Comparing Software Development Outsourcing Models: A Decision-Maker's Guide

Arshpreet Kaur
Arshpreet Kaur
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      IT outsourcing development isn’t a one-size-fits-all endeavor. In fact, there are many different ways to go about doing it—different models that may work best depending on your company’s needs and the outsourcing services you require.

      This post will explore common software development outsourcing models you can review before making a decision about how to structure your outsourcing efforts. We’ll look at different models as they relate to:

      • The location of your outsourcing team (from onsite to offshore)
      • The type of relationship you engage (from staff augmentation to dedicated teams)
      • The type of contract you adopt (fixed-price vs. time and materials)

      In the end, you will draw from each of these dimensions to form your own blend of outsourcing models and create your own tailored strategy. For example, you might work with a dedicated offshore team at a fixed price, or you might use a nearshore provider for staff augmentation where you’re billed for time and materials.

      This guide will help you choose the right outsourcing model for your business and answer a number of common questions about IT outsourcing.

      Location-Based Software Development Outsourcing Models

      The first set of outsourcing models relates to the location of your outsourcing team. When selecting the geographic component of your outsourcing model, you have four options:

      • Onsite outsourcing
      • Onshore outsourcing
      • Nearshore outsourcing
      • Offshore outsourcing
      • Global delivery outsourcing

      Let’s explore the outsourcing pros and cons associated with each model so you can make the best decision for your business.

      Onsite outsourcing

      Just as the name implies, if you hire an onsite outsourcing partner, the team will work directly with your in-house team at your physical offices.

      The big difference between your outsourced development team and your in-house team is that the former will be hired, onboarded, managed, and paid by the outsourcing company.

      This comes with a number of advantages over hiring an in-house staff, including the flexibility and scalability that comes with all outsourcing models. Compared to other outsourcing models, it has its pros and cons.

      Pros:

      • Allows for real-time collaboration without the use of video chat
      • Outsourcing team can come to deeply understand your business and culture
      • Differences of opinion are easier to resolve with everyone on site

      Cons:

      • Extra overhead required to house an outsourcing team (e.g., office space, equipment, energy use)
      • Companies headquartered in the U.S., Canada, Europe, Australia, and other fully industrialized countries will pay significantly more for local talent than they will for developers overseas
      • Limited talent pool, since you only have access to local tech workers

      Best for: Companies that require extensive, hands-on collaboration and have a large budget allocated to hiring staff in an area with wide-ranging tech talent.

      Onshore outsourcing

      Onshoring outsourcing occurs when a company works with an off-site software development team within their own country. By working with teams close to home, language barriers are non-existent, and cultural differences are minimal.

      For example, a startup in San Francisco, CA, might work with developers in Reno, Nevada, which is in the same time zone but has a lower cost of living. This is more cost-effective than working with an outsourcing provider in the San Francisco Bay Area, where hourly rates for developers are much higher.

      Pros:

      • Minimal (or zero) time zone differences
      • No language barriers
      • Minimal or non-existent cultural differences

      Cons:

      • Minimal cost savings for industrialized countries with a high cost of living
      • Unable to access an international tech talent pool
      • No option to work asynchronously, such as having your QA team find bugs while your developers sleep

      Best for: Companies that have the budget to hire an onshore team and still want the flexibility that comes from outsourcing, but don’t require everyone to be in the same set of buildings.

      Nearshore outsourcing

      Nearshore outsourcing is a model where companies hire an outsourcing vendor in a nearby country, such as a company in Los Angeles working with a development team in Mexico City.

      Outsourcing nearby means minimal time zone differences and often fewer cultural differences—although that’s not always the case. For example, offshoring to India might mean fewer cultural and linguistic barriers when working with a team that is fluent in English (which many Indians are). We’ll talk more about offshoring below.

      Pros:

      • Fewer time zone differences and (sometimes) minimal culture differences
      • Ability to leverage lower labor costs for cost savings
      • Access to a wider pool of software engineers compared to onshore and onsite outsourcing

      Cons:

      • Language and cultural barriers may still be an issue, depending on where you outsource the work
      • Often the talent pool remains limited if you’re not located near major outsourcing hubs
      • Cost savings may be greater if you’re willing to explore options on the opposite side of the world (see our country-by-country pricing comparison to learn more)
      • International contracts may be harder to enforce, so be sure to write legally solid agreements, and work with an attorney who is knowledgeable in creating internationally binding agreements.

      Best for: Countries located near inexpensive outsourcing hubs who are looking to go international, but aren’t comfortable working with a team on the opposite side of the world.

      Offshore outsourcing

      When we hear about outsourced software development services, offshore outsourcing typically comes to mind—with U.S. and European companies hiring teams of developers in places like India and the Philippines.

      Offshoring your software development can be extremely cost-efficient due to the cost-of-living differential (and corresponding labor costs), and it plugs you into a global talent pool.

      Of course, we would be remiss if we didn’t mention some of the potential downsides of working with offshore teams, such as language and cultural barriers. Additionally, like nearshoring, you’ll need solid agreements that are internationally enforceable.

      Pros:

      • Software development costs can be far less expensive
      • Connects you to an international talent pool, where you can find the best developers
      • Working with a flexible team means they can either adapt to your hours or work asynchronously, whichever best serves your needs

      Cons:

      • Language and cultural barriers may be an issue without proper vetting
      • Contracts must be internationally binding
      • Time zone difference may be an issue if your partner isn’t willing to adapt to your time zone and you don’t benefit from asynchronous work

      Best for: Companies looking for quality, cost-effective work and have flexible systems that allow them to collaborate with partners anywhere in the world.

      Global delivery outsourcing

      Global delivery outsourcing involves working with a fully distributed team around the world. For example, you might hire a design team in India, a software development team in the Philippines, and a QA team in Chile.

      The global delivery outsourcing model has the advantage of selecting the right partners based on their individual specialties. It can work well with a carefully defined development process and clear adherence to methodologies like Agile.

      That said, it runs the risk of disorganization and inefficiency, and it may be difficult to coordinate with teams distributed around the world.

      Pros:

      • Cost-savings due to cost-of-living differentials
      • Able to focus on outsourcing partners based on their specialties
      • Taps into a worldwide talent pool

      Cons:

      • Can become difficult to manage without clear systems in place
      • Introduces multiple layers where language and cultural differences come into play
      • Coordinating in the face of multiple time zone differences may present challenges

      Best for: Companies that have mastered project management between diverse, distributed teams.

      Relationship-Based Software Development Outsourcing Models

      Determining the geographic strategy of your outsourcing approach is just one element of the equation. You also need to choose which relationship-based outsourcing model to adopt.

      Do you have a full-time, in-house staff who will manage your software development projects internally in a staff augmentation approach? Are you interested, instead, in hiring a dedicated team, or working with your partners on a per-project basis?

      Each of these approaches is a different type of relationship-based outsourcing model. Here are the pros and cons of each approach.

      Staff augmentation model

      A staff augmentation model describes those companies that have established in-house development teams and hire software development outsourcing companies to extend their team’s capacity, adding individual outsourced employees to fulfill different roles.

      The company continues to manage each project internally and retains control over the process, relying on the outsourcing partner for flexibility and scalability. When the in-house team’s capacity is limited, they can farm the work out to talented developers at the outsourcing firm.

      Pros:

      • Staff augmentation extends an in-house team’s capacity while maintaining control of the project internally
      • Offers flexibility without complete dependence on an outside company
      • Internal staff, who deeply understand the company and its mission, can ensure the project feeds into the organization’s larger goals

      Cons:

      • Requires constant involvement of internal staff
      • Requires daily communication with the outsourcing partner
      • May be less cost-effective than other models since internal staff typically costs more (due to payroll taxes, benefits, higher labor costs, etc.)

      Best for: Companies with established in-house IT departments who have the expertise to both manage projects and handle the heavy lifting required to meet all project requirements.

      Dedicated team model

      Working with a dedicated software development team is a step up from the staff augmentation model in terms of the outsourcing firm’s active involvement in managing its own staff and working with you to build the larger strategy.

      The dedicated team model isn’t a full-scale outsourced project-based model, which we’ll discuss below. It’s a middle ground between staff augmentation and project-based outsourcing.

      Pros:

      • Maintains some control over your project while offering some flexibility
      • Draws from the strength of the outsourcing team’s project managers and strategists
      • Requires less involvement from the client than staff augmentation, while offering greater flexibility than the project-based model

      Cons:

      • Offers less control than the staff augmentation model
      • Offers less flexibility than staff augmentation
      • Continues to require some technical expertise from in-house staff, unlike project-based outsourcing

      Best for: Companies with an established in-house staff and moderate technical expertise, willing to maintain significant involvement in the project and collaborate with the outsourcing partner.

      Project-based model

      A project-based model of outsourcing involves turning over the lion’s share of a (typically) long-term project to an outsourcing partner’s managed team. A full-service outsourcing firm takes over project management, meeting with you to provide updates and gather feedback that guides the project.

      The project-based model requires minimal work from the client, beyond feedback and general guidance, since the outsourcing team manages the entire project and brings the necessary skill set to the table.

      Pros:

      • Minimal involvement required from you and your IT team, requiring less in-house technical expertise
      • Tends to be cost-effective since you need to hire fewer in-house team members, which come at a higher price
      • Allows you and your team to focus on the larger vision you’re attempting to achieve with your software product, from marketing to financing

      Cons:

      • Project-based outsourcing offers less control of the project
      • Less flexibility
      • More challenging to scale

      Best for: Companies that are willing to hand project management and other elements (such as UI and UX design) over to a trusted partner. It can also work well with those who have quick deadlines and need a product created in a short timeframe.

      Contract-Based Software Development Outsourcing Models

      The final selection for your outsourcing model will come down to the nature of your contract: Fixed pricing vs. time and materials. When combining different types of outsourcing models, you’ll find that certain combinations work better than others.

      Fixed-price model

      A fixed-price contract outlines a specific cost for deliverables. This is a less flexible model than a time-and-material contract, but it can help with budget control because you know in advance what you’re paying. On the downside, you have less freedom to expand the project requirements without revising or rewriting the contract.

      Pros:

      • Budget control
      • Clearly defined path forward for the outsourcing firm

      Cons:

      • Less freedom to add new requirements without writing a new contract
      • Less control over the project
      • Less scalability

      Best for: Companies with a fixed budget and specific requirements that are not likely to change.

      Time and materials model

      A time and materials approach for billing provides maximum flexibility since project requirements change over time. A reputable outsourcing partner will give you an estimate up front, with the understanding that new requirements or evolving circumstances can change the final cost.

      One thing that makes this an appealing option is that software development is an iterative process. You might have your partner design and build certain features, only to discover (based on UX research) that you need to add new features or shift your approach.

      Also, you may simply decide to add features based on your own team’s input, and a time and materials contract offers the power to scale.

      On the flip side, an unscrupulous partner could take advantage of a time-and-materials contract, so be sure to work with a reputable outsourcing company. That’s always a good idea for countless reasons, but it’s especially important with this style of contact.

      Pros:

      • Flexibility to expand requirements at will
      • Greater control over your project
      • Immediate scalability

      Cons:

      • Less predictable budget
      • Can present problems if the outsourcing firm isn’t trustworthy

      Best for: Companies who want project flexibility and scalability and are willing to expand the budget as necessary when the need for shifting requirements presents itself.

      Which Software Outsourcing Model Is the Best Fit for Your Project?

      Every company’s needs are unique, which is why we’ve presented the pros and cons of the various relationship-based outsourcing models we mentioned above. Note that we’re specifically focusing on the relationship-based models in this chart since this is the most complicated set of models to choose from.

      Staff Augmentation Dedicated Team Project-Based
      Scope Open Rough Estimate Clearly Defined
      Timeline Open Rough Estimate Clearly Defined
      Flexibility Strong Medium Minimal
      Team scalability Strong Medium to Strong Minimal
      Responsibility for Execution & Deliverables Largely Client Shared Largely Outsourcing Partner
      Client Involvement Active Medium Minimal
      Client Technical Expertise/Leadership Necessary Helpful Minimal
      Communication with Outsourced Team Every Day Regular Intervals Depends on Client Needs
      Project Mgt Responsibilities Client Shared Varies—but typically outsourcing partner
      Workflow Development Responsibilities Client Outsourcing Partner Outsourcing Partner

      Key Factors to Consider When Selecting an Outsourcing Partner

      Choosing an outsourcing partner is no simple task, and it’s not a decision to take lightly. When selecting a partner, conduct thorough interviews, ask tough questions, and make sure you’re dealing with a knowledgeable, honest team.

      We recommend looking for the following qualities when selecting an outsourcing partner.

      Experience: Choose a firm that has stood the test of time, with at least 10 years of experience or more.

      Testimonials, reviews, and case studies: Reputable firms will feature a library of case studies on their websites, along with unambiguous testimonials from past clients. You can also take a look at their reviews on websites like clutch.co.

      Language skills of potential offshore partners: Plenty of leading enterprises successfully outsource to overseas companies. If you choose to explore that route, have extensive conversations with your project managers to ensure they speak English (or your operating language) with a high level of fluency.

      Time zone requirements: If working asynchronously is not an option for you, find a partner whose team is willing to adapt to your time zone.

      Potential outsourcing partners’ skill sets: Ensure they’ve got a track record of performing whichever roles you’re thinking about hiring them for.

      Considering Software Outsourcing for Your Next Project?

      Net Solutions is a full-service outsourcing firm that has been around for over 20 years, helping enterprises as well as startups with every aspect of software development, user research, design, testing, project management, and product strategy.

      We offer staff augmentation, dedicated teams, and per-project models, and we can help you achieve your goals, just as we’ve done for well-known organizations like the Harvard Business Review and IMG.

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      Arshpreet Kaur
      Article written by

      Arshpreet Kaur

      Arshpreet Kaur is a Lead Business Analyst passionate about resource management and in-depth, data-driven competition analysis. She is a highly motivated and results-oriented individual with a proven track record of increasing team productivity.

      Arshpreet’s well-rounded knowledge of engineering concepts and a certification as a Scrum Product Owner helps her handle multiple projects effectively while defining the product vision and delivering value to customers.

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