For modern businesses, the choice of an IT outsourcing engagement model is as important as the selection of an outsourcing provider. Contemporary outsourcing industry offers tailored cooperation options to meet individual requirements and needs of your business. Still, software development providers usually provide three classic engagement models that differ in the organization of the development processes, the level of flexibility, monetization etc. They are the Dedicated Team, Fixed Price, and Time & Material. Strictly speaking, Time & Material and Fixed Price are commercial models for pricing purposes. Yet they are only compatible with certain collaboration patterns. So now these terms include both commercial and organizational aspects and are used to describe the respective engagement models.
Knowing the details of each type of cooperation, its pluses and minuses, pricing and compatibility with different kinds of projects is critical for choosing the engagement model that will satisfy your business requirements. So in this article, we suggest an overview of the most popular types of cooperation by delivery method and pricing.
When we start cooperation at N-iX, we always consider the specifics of the project, business requirements of the client and a number of other factors. Yet mostly our customers prefer the dedicated team as the most cost-efficient model that allows to put together a balanced team with the right skills and gives the ability to scale it fast.
1. Dedicated Team
Dedicated Development Team model (which is often called staff augmentation or outstaffing) is widely used in the IT sphere to run and deliver a project. It suits both tech companies in need of additional workforce and non-tech ones that want to develop a particular product. It is by far the most popular and the most used model as it is easily customized to different business needs.
One of the merits of this model is that you get your team of developers built according to your specific requirements. The outsourcing vendor may either allocate a strong team of senior developers or you may hire middle and junior specialists who will follow the tasks of your on-site senior engineers. In addition, this team is very flexible so you may scale it when necessary and complement the project with new skills.
Whether you work with nearshore or offshore developers, they, as a team, are integrated into your environment and fully dedicated to your project. So the team acquires the experience in your domain and keeps the product knowledge throughout the cooperation. Thus it is especially beneficial for your company’s long-term needs.
As for the cost savings, this IT outsourcing engagement model allows you to have a more predictable bottom line. Before the beginning of the project, you and the outsourcing provider agree about a monthly cost per engineer allocated to your account, which is definitely more cost efficient. Engineer is typically allocated full-time (160 hrs per month) with a long-term assignment duration (1+ year). Both of these factors (full time involvement and long-term duration of the cooperation) allow to minimize the total monthly cost by avoiding management overheads, bench charges and other additional hidden costs on top of the monthly rate.
Concerning project management, there are several ways to build your cooperation. Oftentimes, there is a product owner and/or a CTO on the client’s side who takes over the project management activities of the software vendor team’s work. This gives full control over the team and the customer remains responsible for the project planning and the deliverables. Yet, a common practice is to have a team/technical lead in the offshore team who will take over the team management locally at the same time contributing to the actual development and coding. There are also many cases when the clients focus more on the business area of the product development and delegate all the software development, IT architecture and strategy decisions to the outsourcing vendor. Additionally, an outsourcing provider (due to the profound experience and a variety of projects) may propose consultancy on a certain technological solution or in the domain knowledge in company’s core expertise.
2. Fixed Price
Fixed Price is commonly used to freeze the price to a set amount. This IT outsourcing engagement model encompasses fixed quota, fixed scope of work and fixed time of project delivery. As a client, you address the provider with a business problem and your vision of how it may be resolved. A common practice is to go through the discovery phase together with the software development vendor, during which clear project business and software requirements are established and analyzed, which leads to clear understanding of the final product and deliverables.
Therefore, the Fixed Price cooperation is suitable for well-specified projects. It will not work if the client wants to continuously adjust the product to the market changes or if there is a need to test and alter some parts of functionality. This cooperation is mostly applied for smaller scale projects (up to six months of development), or the solutions which may be developed in several fixed price iterations.
Although you get the ready-made solution for a fixed price, this engagement model excludes flexibility in terms of scope vs estimated time and cost to deliver it. Changes to the scope will be applied through the change management procedure and will definitely influence the time and cost of the final product. Thus if your business needs to react to the customers’ needs and market changes very fast, this model is not the best way to go.
3. Time & Material
In Time & Material (“pay-as-you-go”) engagement model, the requirements are not clearly defined at the beginning. That is why it is usually applied when a project cannot be estimated in advance (especially if the scope of work is likely to change in the development process). New specifications may be created during the development process or result from the deliverables. Also, the team composition is flexible so it allows to involve IT professionals with different skill sets when needed.
As for the billing process, you and the provider agree upon an hourly rate of each developer, so a weekly/monthly charge is based on the total effort reported by each member of the team. In addition, this model is flexible in terms of allocation time of specialists, which may vary from 25% and higher depending on the project needs. Yet the main hidden risk in this model is that the client may lose focus and get carried away in the process endlessly improving the final product. Thus it’s very important to have clear objectives and stay focused on the outcome.
Establishing effective cooperation is vital for any business relationship, and we realize that is it especially important for those who decide to outsource software development. N-iX has been providing nearshore and offshore IT services for over 17 years and in that time, we’ve delivered a variety of projects with the most diverse engineering and business challenges. Therefore, we understand that in order to build a long-lasting partnership, it’s essential to evaluate each project based on its individual requirements. When we choose an IT outsourcing engagement model together with our clients, we take into account time pressures, the budget, the expected deliverables, desired outcomes etc. So consider the benefits of each type of cooperation and don’t hesitate to consult with your software vendor about the most suitable option.