IT Outsourcing Models - How To Choose The Right One in 2024

9 minutes read

Everyone has been talking about the tightness of the labor market but perhaps the technology sector has faced the biggest gap in talent so far.

According to the CompTIA Tech Jobs report, as of May 2022, the rate of unfilled IT jobs increased to 443k.

Another report by the Bureau of Labor Statistics predicts the rate of software developer shortage to be alarming. By 2026, it’s believed to increase to almost 1,2 million open job positions.

Part of this can be explained by the fact that companies are actively investing in tech and companies’ demand for skilled software developers is constantly growing.

Figures with a few noughts, the possibility to work from just about anywhere, and expensive training are just some of the perks companies offer IT workers, as they struggle to compete for the best talent in a tight labor market. However, others decide to hire talent from different locations, as this option saves much time and money, and what’s most important — don’t compromise on the quality of development.

What is IT Outsourcing?

IT outsourcing is the process of cooperating with external service providers to successfully deliver IT services and infrastructure solutions. The services provided by technology vendors can comprise a wide range of operations from software development, product maintenance, QA testing, and design to disaster recovery and data storage services, etc.

Outsourcing enables companies to exceed the time to market, reduce costs, give them access to a global talent pool, and ability to scale up fast.

Advantages of IT Outsourcing

Ability to Focus on Core Functions

While outsourcing, businesses retain the ability to stay concentrated on vital internal tasks of their organizations. Actually, everything except your core business procedures, in practice, is more cost-effective to outsource. This way, you eliminate stress, save money, and spend your time doing what you are good at.

Outsourcing IT services helps your business evolve and ultimately boost your ROI while professionals run IT operations instead of you.

Cost Savings

Outsourcing means saving money. Outsourcing is always cheaper than hiring an in-house team. And it’s not only about recruitment, office, equipment, insurance, vacations, and corporate parties. You increase your profit margins due to lower overheads.

Labor costs greatly vary depending on the country. For example, according to Indeed, the average salary of a .NET developer in the US is around $98k annually while in Ukraine it is much lower — $36k.

Capability Increasement

You incorporate high-quality deliverables and significantly decrease the time it takes for your product to reach the market. Consequently, you can translate your ideas into products much faster, keeping track of what is being produced by your third-party development and design teams.

Location-Based Types of Outsourcing Model

Depending on the location where your vendor operates, three location-based IT outsourcing models are differentiated.

Onshore Development

How it Works

Companies that opt for the onshore outsourcing model are hiring IT talent within their country.

Pros

# Ability to Collaborate in Person

When you choose onshore development, it’s much easier to meet in person than traveling overseas even if your vendor is located in a different state. Travel distance and time are considerably shorter which makes it easier to build a partnership and communicate your requirements.

# Cultural and Language Compatibility

Speaking the same language and having the same cultural background will contribute to the project’s success and eliminate misunderstandings in the process of development and design.

Cons

# Expensive

The cost of onshore software development in most cases will be significantly higher than the rates for the same services you can receive from offshore partners. Of course, it greatly depends on your location.

# Smaller Talent Pool

The range of services and tech stack is quite narrow as you choose from tech vendors available only within your country.

When to Consider

An onshore outsourcing model is a good option if you already have an in-house team involved in the project as in-person communication makes the development process smooth and fast, eliminating the risk of possible delays and language and cultural differences.

Nearshore Development

How it Works

When you choose a third-party vendor in a similar time zone that is geographically close to your country, it’s called nearshore software development.

Pros

# Cultural Similarity

According to Accenture, 69% of outsourcing deals fail due to the deficiency of cultural compatibility between the parties. By choosing the nearshore outsourcing model, you eliminate this risk.

# Flawless Communication

Since you and your software development partner are in the same time zones, you face no difficulty in arranging the meetings, onsite visits, and

Cons

# Limited Access to Tech Expertise

If you’re searching for a specific tech stack and domain, there might be a lack of experienced service providers or engineers in the neighboring countries.

# Higher Costs

While the nearshoring outsourcing model is less expensive than establishing an in-house development team, in most cases, it’s more expensive compared to offshoring. For instance, if an American company opts for nearshoring, it has to choose between Canada and Mexico. While development services there are less expensive than in the US, outsourcing to Eastern Europe, India, or China would be much more cost-efficient.

When to Consider

Nearshore development is a good option for both short-term and long-term projects when the customer wants to have more control over project delivery and teamwork.

Offshore Development

How it Works

The offshore outsourcing model means hiring a vendor from a distant country, in most cases, in a different part of the world.

Pros

# Access to a Large Talent Pool

ICIMS report states that in the last three years, the US employers managed to hire only 60% of the tech talent required though the number of applicants was twice higher than the number of open positions. The reason lies in the lack of qualified candidates. When you offshore software development, you can choose from the best tech expertise in any part of the world.

# Cost-efficiency

One of the most common reasons why companies decide to choose an offshore software development company is cost-saving. Outsourcing to a nearshore vendor slightly differs in price from outsourcing onshore while offshoring allows you to save sometimes even twice more than you would pay in your country or nearshore.

# Unique Expertise

Within a short period of time (in our inVerita, up to 30 days), you can fulfill the needs of your project in various tech stack and domains. In Eastern Europe, for example, companies invest in STEM and CS education of software developers on a regular basis so you can be sure to hire the uppermost talent at a considerable cost.

Cons

# Different Time Zones

Some people find it difficult to adjust to working in different time zones, waiting for replies, or fear a lack of control over the project scope. Though, from our experience, setting clear requirements and setting a stable and convenient for both meeting schedules will make the communication process smooth and simple.

# Risk of Cultural Incompatibility

Unfortunately, business owners frequently ignore the risk of cultural incompatibility while choosing an outsourcing partner. However, it’s one of the most common reasons why cooperation fails. A common example is the Indian “yes” syndrome. In Indian culture, people try to avoid giving negative answers, so if you receive a positive answer for your question, most probably it means “I’ll do my best”.

When to Consider

Complex, long-term projects when the in-house development team is absent or small.

Relationship-Based Types of IT Outsourcing Models

Based on the type of cooperation with a vendor, there are three IT outsourcing models.

Staff Augmentation Model

How it Works

The IT vendor provides you with a number of remote professionals whom you manage on your own.

Pros

The model is suitable for short-term and long-term projects.
You have full control over your teams.
It’s easy to scale up and scale down to adapt to the evolving business needs.

Cons

Responsibility for project success lies exclusively on you.
Possibility of communication gaps.
The customer takes care of onboarding and managing an outsourced team.

When to Consider

Staff augmentation is a good option if you don’t have enough expertise in a particular technology or domain or you need to speed up the development process.

Managed/Dedicated Team Model

How it Works

A vendor provides you with a team that works exclusively on your project. This team may include not only software developers but also designers, QA engineers, business analysts, and a project manager, depending on your needs and budget. The outsourcing company is interested in compiling a team that works well together and feels for a customer like an in-house team.

The budget of the project depends on the number and expertise of people involved.

Pros

The customer has complete control over the project delivery and work process, and the ability to choose team members or apply any staff changes.
The ability to increase or decrease your project, and adjust the conditions through an agile approach.
A team has a full understanding of your project, industry, and business domain, as it works exclusively on your project.
Full control over the budget.

Cons

You need to wait for your team to be allocated (time depends on the company).
It’s not sustainable for very short projects.

When to Consider

A dedicated team outsourcing model is the best option for long-term projects with a specific product niche when the customer aims at delegating management processes though still remaining engaged in decision-making and controlling the pace of development.

Project-Based Model

How it Works

The outsourcing company takes full responsibility for the entire process of software development from planning to release.

The customer pays a fixed price agreed beforehand or pays for the number of hours needed to complete the scope.

The vendor is obliged to deliver the product according to the specifications and deadlines agreed upon beforehand while all management tasks are held by a PM assigned by the outsourcing company.

Pros

Definite timelines and deliverables.
The ability to focus exclusively on your core business.
The responsibility for the execution and delivery of the final product is on your vendor.

Cons

Limited control over the project and development team.
A customer must define the full specifications of the project at the beginning.

When to Consider

The project-based model works well for startups, and enterprises with small or no internal development teams.

IT Outsourcing Pricing Models You May Adopt

Among pricing IT outsourcing models, two of the most common are:

Fixed Price

A fixed-price contract is based on the evaluation of time, price, and the amount of work to be done. The customer pays the mutually negotiated fixed price with future modifications that might arise resulting in timing and pricing adjustments.

Time & Materials

Also called the pay-as-you-go, the time and material cooperation model offers flexibility as you can customize your requirements and still pay the amount of time that the development team spends on your project.

The invoice is based on preset hourly rates of team members.

How to Pick an Outsourcing Model that Fits All Your Needs?

A few years ago, business owners were afraid of signing contracts with overseas partners due to time zone differences and fear of facing cultural incompatibility.

Today, with the endless opportunities of different communication channels, efficient team management models, and successful examples of software offshoring, the choice is obvious.

Every software project has unique requirements, therefore, most offshore vendors offer different types of outsourcing models to choose from.

At inVerita, we’ve established a solid partnership with companies from different industries and parts of the world. Being listed among the best B2B vendors on Clutch, we guarantee the highest service quality, weekly updates, and ramp-up speed of 30 days.

If you’re currently thinking of outsourcing software development, contact us directly to discuss the best IT outsourcing model for your project.

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