Software Development Outsourcing #2: Types and Models

Introduction

Have you ever called a carpenter to make your home furnishings or connected with a baker to bake a cake for you? Yes, we all would have done this at a certain point in our lives. 

But do you know what this activity is termed when you get the work done by external professionals? It is termed "outsourcing.”. But, when we talk about it from an IT point of view we can term it software development outsourcing.

According to one study by Fortunly, the global outsourcing market is expected to grow by a huge $98 million from 2020 to 2024. 

This shows that outsourcing software development to external companies has become common among established businesses and startups. But which type of software outsourcing would help you attain business growth is still a question.

In this article, we’ve covered all the main types of software development outsourcing that you can choose from. Let’s understand all of them one by one.

Now, let’s first begin by understanding the different types of software development outsourcing.

3 different types of software development outsourcing

There are various types of software development outsourcing models; these models can be broadly divided into three categories:

The three categories are as follows:

• Location-based Outsourcing

• Relationship-based Outsourcing

• Contract-based outsourcing

All the above three are further divided into various sub-types. Before understanding the subtypes, let’s understand all three main categories in brief with their subtypes.

#1 Location-based Outsourcing

In this type of software outsourcing, decisions are made primarily based on geographical and economic factors. For example, it would be much cheaper to outsource software development work to an external team in another part of the world.

There are namely five subtypes when we talk about location-based software development hiring.

Onsite Outsourcing

In this kind of outsourcing model, a team is sent to work from an external premises for as long as the organization needs them. In this model, they will be employed by the outsourcing company itself. An onsite outsourced team would be closely working with the existing team to speed up the development process.

Onshore Outsourcing

In this type of outsourcing model, the outsourcing work is delegated to an outsourced team that is from the same country in which the existing team exists. This won’t be in the same city or region, but it would still give you access to expertise without any hurdles. Despite this being one of the simplest location-based outsourcing models, it has some limitations.

Nearshore Outsourcing

Nearshore outsourcing expands the options slightly, offering enhanced access to specialized skills and cost savings without the logistical challenges of significant time zone differences. Typically, this involves engaging an outsourced team from a neighboring or regional country.

Nevertheless, it is important to acknowledge that cultural, linguistic, and legal nuances might still present challenges, contingent on the specific countries in question.

Offshore Outsourcing

Offshoring involves delegating tasks to a global outsourcing firm, offering cost benefits and continuous work cycles. Success hinges on partnering with a trusted provider known for robust communication and secure data handling. We also provide a detailed guide on leveraging offshoring for business growth.

Multi Shore Outsourcing

Software development outsourcing offers the flexibility to mix different models based on your project needs and integration with your team. For instance, you can employ an onsite company for UX support while outsourcing intensive back-end development to a cost-effective Asian partner.

#2 Relationship-based Outsourcing

Under this structure, various teams are formed based on the nature of the relationship between the client & the outsourcing firm. Specifically, determining whether the outsourced team is integrated as a component of the client's internal operations or functions as an independent organization is essential.

There are namely three subtypes of this outsourcing type

IT Staff Augmentation Model

Staff augmentation involves hiring personnel from an outsourcing company to enhance your in-house team's capacity and skill set. These staff members can work either on-site or remotely, for a set duration or a specific project, offering a swift way to increase capabilities without the costs and delays of recruiting full-time employees.

Managed Team Model

In this outsourcing model, a dedicated team of developers is deployed to work on a specific project requirement. This time would work for the client for as long as the services are required.

Project-Based Model

Based on this relationship-based model, the outsourced development partner would manage & supervise the whole development work based on different project requirements.

#3 Contract-based Outsourcing

In this type of outsourcing model, it is to be seen how the outsourcing company is paid and for what tasks it is paid. This can be through a fixed price or a flexible payment option, etc.

There are namely two subtypes in the last category of types software development outsourcing.

Fixed-price Model

This approach involves agreeing on a total price for a development project's scope, skills, and deliverables upfront, providing financial predictability and avoiding cost overruns. However, significant changes in project scope could still lead to additional costs.

Time & Materials Model

Alternatively, consider the time and materials model, where the outsourcing firm tracks resource use and bills you accordingly. While costs might exceed initial estimates, this model offers flexibility, allowing adjustments to meet changing needs without compromising app quality.

In the below table, we’ve mentioned the Pros & Cons of all ten types of Software Development Outsourcing

Outsourcing Type	PROS	CONS
Onsite Outsourcing	Close collaboration with the in-house team. Immediate response to project changes	Higher costs compared to other outsourcing models. Possible cultural and language barriers
Onshore Outsourcing	No significant cultural or language barriers. Easier coordination and legal compliance.	Higher costs compared to nearshore and offshore. Limited access to global talent
Nearshore Outsourcing	Cost-effective compared to onshore Lesser cultural and time zone differences	Potential cultural and language nuances Limited talent pool compared to offshore
Offshore Outsourcing	Significant cost savings  Access to a global talent pool	Cultural and language barriers Time zone differences can complicate communication
Multishore Outsourcing	Flexibility to combine different models Tailored approach based on project needs	Complexity in coordination and management Increased overhead for handling multiple contracts
IT Staff Augmentation	Quick scaling of team capabilities Direct control over hired personnel	Can be expensive in the long term Integration challenges with the in-house team
Managed Team Model	Dedicated focus on specific projects Provider handles management and administration	Less control over team dynamics Dependency on the outsourcing firm's management quality
Project-based Outsourcing	Fixed scope and deliverables Outsourcing firm handles entire project management	Limited flexibility for scope changes Potentially higher costs for scope alterations
Fixed-Price Model	Predictable budgeting Defined scope and timelines	Risk of quality compromise to stay within budget Inflexible to changes and additional requirements
Time & Materials Outsourcing	Flexibility in scope and requirement changes Payment for actual work done	Uncertain total cost Requires close monitoring to prevent budget overrun

Now, let’s compare which outsourcing model will suit your business needs the most.

Which Outsourcing model suits your business needs?

Certainly, each application development project and business is unique, which means a variety of factors must be considered when selecting among different software development outsourcing models. Nonetheless, the table provided offers a broad overview to help you identify which models suit your needs and which ones you should steer clear of.

Software Development Outsourcing Model	Choose if you:	Avoid if you:
Onsite Outsourcing	Want to boost your in-house skill set	Simply want to outsource to save costs
Onshore Outsourcing	Want more skills without facing a language or cultural barrier	Want to work in a country with a limited talent pool
Nearshore Outsourcing	Want to save money by hiring an outsourced team in similar time zones	Want to operate with a region with many different cultures
Offshore Outsourcing	When you want to maximize your cost efficiency by broadening your skills	Do not have clear communication in place
Multishore Outsourcing	When you have a chunk of work to complete in a single timeframe	When you are not able to manage multiple arrangements at the same time
Staff augmentation model	When you lack an in-house team budget to hire full-time employees	When you are struggling to integrate a fixed-term staff into your team
Managed team model	When you need a group of developers across a range of skills	Want to have a close collaboration with your team
Time & materials model	You want a guaranteed delivery of the project	When you are concerned about cost overruns in the longer run
Fixed-price model	Want a full predictability of costs & prices	When you are looking to have lots of changes in the project scope
Project-based model	When you do not have time to manage the project	When you are aiming to retain control over costs & data.

Now, let’s understand what factors are important to analyze while choosing the right software development outsourcing partner.

What factors are important to analyze while choosing the right software development outsourcing partner

Before hiring a software development outsourcing partner there are some factors you need to consider.

Read How to Choose the Right IT Outsourcing Partner? to know all the factors that will affect your outsourcing software development decision.

Wrapping Up!

Software Development Outsourcing has become an effective method to build custom software. In this article, we learned the different types of Software development outsourcing options available. We also learned the factors that are important to analyze when you are opting for a software development outsourcing partner. 

If you are fascinated about Software Development outsourcing & love this series then go nowhere as we have a lot more to cover in the upcoming parts. Stay Tuned!. Also, if you missed out on reading the first part then worry not you can read it right now!