Types of IT Outsourcing Models:
Which Model to Choose?
IT outsourcing is one of the efficient ways to remain competitive in the business landscape, especially when it comes to the tech domain. In times of the rapid development of technology, keeping a diverse in-house team and utilizing resources within the organization can significantly increase the product’s total cost of ownership and slow down its time to market — it takes time and requires investments to regularly upgrade your team’s skills, and even in this case your company may still lack necessary competencies.
For additional information, read the following article: “The Top Five Benefits of IT Outsourcing”.
IT outsourcing addresses these issues and allows for strengthening your expertise with the use of external resources. If you consider outsourcing for implementing your long-term strategies, you should also be aware of different types of IT outsourcing models.
Generally, IT outsourcing models are divided into several categories depending on location, relationship, and pricing.
Location-based outsourcing models
This framework focuses on the location of your outsourcing partners.
- On-site outsourcing. This model implies inviting external service providers to your physical environment.
- On-shore outsourcing. It means that you cooperate with your external team within the same state or country. The main advantage of this model is that there is a minimum of cultural or language barriers
- Nearshore outsourcing. Within this model, a company hires third-party vendors that are located in neighboring countries and have the same time zone.
- Offshore outsourcing. This type of outsourcing covers more distant locations. For example, a U.S. company hires an outsourcing team from Ukraine.
Relationship-based outsourcing
This model defines the method of cooperation between outsourcing partners.
- Staff augmentation. It can be similar to on-site outsourcing where a company temporarily rents additional resources. Within staff augmentation, a company also augments its resource capacity with external talents. It may happen either on-site or remotely.
- Managed team model. In this model, both the internal organization’s team and external vendors take part in the same projects, while each party takes responsibility for a particular process.
- Project-based model. This type of outsourcing entails the delegation of the entire project to a third-party service provider.
Outsourcing pricing models
There are also different types of pricing frameworks for IT outsourcing.
- Fixed-price model. It’s considered quite an old-fashioned approach to an outsourcing partnership. In this case, a third-party vendor sets a standard rate and charges monthly. To implement this model efficiently, the vendor should provide the host’s company with full details of the project scope/technical task.
- Time and materials model. It is most widely spread among IT projects. Within this model, a client pays only for the time and resources spent on the project.
- Incentive-based model. This model implies additional payments if the performance of the product significantly exceeds the initially outlined metrics.
Conclusion
The practice of outsourcing IT projects to external vendors is frequently used in the IT environment. It enables tech companies to considerably reduce the cost of the product without sacrificing the quality of the work. There are many types of outsourcing models available on the market to mutually benefit the cooperation between parties.
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