Outsourcing IT services enables companies to identify and create personalized services that can better fit their needs. Ultimately, recruiting, hiring, and maintaining local teams of IT specialists is cost-prohibitive for many businesses. With outsourcing, they can delegate the work as needed, often for significantly less money. This not only enables them to expand their IT resources while also focusing more on business growth than management.
There are many outsourcing pricing models, and it’s important to evaluate them all in order to figure out which best suits your needs.
According to Statista, the value of outsourcing is set to exceed $413.72 billion by the end of 2021. Indeed, more and more companies are using the services of external supplers, with IT services dominating much of that market. Moreover, the Global Industry Analytics Report predicts that the outsourcing market will grow by 5% in the next four years (2021-2024).
Of course, there are many benefits to outsourcing IT services, including:
Effective outsourcing can drastically improve a business’s technology, recruiting, management, and infrastructure budget. It also allows you to build strategic partnerships with agencies that can serve you for years to come. It also transforms into more operational control, improved risk management, and better overall continuity throughout the organization.
The most important aspect of outsourcing is planning. More specifically, it’s about planning the level and type of outsourcing your business needs. Depending on your business model, industry, and the types of projects in your queue, you could benefit from a range of different outsourcing approaches.
In our opinion, the best models are those which are not fixed, as they provide the flexibility many businesses need to evolve and grow. However, as you’ll see in the discussion below, there are pros and cons for every model out there. In the end, it’s all about gaining a competitive advantage without having to recruit more local employees.
In a Fixed Price outsourcing model, the service provider sets a standard rate. Usually, it is charged monthly. Of course, in order for a fixed-cost model to work, the vendor must ensure they have detailed information on what they’re expected to deliver. This puts some pressure on the hiring company, as they need to be very thorough in their preparation. They generally require:
Pros
Cons
Fixed price contracts well for small start-up companies with limited funds. The low budget usually means that the quality of service provided is compromised. A fixed price model is not suitable for long-term projects as it could be limiting and expensive.
The time and material pricing model is based on the actual time the service provider expends to complete the assigned project. Essentially, the business will pay for the time and materials billing, so the time spent in hours is billed, and the materials used are priced. When comparing the fixed price vs. time and materials billing model, companies find that the latter is often cheaper.
Pros
Cons
A successful time and material model requires the service provider to be happy with the agreed-upon pricing structure, and for the business to be satisfied with the service provider’s technical abilities. T&M is one of the most popular models with companies that outsource their development work and already have a budget in place for it.
The IT staffing strategy is where the service provider provides the client with staff (IT staff and developers) that work directly with them based on their needs and requirements. In outsourcing models with this structure, the developer becomes a dedicated staff member, doing the work the business requires via direct communication
Pros
Cons
The staffing method is good for businesses that require in-house expertise but do not want to enter lengthy and complicated recruitment processes.
The Cost-Plus outsourcing model is perfect for clients who want to know exactly what they’re paying for. Also known as the “open book” model, it provides a good look into the types of people the service provider is hiring. Clients also get a much more detailed look into how their monthly or yearly investment is being spent by the outsourcing provider.
Pros
Cons
All in all, the Cost-Plus outsourcing pricing model is ideal for large-scale and long-term projects that may include evolving requirements.
Incentive-based pricing model offers bonus payments to the outsourcing partner as a reward for meeting certain established goals. These extra payments are added on top of what is established in the original contract. Many experienced businesses embrace this model for its ability to motivate teams to meet (and exceed) directives.
Pros
Cons
As far as incentive-based models go, the profit-sharing structure is among the most popular. In this case, you have a model that is largely focused on the outcome of the work, with service providers being rewarded for increasing the overall value of the client company. There are myriads of profit-sharing structures, and being able to determine what works best for both the parties is one of the major benefits of this model.
Pros
Cons
In a Shared Risk-Reward Pricing Model, both the software development service provider and the client fund the development of new solutions or services. Essentially, the two team up for a relatively equal distribution of work and benefits.
Pros
Cons
This is a good option for clients who are willing to share in both the upside and downside. However, they should have a strong management team that’s willing to work very closely with the service provider.
Similar to other incentive-based models, a Performance-Based Pricing Model rewards the service provider for producing satisfactory results, reaching milestones, or hitting certain metrics. It usually involves a lot of negotiation in order to set terms and benchmarks that both parties find suitable.
Pros
Cons
Larger or more established companies that don’t need to build partnerships with their service providers frequently employ this model.
One of the most popular outsourcing structures of all is what’s called the Mixed-Mode Pricing Model. This is great for companies whose project requirements aren’t yet well established, but who still have a timeline in mind for their outsourced services. At its heart, it’s a mix of Fixed Price and T&M.
Pros
Cons
This is ideal for businesses that are more focused on meeting deadlines than having specific project goals. However, only companies with a strong (and willing) management team should attempt this strategy.
In a Pay-Per-Unit Pricing Model, vendors will offer a unit-based set rate. The amount the client pays ultimately depends on how much of the service they use over a period of time.
Pros
Cons
The PPU Pricing Model is one of the best reserved models for companies that have more sporadic service needs.
The Cost-plus model is offered by InventorSoft as a unique and innovative service for businesses requiring IT outsourcing. In this model, a business solution consultant will evaluate what level of service you require based on your unique business plan.
Businesses wanting to reduce development costs or long-term plans are encouraged to take advantage of the Cost-plus model, as it is highly beneficial for a long-term software development project and for the relationship.
The model offers businesses stability and predictability in an often-turbulent business environment. Clients looking to scale up and expand their remit would benefit from everything the Cost plus model offers, including:
The business landscape is undergoing a massive change. The onset of globalization means businesses must be flexible and meet the requirements of a dynamic environment. Of course, the demand for IT services will continue to grow exponentially, despite a lack of highly-skilled developers.
Fortunately, we offer you the opportunity to access highly-skilled, resourceful professionals from our country. This allows you to focus on increasing your operational efficiencies and building your core business.
In the end, the Cost-plus model provides you with increased flexibility. It is a leaner and more cost-effective option, especially when compared to Fixed-Price or T&M models. All in all, it’s a collaborative and innovative outsourcing option that delivers skilled developers directly to businesses that need them.
To choose the best outsourcing models for your software development project, you should start with the following steps:
1. Understand your business needs. What is it you need? What timeframe and the budget are you looking at?
2. Choose the right outsourcing partner. At InventorSoft, we ensure that we have the technical skill-set and support structures in place so you get the best from your outsourcing structure.
3. Select the right outsourcing model. Again, this depends on your answers to #1, so make sure you spend the time answering them.
4. Test and communicate with your partner. A good outsourcing arrangement requires great communication and flexibility. We ensure that we take care of your needs and help you feel supported.
5. Get started!