IT outsourcing services: what are trendy software development contracts and models

In several developed countries, firms use IT outsourcing services as an alternative form of in-house software developers with higher proficiency.

For IT outsourcing companies, clarify the business model seemingly boost the efficiency in the process of collaboration with clients. However, keen on only one outsourcing business model might be impossible in a recently fierce competition of the software development industry.

Each model indicates both benefits and drawbacks, which challenge software development companies. In fact, the more models apply in business operation, the more effort should invest in the management process.

From the clients’ perspective, they might consider several types of contracts before signing any outsourcing agreement with any IT support services. For those who only have a disputable background of the offshore software development process, we generate a fundamental idea regarding work progress, payment term, and team management of each contract type. Whereas clients could find the most suitable one for their projects.

Software outsourcing development services lassification

In the current global market, there are two common types of outsourcing services, which are Business Process Outsourcing (BPO) and Information technology Outsourcing (ITO). Those services allow companies to operate beyond their inner capacity and ability. Businesses choose BPO services to maximize operational efficiencies. Alternatively, ITO providers promise to let their clients adapt to the technology race in the industry. This article will focus on ITO, known as software development outsourcing services.

Along with the advancement of the outsourcing market, small businesses use IT outsourcing to save time and effort in operation. Instead of building an in-house team tire with the worries of long training time, less expertise, and managing difficulties, IT outsourcing services might be a suitable way for startups or non-tech firms. So, what are the types and attributes of software development outsourcing services?

IT outsourcing services based on location

• Onsite software outsourcing services: using onsite services, host companies can have employees came from outsourcing providers to works as in-house staff in the host offices. The advantage of onsite services refers conveniently to manage. Companies prefer this type might offset the shortage of human resources in the short-term. However, the presence of new team-mate from other firms possibly cause disturbances among in-house team works.
• Onshore software outsourcing services: when a business outsources their works to another firm in the same country, it tends to use an onshore outsourcing service. Due to similar in language and culture, this type prevents the communication difficulty and culture gap. on the contrary, in developed nations, onshore outsourcing might put a heavy burden on companies’ budgets.
• Nearshore software outsourcing services: firms choosing nearshore software outsourcing, hire providers in some neighbor countries, frequently located in the same time-zone. Nearshore outsourcing might suffer difficulty in language and culture difference intern with a possibly lower cost of collaboration.
• Offshore software outsourcing services: offshore software providers have to locate in more distant areas. Firms in high labor cost countries prefer this type to cut down costs when keeping the same or even higher efficiency. Similar to nearshore outsourcing, offshore outsourcing project suffers difficulty in communication due to difference in time-zone, cultures, and languages.
• Multisource software outsourcing services: this type is the mix between 4 above outsourcing models. A Multi-source outsourcing project includes the collaboration of several producers in different countries.

Outsourcing services based on relationship 

• The model of staff augmentation: considerably similar to onsite outsourcing. In which, outsourcing providers lend their staffs to clients to joint clients’ team. Clients take comprehensive control of the whole outsourcing projects and leasing staff.
• Team-based model: in this model, a client agrees to hire an outsourcing development team, which does not work in the client’s office. Clients partly control the performance of the team to ensure the final result. Another control power belongs to the team or a project manager client hire.
• Project-based model: clients leave the most control power into the outsourcing team’s hand. Clients clearly define their requirements and do product acceptance. Outsourcing services providers are responsible for finish the tasks mentions in contract in a fixed period of time.

The main IT outsourcing services model for a software development company 

Cost-based pricing model

Cost-based models frequently apply to fixed-price software development outsourcing agreements. Clients for the fixed-price model usually have their comprehensive imagination of what software needs to be developed, including requirements, features, expected to launch time.

In reality, the outsourcing development company comes up with a cost-based model that could deal with the final price in the contracting process. Depending on the clients’ instruction of each project, providers make the quote, which is the cost of each specialist. Before clients accept the contracts, the outsourcing company will start to develop the software that exactly fits with each requirement. For any further support or extension are subjects for other contracts, which require clients to pay more. Generally, clients tend to expect the projects done among the contract period without any extension.

Team-based pricing model

The team-based model or dedicated team model is all about hiring an outsourcing development team to work for clients’ projects, which only takes place in the initial stage with a very restricted route. In other words, team-based provide a more flexible option for development projects, that clients can add extra ideas and requirements during the working period.

Using the team-based model, clients pay for the total working time that developers contribute to the projects no matter the tasks have done or not. In each dedicated team outsourcing model, clients own the right to add or subtract directly each specialist provider by outsourcing development services. In which, outsourcing team works in the same way as clients’ in-house staff.

IT outsourcing services agreement: pros and cons

Project-based outsourcing contract: fixed-cost agreement

1. A fixed-cost contract requires System Requirement Specification (SRS) at the beginning, which describes detailed specifications and functions. Furthermore, instructions of the development timeline, each milestone, as well as delivery times also included in the SRS document, used as a guideline for the developers’ team. Outsourcing companies could provide SRS to clients based on initial requirements.
2. Payment teams commonly divide into 2 periods: 50% contract value pay in advance and the remaining will be complete when final products delivered to the client. The number of payment terms is not fixed, which means clients can deal the way they want to pay based on each milestone defined in SRS documents.
3. Project-based outsourcing contracts are more suitable for short-term projects, of which the expected working time is up to 6 months.
4. In reality, while many companies believe that fixed-cost agreements prevent budget fluctuation, it might cause budget overrun in some situations. It is due to the poor performance in preparing plans and SRS documents.

Dedicated team outsourcing contract: hire IT outsourcing services team

1. Even non-tech firms can start with dedicated development team outsourcing contracts. Clients can participate in the hiring process, including requirement classification and interviews. They can select the right developers for themselves.
2. For long-term projects, clients should consider team-based contracts rather than cost-based contracts. Dedicated team outsourcing provides flexible works until getting complete satisfaction from clients
3. Clients easily add or reduce team members without any management issues, including training, welfare, and branding. The development company takes responsibility for that.
4. The dedicated team model holds the cost-effective in favor of firms in developed countries. Hiring a team in low labor cost like Vietnam can save over 50% salary budget with the same quality.