IT Outsourcing 101: locations, types of contracts, and useful tips
Outsourcing is nothing new in the modern business world, but there is still much confusion, fear, and misunderstanding around this subject. Yet, according to Statista, the global outsourcing market amounted to 85.6 billion U.S. dollars in 2018. Also, 78% of business owners across the globe are satisfied with their outsourcing partner. Therefore, outsourcing brings tangible benefits to a lot of companies, especially when it comes to IT outsourcing.
However, the decision to outsource doesn’t come easy, and it’s hard to choose a reliable IT outsourcing vendor with so many companies on the market. To take the first step towards a successful outsourcing partnership, let’s consider various forms of IT outsourcing depending on the location and the contract type.
3 primary reasons for outsourcing
Most companies that outsource software development, do it for the variety of reasons:
- Financial: to reduce the operating and labor costs, or to restructure and use the IT budget more effectively;
- Business: to focus on the business processes rather than development, to improve or share risk management;
- Technical: to access a specific tech talent pool, to improve the quality of IT services, or to adopt new technology.
Nowadays, almost any process in any field can be outsourced. However, the Deloitte Global Outsourcing Survey 2018  reports that technology & media, financial services, and consumer are the top three industries that refer to outsourcing more often than the others.
Types of outsourcing based on the location
When you hear the word outsourcing, what is the first thing that comes to your mind? Did you think of a particular country or region? Based on the distance between your company and the vendor, there are three primary outsourcing types: onshoring, nearshoring, and offshoring.
The company that delegates the delivery of IT services to another vendor within the same country or a close location is using local outsourcing, also known as onshoring. Among the benefits of this type of outsourcing are:
● same or close timezone;
● no language barrier;
● easily accessible.
On the downside, the cost of such services might be over the top.
If software development is outsourced to a country nearby (the one with the shared border or within the close proximity), we call it nearshoring. Among the examples of nearshoring would be Western European countries outsourcing to Eastern Europe, or the USA transferring particular services to Mexico. The pros of the nearshoring are numerous, including:
● close geographical proximity and same/similar timezone;
● akin business approach and cultural compatibility;
● cost and time efficiency.
Therefore, you can easily control the process and stay in touch with an IT vendor.
In cases, when outsourcing vendor and the customer are located in different time zones and far from each other, we are dealing with offshoring . Offshore IT destinations are often well-known for their services, e.g., India or Eastern Europe (in particular, Ukraine and Poland).
The benefits of offshore outsourcing include:
● reduced costs of the services;
● access to the worldwide pool of experts;
● convenience in terms of product support.
Here’s a map that explains various types of outsourcing for a company located in New York.
If you are considering offshore outsourcing, but have no idea where to begin, here is our step-by-step guide on how to choose the best offshore outsourcing company.
We should also mention the reversed process of bringing the outsourced operations back to your location - reshoring. It might happen when the subsequent expenses outweigh the gains of offshoring .
If a distributed team is working on the same project from two or more various locations, it is called multisourcing. For example, a company from Switzerland employs developers in Ukraine and India.
Outsourcing models based on the type of contract
There are three major types of cooperation models in IT outsourcing:
● fixed price
● time and material
● dedicated development team
So which type is the most suitable for achieving your business goals?
Fixed price is one of the most common software development outsourcing agreements. This form of outsourcing cooperation is excellent for short-term projects with a defined scope of work, well-researched requirements, and detailed specifications. Here is how you know that fixed price form is your best choice:
● Do you have a detailed description of the product needed?
● Do you have clear requirements for the product?
● Do you expect the product to be delivered within a few months?
● Can you avoid making any significant changes in the concept of the product?
● Are you ready to delegate all the technical decisions and project management to your IT vendor?
If you answered “yes” to all these questions, then you should consider a fixed price contract.
This cooperation model comes with certain benefits:
- No unexpected expenses, as your vendor commits to providing the defined amount of work for the defined sum of money.
- No direct supervision required. The outsourcing company carries the day-to-day coordination and communication, so you can focus on your business tasks rather than the development process.
- Lower risks. If the company fails to deliver the product within the specified deadline, you have the right not to pay.
However, choosing this form of collaboration, plan your time wisely to document all the requirements, technical specifications, and deadlines. Once the deal is sealed, you won’t be able to make any radical changes without having to pay for it.
Time and Material
For the cases when the project concept is raw, any precise estimates are not possible, or the deadline might vary, a time-and-material contract might be a much better alternative. You pay for the working hours spent on developing the pre-defined features.
This form of IT outsourcing agreement is flexible and sets the ground for long-term collaboration. However, you should answer these questions before rushing into any decisions:
● Does the project concept require the use of new technology or is expected to perform on the new, uncharted markets?
● Does the project concept require additional investigation that may change the scope of work?
● Will the development process require much flexibility?
● Will you need to control the project on the daily/weekly basis?
If case, you gave affirmative answers to these questions, then it is a good choice for your case. If you choose this type of contract, you will be able to:
- Control your budget and expenses. You can discuss the need for the particular feature, type of work that will be done, and how much it will cost you. Then you can decide whether you really need it.
- Start right away. As there is no need to provide the detailed specifications, you can begin working on the prototype or an MVP and see how it goes from there.
- Stay agile. Depending on the change of requirements of feedback from users, you can change the scope of work or the overall direction.
However, you need to remember that according to such contact, no specific deadlines can be promised and you will have to participate in many activities throughout the process. In addition, time and material is a quite expensive option since hourly rates of outsourced developers are much higher than paying them a fixed monthly salary, for example. So you will need to invest a lot of time in managing product scope and controlling the work of your outsourced team.
Dedicated Development Team
If you are looking to scale up or need expertise unavailable in your location, and you need a partner for long-term cooperation, then dedicated development team is the right option for you.
This is a group of professionals that are working on the specific tasks you entrust them to do, and they are a part of your team. The vendor charges you a fixed monthly fee which depends on the team composition and the seniority level of your developers.
When should you choose a dedicated team model?
Here are four questions that will help you decide.
● Do you need a customized business solution?
● Do you want to manage the team directly?
● Do you plan to expand your business in the future and need a vendor for a long-term cooperation?
● Do you need a team that will work only on your project?
Many companies choose this type of cooperation due to its multiple benefits, including:
- Direct communication. The team is always there for you to discuss any aspect of the work.
- Full control over the process. You can oversee every part of the process if you want to.
- The flexibility of the process. As you don't have to specify all the requirements at the outset, you can modify the scope of work for future iterations.
- An effective process. Such teams are focused on one product only, and they are interested in a long-term cooperation.
If you feel overwhelmed by all this information, here’s a quick visual guide for choosing the contract model for outsourcing.
There are several other types of contracts, such as a transaction-based pricing model, a managed services contract or hybrid models, that are used for specific cases, like business process outsourcing.
So while choosing the location and type of the contract, you have to clarify what you need and when you need it. Next, think about the budget you have and how it correlates with time and tasks. Next, research the locations that provide the services you need to outsource. Carefully considers all the benefits and drawbacks and choose the one that provides the best solution for your case.
- Bailey, D., & De Propris, L. (2014). Manufacturing reshoring and its limits: the UK automotive case. Cambridge Journal of Regions, Economy and Society, 7(3), 379-395. Retrieved from https://research.aston.ac.uk/portal/files/17934640/Bailey_De_Propris_final_paper_for_CJRES.pdf
- Doh, J. P. (2005). Offshore outsourcing: Implications for international business and strategic management theory and practice. Journal of Management Studies, 42(3), 695-704. Retrieved from http://hadjarian.com/esterategic/tarjomeh/1-89/daejavad1.pdf
- The Deloitte Global Outsourcing Survey 2018(Rep.). (n.d.). Retrieved February 5, 2019, from Deloitte Development LLC website: https://www2.deloitte.com/us/en/pages/operations/articles/global-outsourcing-survey.html