In the digital age when everyone is connected in one way or the other, it seems pretty reasonable to have teams that are spread all over the world. In fact IT outsourcing has become easier to manage and diverse teams from different countries have come together to create some truly amazing products and solutions.
Outsourcing lets companies focus on their core competencies and frees management time, while making sure development is being carried out by their offshore team which is equipped to handle the product.
Outsourcing is the cooperation between two firms that usually belong to different companies where one company is looking for services or processes and the other company offers those services. Over the past few years, the trend of outsourcing services has developed immensely. It has been proven to be an excellent solution to reduce operational costs and time to a significant level.
Smaller and midsize companies work with established outsourcing partners that act as an extension of their teams but larger companies have found this model so beneficial that they have established offices in different parts of the world capitalizing on the skills of people from varied backgrounds.
Outsourcing refers to assigning processes or services to some external company instead of developing and managing them internally. This allows core teams to focus on the product roadmap, sales and marketing while outsourced development teams implement new features. Outsourcing releases you from taking day-to-day action and decisions when it comes to managing the project so you can focus on the bigger picture.
From project planning to developing and testing to deployment, all the tasks are performed by the outsourcing partner. Outsourcing is widely adopted in the IT sector. The reason is that outsourcing benefits a lot by cutting management, equipment, and additional costs and saving time. Moreover, it eliminates the need of hiring and training new employees.
So before diving deep into the basic model of Information Technology outsourcing, let’s categorize the types of IT outsourcing models based on location.
Offshore outsourcing is defined as working with a partner company in any other country that has a different time zone. Offshore outsourcing is more common as it saves a large % cost. Offshore companies are approached mostly by countries that have high labor costs and are looking for countries that can provide the same high-quality services at lower prices.
Nearshore outsourcing is when a project is outsourced to a company located in neighboring countries and has the same time zone as yours. This option makes it easy for you to communicate with the development team and take regular updates. The cost saving in this model is less than offshore models.
Basic Model of Information Technology Outsourcing
According to a study published in Research Gate in 2005, “A Basic Model for Information Technology Outsourcing”, the following are seven key success factors that demonstrate the basic model of IT outsourcing.
1. Alignment to Business Strategy
The business strategy is taken into consideration with the mapping of appropriate outsourcing decisions. It is crucial to ensure that both you and your partner company are aligned well on business strategies. This is a dynamic process though and business strategies can be re-thought and re-engineered until they meet your ultimate goal.
2. Management Support
The second factor that plays a key role in the model of IT outsourcing is management support. This management support should ideally help with decision-making about your product and also be able to share key information to help make future decisions about your product. It also promises continual innovation with a well-thought-out scope of technical possibilities.
A cultural willingness by both the vendors and the organization should be balanced. It addresses the issues related to tax, licenses, policies, etc., and helps ensure enhanced communication between the partners. It also evaluates the political climates where needed.
For successful IT engagement, there should be a technical environment in place to achieve the outcomes. From software to hardware and networking requirements, a solid infrastructure addresses all the integration and interoperability components. Scalability, standard, and domain knowledge are important for effective infrastructure.
IT outsourcing contract samples are the formal documents that have all the requirements and commitments for the relationship between both parties. All the standards and measurements are defined clearly in the different types of outsourcing contracts.
6. Strategic Partnership
It fosters the relationship between business leaders, management teams, CEOs, CTOs, and CIOs. It includes the significance of vendor management and customer relationship management.
7. Governance Committees
This pillar highlights the need for both strategic and tactical processes that help identify the services that need to be outsourced. It takes into account the continuous monitoring of the expected outcomes, risk analysis processes, security, privacy, and cost analysis.
Types of IT Outsourcing Models
There are different types of outsourcing models used in supply chain management, software development, various billing and invoicing software, etc. that totally depend on the dynamics of the project. Some types of IT outsourcing models are:
Below are some models that are categorized as relationship-based outsourcing.
1. Project-based Model
Project-based outsourcing model hands over the entire project to the outsourcing partners. After giving all the details of the functional and non-functional requirements of the software project, it is the responsibility of the partner to develop and deploy it for the duration of the contract.
2. Staff Augmentation Model
In this model, an outsourced team is hired in-house that manages all the internal programs. The client then has access to the entire outsourcing project and manages them on its own.
3. Managed Team Model
In the managed team model, the outsourcing service provider and the host company both distribute the responsibilities with each other. The teams take control over some sets of tasks. The clients also take regular updates and have control over the development team to get to know the status of desired outcomes.
Outsourcing Pricing Models
Pricing frameworks are an important part of outsourcing models that keep on changing with time. However, it depends on the project and the types of outsourcing models against which you can get the maximum value of the project.
1. Fixed Price (FP) Model
It is one of the old approaches to outsourcing pricing. In the FP model, a standard rate is given to the client based on the preferences, tools that will be used, and the workspace charges. The outsourcing services provider gets the payment once the project is completed. However, the outsourcing partner can ask for payment settlements when a particular milestone is achieved.
2. Incentive-based Model
This model applies when the client increases the requirements in the project and accordingly, payment is done. In this, the goals and outcomes exceed the pre-decided commitments.
3. Shared Risk-Reward Model
The shared risk-reward approach involves an additional bonus when the outsourced team achieves a particular milestone. It encourages the team to formulate more interesting concepts that can contribute to the enhanced performance of the project. Moreover, it reduces the risks associated with the project and employs the latest technologies and models.
4. Time and Materials (T&M) Model
The T&M Model involves bidding after which the outsourcing partner presents a proposal based on the client’s requirements. In this model, it is also mentioned whether the team will work in-house with a client or just under the client’s supervision.