Models of Outsourcing: Which One is Right for You?

Across the globe and industries, enterprises are turning to various models of outsourcing to boost efficiency, cut costs, and gain access to world-class talent. 

The global software outsourcing market is projected to reach nearly $1416.3 billion by 2031, a mouth-watering number for companies racing to leverage flexible resourcing models to fuel innovation. However, companies are often hesitant because choosing the wrong approach can derail budgets, timelines, and results.

In this article, we’ll analyze the most viable models of outsourcing – clarifying their pros, cons, and best-fit scenarios – to help you chart your way toward the outsourcing model best suited for your unique needs.

Why Enterprises Struggle to Pick the Right Model of Outsourcing

While outsourcing offers strategic value, from accessing specialized skills to enabling round-the-clock development, it introduces decisions around outsourcing models aligned to constraints. Common pain points include:

• Murky scope definition. Without clear specifications, providers struggle to price and resource services accurately on any model.
• Budget and timeline unpredictability. What looks affordable initially can balloon under certain models without proper governance.
• Talent and infrastructure oversight. Even with an ideal model, clients relinquish some control and visibility as work gets outsourced.
• Lack of flexibility. Some models make changes mid-stream difficult despite evolving stakeholder needs.
• Career development. As skills are built externally, clients risk talent walking away once training is complete.

Carefully examining outsourcing models against requirements minimizes these friction points and unlocks outsourcing’s notable advantages. Next, let’s review the different types of outsourcing models. 

1. Fixed Price Agreements

Fixed price agreements typically establish a set fee upfront for an entire project's scope and timeline. In exchange, the outsourcing provider assumes responsibility for delivery per specifications.

One of the significant advantages of fixed price agreements is predictable pricing and budgeting, risk ownership transferred to the vendor, and incentivizing the provider’s efficiency. 

On the other hand, you might face challenges like limited flexibility for changing requirements, budget and timeline overruns if scope grows, and intensive upfront planning and documentation.

We recommend going with a fixed price agreement if you have detailed specifications with limited uncertainty, if your budget can’t be exceeded, and (or) if you prioritize delivery guarantees over agility. An example of such a project could be a mobile app development based on wireframes and user flows or rolling out new modules to an existing platform. 

This ironclad type of outsourcing model brings confidence in cost control and risk mitigation. However, changes become highly constrained once contracted, even when evolving stakeholder needs arise. Still, for well-documented efforts, fixed pricing lessens surprises.

What to ask providers about when signing a fixed price agreement:

• How they handle gaps in specs and estimate efforts
• What fees and workflows they apply when adjustments are required
• How they usually manage unplanned work during fixed-price projects.

2. Staff Augmentation

In this format, you get the desired flexibility and control over outsourced teams, allowing you to align closely with your existing processes and culture. 

However, staff augmentation doesn’t mitigate potential cultural and communication challenges completely and requires careful integration into existing workflows and teams. Working through the augmented team model can also lead to dependency on external talent for core competencies and may not address underlying issues with internal processes or skills gaps. 

Augmented teams are effective in projects that require: 

• Extended in-house teams with specific skills for temporary projects
• Short-term hiring commitments (like supplementing a development team during product launch phases)
• Meeting tight deadlines
• Experienced tech talent to guide companies undergoing digital transformation or technology upgrades that involve talents with specific expertise.

What to ask providers about when collaborating with augmented teams:

• Provider’s approach to integrating augmented staff with existing teams
• Experience and training protocols for staff in relevant industries and technologies
• Mechanisms for feedback, performance tracking, and conflict resolution
• Flexibility and policies around scaling the augmented team up or down.

3. Time and Material Model

With the Time and Material (T&M) IT outsourcing model, you pay hourly or daily for talent and resources deployed. Costs scale up or down based on effort level.

In this model, you only pay for work performed, so you can be flexible with your project scope and add or remove no longer needed tasks. Also, you directly manage the team so that you can build efficient communication and get complete control. The fluidity of time and material engagements also allows for adjusting the talent mix to needs. Yet, the variable costs require hands-on oversight to prevent uncontrolled spending.

However, with the T&M, predicting the overall and overrun budgets may be complex. Besides, this model requires your high involvement and project management.

The Time and Material model is efficient in projects with constantly evolving specifications. Also, if you want close guidance over the team, flexibility in budget and scope, and timely delivery guarantees, this model is likely to 

What to ask providers about:

• How they help contain costs through delivery governance
• Rate models for different skill levels and geographies
• Options to blend fixed fee and T&M elements.

4. Dedicated Development Teams

Often referred to as team extension, this IT outsourcing model entails temporarily augmenting capabilities with a pre-assembled squad. You “borrow” offshore talent built to integrate seamlessly while avoiding permanent hires. Essentially, this model allows companies to outsource an entire project to an external team, which takes full responsibility from start to finish, ensuring timely delivery within budget.

The dedicated development teams (DDT) model allows you to expand operational capacity quickly, facilitate round-the-clock development, gain competencies without significant onboarding ramp-up, and sustain in-house knowledge thanks to a shared context.

The DDT model is useful in projects with an urgent skills and capacity gap. Also, if you’re seeking to accelerate time-to-market for innovations or launching one-off projects like mobile app development or website redesigns, a dedicated development team model is for you.

What to ask providers about:

• Options to scale the team dynamically based on phase needs
• Built-in knowledge-sharing mechanisms
• Change management support during onboarding

5. Offshore Development Center (ODC)

An ODC provides a dedicated offshore team, working exclusively on your projects. This setup acts as your extended office, offering scalable resources and infrastructure.

This model works best for long-term projects with growing requirements involving continuous development and support teams. Also, if you’re seeking cost-effective solutions while maintaining quality standards, this model helps you expand technical capabilities without the overheads of physical expansion.
The benefits of ODC cooperation include:

• Cost savings on labor and operational expenses
• Access to a vast talent pool and specialized skills
• Scalability and flexibility in team composition and project management
• Continuous development cycle enabling faster time-to-market.

On the other hand, the ODC model comes with its shortcomings: 

• Challenges in communication and alignment due to cultural and time zone differences
• Need for effective remote management and collaboration tools
• Lengthy team onboarding and transition 
• Dependence on the service provider for critical functions and knowledge retention.

What to ask providers about:

• Strategies for overcoming time zone and cultural differences
• Experience and track record in setting up and managing ODCs
• Security measures and intellectual property protection
• Integration process with in-house teams and project management methodologies

An ODC acts as your remote IT department, offering a complete setup of infrastructure and personnel. It's best for organizations aiming to expand their development capabilities without the overheads of setting up a physical office in another country.

Which Option Should You Choose?

Models of outsourcing bring about complex decisions with lasting consequences on outcomes, economics, talent, and operations. Ultimately, the “right” approach comes down to carefully aligning methodology to the needs and realities of your project and the organization's constraints and culture.

While one IT outsourcing model may fit a current initiative or address modern needs, that might only be optimal as strategies evolve. Embracing frameworks and maximizing flexibility is critical, especially in dynamic industries.

Consider the following when making your decision:

• Project complexity and size: Staff augmentation suits small to medium-sized projects, while project-based outsourcing is better for projects with a clear end goal. Dedicated teams and ODCs are ideal for complex, ongoing projects.
• Control and flexibility: If maintaining control over the team and project management is crucial, staff augmentation or a dedicated team model may be preferable.
• Cost efficiency: Evaluate the cost implications of each model, keeping in mind that the cheapest option may not always offer the best value.

How Svitla Systems Can Help

At Svitla Systems, we understand the intricacies of models of outsourcing and how the right one can transform your business. Our expertise spans all major models of outsourcing, and we work closely with our clients to identify the most suitable approach based on their specific needs and goals. 

With Svitla Systems, you gain a partner committed to tailoring solutions that target growth and success in the digital world.