Cooperation Models in IT Outsourcing

If the term outsourcing is well-known for you, you must have already read a lot about it. Maybe even in one of our recent articles, where we outline the pros and cons of the in-house and outsourced dedicated development teams. Today we are going to look at the peculiarities of the most popular cooperation /pricing models – fixed price, time and material, and dedicated team.

So, you have decided to delegate the development process to an outsourcing company. Choosing the right pricing model might be baffling. It is a complex procedure and requires quite a lot of time and effort to familiarize oneself with such key points as the scope of work, deadlines, tech description, and, of course, payments.

When choosing the pricing model, it is important to keep in mind that there are no worse or better models, there are ones, that are suitable or not suitable for your project, in other words, you should look for the one, that will bring the most value to your business. Each model has its own drawbacks and strong sides and knowing them will be in hand when making your choice. So, without further ado, let’s start with the most frequently used model.

Fixed price model

Fixed price model is the most efficient for short-time projects with predictable deadlines, up to 6 months. According to this type of agreement, you have to pay a defined amount of money for a particular scope of work done. The sum of payment does not depend on how much time and resources will be spent by an outsourcing company to finish the project.

A fixed price contract cannot be easily modified, that’s why a detailed specification of requirements of your product is necessary before the start of the development. Understanding of all the requirements for both sides, will a benefit during designing a strict roadmap and sticking to it to deliver the product in time. If you would like to make some changes in the project – you can reevaluate the project. You need to organize an additional agreement, to outline unmentioned points of the previous one and reestimate of the price of the contract.

Fixed price agreement does not assume a client’s active participation in the management of the development process workflow. This part is usually the responsibility of the outsourcing the company’s project manager.

Pros of a fixed price model:

  • Low risks. Your budget is protected if a project won’t be finished within the earlier agreed timeframe. You pay only when the whole scope of work is completed and meets the requirements. Thus, all the risks are on the outsourcing
  • Predictability of expenses. You know the cost for the declared scope of work being done and within what time frame before signing an agreement. The document fixes the terms when a certain milestone should be met. There is an opportunity to reevaluate the project if necessary.
  • Clarity. The project requirements and needed documentation are described in detail and prepared in advance.
  • No supervision. You don’t have to be involved in communication with developers on a daily basis to control the development process. Outsourcing vendor is interested in the development of the product within an agreed timeframe to avoid financial loss.

Cons of a fixed price model:

  • Time-consuming preparation before the project start. This approach requires careful/diligent planning to avoid overpayment and further project reevaluation.
  • Less control. Management of the development process is carried out by a team member / meticulous manager on a client’s or on the outsourcing company’s It is a vital prerequisite to have the tasks completed properly in a timely manner.
  • Lack of communication. Constant communication between the client and the team is not implied by this cooperation model. You can participate in meetings to the extent you find necessary for the project needs.

A fixed priced cooperation model will suit you the best when:

  • You have a detailed specification of your product’s features and an accurate plan with steps how to deliver them.
  • The development process has clear deadlines and is expected to be finished within 6 months.
  • You can hand over management functions to the outsourcing company.
  • You do not have the intention to introduce significant amendments to the product during the development process.
  • You start cooperation with a new contractor.

Time and material model

Time and material pricing is a more flexible approach. This agreement does not require a precise description of all the details of the project, but the end goal is declared, e.g. release or MVP. The customer pays an agreed sum only when features are delivered or milestones are met. Time and material model suits perfectly for long-term cooperation when the final version of the product and priorities can be changed during the development process. The client also covers the costs for hardware, business trips, etc.

In this cooperation model cost, as a rule, is calculated in man-hour and take into account the cost of a specialist’s working hour. The team reports an amount of time spent on the development and explains the specificity of the development. Usually, the development process is split into the milestones.

The project is considered as completed when the delivered product meets all requirements from the client. On the other hand, it is impossible to set strict timeframes for project completion, as this pricing model is a flexible one.

Pros of time and material model:

  • Easy start with minimum costs for preparation. You do not have to prepare advanced final requirements and can directly start the development process. All the necessary debates are recognized as a chunk of the workflow.
  • Flexibility. All the key elements of the project, like product specifications, the scope of work, deadlines, team size may be discussed/debated with the team and changed when necessary.
  • Transparency of costs. The payment is made only when the agreed milestones are actually met.
  • Agile. This type of contract makes it possible to implement Agile methodology to software development lifecycle process. Its instruments (daily and retrospective meetings) are helpful to show visible results over a fixed period of time – sprint.

Cons of time and material

  • No strict deadlines. It is difficult to determine an exact date and cost of the product delivery.
  • Need for supervision. You will need thorough guidance to ensure that the predefined stages of development are completed in full within the shortest terms possible.
  • Time expenses. Be ready to allocate your time if you tend to participate in the management of the project directly.

When to choose a time and material model

  • There is a raw idea of the project.
  • New requirements may emerge in the development process and the workflow can be adjusted accordingly to them.
  • You have got an innovative idea related to new technologies.
  • You do not have an entire picture of your target market.
  • You are going to conduct straightforward supervision over the project.

Dedicated team model

Dedicated team cooperation model enables high productivity and first-rate result. As a rule, it is suitable for long-term and complex projects. In this type of pricing time and money are allocated for salaries of qualified specialists and to provide the team with all the necessary tools. Dedicated team model enables building development teams within the shortest span of time.

Dedicated team model is reasonable for the projects with a need for lacking in-house IT expertise. The outsourcing company will build the team according to your requirements, and this team will report directly to you. You, as a client, are usually offered to participate in the hiring process stages – the interview, a review of the results of the technical tests and making a final decision, as candidates may have various technical skills and salary inquiries.

The dedicated team operates as a part of an in-house team but located in another office and sticks to the client’s corporate culture to bring the most value to the company. A dedicated team model implies that your dedicated team (developers, designers, QC Engineers) will take care of your project only and are interested in long and effective cooperation. It also implies that you will manage the development process yourself, including setting priorities and assigning tasks.

The role of the outsourcing partner is mostly to deal with organizational moments after the team starts the development process. As we have mentioned earlier, the payments to the outsourcing company include the salaries of the team and a company’s fee for administrative needs. They include office maintenance (air conditioners, kitchen and coffee zones, gym), workplace expenses (laptops, monitors and all the necessary hardware, software, and stationery).

Pros of the dedicated team model:

  • Foreseeable expenses. You can plan your monthly/quarterly/annual budgets easily as your expenses are formed in a transparent way.
  • Direct communication. You or your in-house team can communicate with each of the dedicated team members, via channels as status meetings/calls, issue tracking system, project management tools, etc. to negotiate all the necessary details of the workflow.
  • Flexibility. The team size, project scope, requirements, deadlines, and priorities can be adjusted if such necessity appears on the project. You do not have to prepare a detailed description of all features and requirements in advance.
  • Reliability. Long-term cooperation with a dedicated team on the project provides team members with a deep understanding of a codebase and key features of the product. This kind of expert knowledge increases team’s productivity and the project is run more effectively.
  • Graduality. If you need a team of ten people, you can start development when you have got core team members and expand the team gradually. It may take 2 to 4 weeks to find the necessary specialists.
  • Thorough control. This model implies the conduction of the thorough monitoring and supervision of the workflow by the client.

Cons of the dedicated team model:

  • Costliness. In comparison with other pricing models, this one is more expensive. A dedicated team model is usually used for complex long-term products and they are costly regardless of the type of pricing approach used.
  • Time expenditure. You will need to spend your time to participate in the hiring specialists with required technical expertise

When to choose a dedicated team model:

  • Your product/project is going to be complex and long-lasting.
  • You are intended to take control over all stages of the software development life cycle by yourself.
  • Extention of the business is in your plans.
  • You prefer having a team focused on your project only and interested in a long-term cooperation.

Which outsourcing model to choose?

Your choice of the cooperation model should be based on the specificity of your project or product. We have outlined the main features of three types of outsourcing pricing models and all of them have their benefits and disadvantages. Let us have a brief look at them in the table below:

When making a decision on the cooperation model stick to the following criteria:

  • Possibility to present a detailed technical specification or just a general idea of the project
  • Project scope and duration
  • Size of the team and whether it should be focused on your project only
  • Available budget
  • Degree of control over the development process to carry out by yourself.

Fixed price model will be suitable for you when:

  • you can specify the main technical requirements and features of the product before the start of development;
  • timeframe for project completion will not take more than 6 months;
  • you can rely on your partners in regard of the project management;
  • you are not going to make significant changes in the final version of the product.

Time and material pricing model is the right decision when:

  • you have got a raw concept of the product
  • deadlines and scope of work may be changed during the development
  • you are ready to ensure the team with the necessary tools
  • a competent manager should be entrusted with project supervision.

Choose a dedicated team model of cooperation when:

  • you are going to develop a complex project
  • you tend to deal with the product/project management and supervision yourself
  • you need a team focused on a single project
  • you have an intention of future business expansion.

So, an IT project is the most effective when the most suitable cooperation model has been chosen for it. Keep in mind that effective project management is one of the crucial moments for the entire project to be completed in time and within budget. Take a consultation with a manager, negotiate the scope of the project, the expertise required for it and the expected budget, and decide which model to choose.