IT Outsourcing: How To Choose Right Cooperation Model

Nowadays, the vast majority of companies have information technologies as a non-core asset. Consequently, the opportunity to transfer these non-core assets under the management of a professional external partner and free up resources of the company for priority business areas – looks very attractive. 

At this point, the customer is faced with several issues as to how to choose the most effective cooperation model, how to evaluate this approach from a financial perspective rather than investing in the development of his/her own team of IT specialists?

We continue a series of blog posts devoted to the topic of outsourcing software development. In this article, we decided to reveal the topic of cooperation models in IT outsourcing and how to use them efficiently. Moreover, you can check our previous article “7 main tips to avoid startup failure”.

Outsourcing partner: models of cooperation

Currently, there are 4 basic models of cooperation that are used in all the world markets:

  1. Fixed-price
  2. Time and Materials
  3. Dedicated team 
  4. Hybrid

If you are interested in this topic, you might also like Step-by-step Instruction: Scope Of Work For An Outsourcing Company

Denis StolyarHead of Project Excellence

Fixed price

The main criteria of this model are – a fixed budget, a constant project scope, an established time interval (4 weeks, 2 months, etc), also a possible compromise in quality. 

The fixed-price contract is perfect for any size projects, where requirements, specifications, and schedules can be clearly defined before the start of project development since it is nearly impossible to make adjustments when the project started. 

Typically, this model is also used for short-term software development tasks that do not require close monitoring by the client.

Time and Materials

The peculiarity of this model lies in the absence of a precisely defined project cost – the customer pays the actual amount of work performed by the IT outsourcing company under the time spent and the hourly rates of the contractor’s specialists. 

Both parties can flexibly approach the changing requirements, conditions, and priorities of the project and, as a result, can quickly adjust the scope of work and terms.

The model is suitable if the customer’s idea is associated with new technologies (not with fully developed markets), and he/she intends to provide direct control over the project and ensure the team with specific materials, also when the scope of the project is unknown or the implementation will take several months or even years.

Dedicated team

Dedicated Team is a business model that implies both parties mutually agree with the workload and requirements of the project, indicating the necessary amount of time. At the same time, the outsourcing company provides IT specialists that are fully focused on the project and meet the requirements of the customer. The client has full managerial control over the project and the team. Moreover, the contractor performs the functions of a staff recruiter and administrative support.

The fundamental difference of the dedicated development team is its long-term nature: partnerships between the customer and the contractor are conducted for a long time and can involve the implementation of a set of projects.

Hybrid model

The approach includes the basic principles of Time & Material and Fixed Price models.

Our company, RNDpoint, applies the hybrid model in practice. We can share with you 2 types of hybrid models that we use. However, it is worth noting that the choice of model is highly dependent on many factors such as estimated time, amount of work and resources, the complexity of execution and so on.

The first type is suitable for longer and more expensive projects. At the beginning of the project, we start working according to the Time & Material model. Then, when a certain part of the functionality is ready and we can plan our next sprint more clearly, we discuss the edits with the customer and schedule further fixed price sprints.

The second type is better working for small projects or startups. It implies  that the company and the customer agree on certain arrangements. For example, to do the specific tasks for a fixed price no matter how many hours it takes, and also completing other minors (or not) tasks for Time & Material strategy. The model is successfully working because the customer can pay a lower cost for Time & Material assignments and be ready to pay for a fixed part of the project. As a result, it is easier for startups to control their expenses.

Thanks to this model, the client has an opportunity to be flexible and, at the same time, look through every detail, thus avoiding too many edits in the final project.

Conclusion

The model of cooperation with outsourcing IT partners is the client’s decision, which depends mainly on the type of project and the predictability of the time and the cost. The fixed price model would be the best choice for short-term development with a clear description of the functionality and the concept of the final product. Three other models would be better for long-term cooperation, and also in case, the customer is going to change the workflow. 

Be that as it may, the client should remember that the cooperation model that worked well for other organizations and a particular contractor may not always be the best choice to launch his project, because everything depends on the main project features – time, money and resources.

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