyst, it's possible. And you can shape and amend the project itself along the way since the requirements aren't final from the start.
- Importantly, the dedicated team will be with you till the end, regardless of how many iterations are needed.
- The client stays involved in the development and therefore gets to control some of the processes.
Mentioning the cons:
- Since the deliverables aren't clear, you might spend more time and resources on the project.
- You'll most likely be paying the dedicated team by the hour which may turn out to be more costly if compared to a project-based collaboration with fixed terms.
The third option is handing over the entire project to an IT outsourcing partner that'll deliver a complete product based on the set requirements.
How Does Project-Based IT Outsourcing Work?
- You agree on the terms of the turnkey project (price, expected deliverables, timeframes, frequency of communication, etc.).
- Provide the team with a specification that lists all the requirements and details.
- Get updates from the provider on the progress.
- Receive a final result within a set deadline.
Several Project-Based IT Outsourcing Peculiarities
In this case, the execution of the project is the IT outsourcing firm's responsibility from A to Z.
The client company doesn't get involved in the development processes or the management details much.
When Does It Make Sense to Opt for the Project-Based Outsourcing Model?
Essentially, the project-based outsourcing model is the way to go if you:
- have a clear vision of the outcomes (e.g., what the product should look like in terms of UX/UI design and which functionality it should have);
- have a detailed plan lined out with a predefined task scope (which most likely won't change much);
- have all the requirements and deliverables listed;
- know when you want the project delivered (have specific timeframes);
- don't wish to get too involved in the process, you care about getting the final result.
Say, you want to build a marketplace and you:
- know exactly what you need;
- don't have your own team to bring the idea to life (or you don't want to waste resources on a side project, recruitment, or employment);
- don't wish to participate in the development process too much;
- just need a solution that'll answer all your needs.
The best way out is to entrust a third party to deliver the final product.
The Pros and Cons of Project-Based Outsourcing
Some project-based outsourcing advantages are:
- When a project is predetermined, outsourcing it to a third party can save a lot of effort and resources. You won't be distracting your in-house team, wasting time on planning, execution, and release works, nor getting too involved in the management processes.
- Instead, you enjoy your final product and free up your time to focus on business-related matters.
- Plus, project-based outsourcing often comes at a fixed price, which makes sense if the scope, deliverables, and requirements are specific.
Mentioning several cons:
- Of course, if you weren't clear enough about what you expect, there may be inconsistencies. To avoid this, it's best to break down the process and meet up for approval talks and "health checks" when some milestones are complete.
- Furthermore, it may be hard to modify the deliverables if you changed your mind about something. Hence, IT outsourcing models of this kind are much less flexible compared to hiring a dedicated team.
Choosing the Right IT Outsourcing Model
So which of the outsourcing models is right for you? Well, there's no right answer as every project has its own peculiarities.
The best option depends on numerous criteria, including:
- whether location is a factor that matters when choosing an IT outsourcing company;
- if you have an in-house team or not (along with its areas of expertise, how complete the structure is, how busy the team is with existing projects and tasks, etc.);
- the budget and expected time to market;
- how involved the client company wants to be in the project and its development;
- how complete the project vision is (a detailed plan with predetermined deliverables vs a vague idea at an early stage of discovery);
- how flexible the project should be to possible requirement changes;
- among others.
While geographical preferences are individual, there are some best practices for choosing between the three IT outsourcing models based on relationship. Let’s list some major takeaways.
Choose Staff Augmentation if:
- you have a necessity to temporarily and quickly fill a team "gap" or get an extra workforce without recruitment headaches and additional expenses;
- you have an in-house project with a team lead and PM who'll be responsible for management.
The Dedicated Team Model is a suitable choice if:
- you need an experienced team for a project that's at the discovery phase or with no clear requirements/deliverables yet;
- you value the flexibility of both the team composition and the project itself;
- you're willing to be involved in shaping the project and are ready to share responsibility with the vendor.
Project-based Outsourcing is right for you if:
- you have clear project requirements and deadlines;
- you can line out the deliverables in documentation and specifications;
- you don't want to be involved in the project execution and are ready to entrust an experienced IT outsourcing provider.
How do you choose the best fit from the variety of IT outsourcing models? The bottom line is that it all goes down to finding a trustworthy partner. So keep an eye on the candidates' expertise, certification, testimonials, and examples of work when you evaluate software outsourcing vendors. Then list the suitable candidates and reach out to them to find out about the possible terms and models of engagement.
As always, you're more than welcome to contact Upsilon to discuss your needs! We provide MVP development services for early-stage startups and assist with product growth. So feel free to browse our dedicated team pricing and book a consultation.