Top 3 IT Outsourcing Pricing Models

February 21, 2022 yasir saeed 0 Comments

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Introduction

When businesses finalize their decision, outsource software development projects to an ideal offshore or nearshore technology partner. During this process, one critical question arises about how to pay and what pricing engagement model is suitable for them. You can read our latest article to understand the value of offshore software development. 

According to this article, companies should follow an effective pricing engagement model that perfectly matches the project size, requirements, which can ease collaboration, stabilize their budget allocation and boost project efficiency. 

Every Software development project provides desired outcomes when you supervise and handle them by the most appropriate outsourcing engagement model. We will give you a better idea and assist you in making a better selection of the top three widespread pricing engagement models based on the pros and cons of each model with a comparison graph. We have explained in our previous article how to choose the right outsourcing partner.

Today in this article we are heading to analyze the top three Outsourcing pricing models that deliver maximum productivity for outsourced projects:

  • Fixed Price Model
  • Time and Materials
  • Dedicated Team

1-Fixed Price Model

The Fixed price development engagement model depends on the predefined crystal clear scope of the project between vendor and client. At the beginning of the project, the customer provides a comprehensive list of project requirements and required software development expertise and experience to the vendor.

The Offshore development vendor calculates the time frame, cost, tools, workspace, and the number of software engineers required to complete the project and finally proposes a fixed price budget plan.

In the Fixed price model, the customer makes all payments on predefined terms and conditions. In this model price of the services are not changeable unless exceptional conditions clauses were added to the agreement. 

When Fixed Price Model should be applicable?

➤ Comprehensive product requirements are completely pre-determined in representations of UI/UX design and product features before executing the development process.

➤ Extensive technical documentation is adequately prepared and ready to execute for the development process.

➤The project delivery time and budget allocation are fixed.

Pros of Fixed Pricing Model:

● Predictable Cost

 The Fixed price model offers agreeable pricing negotiation for the client and vendor before the agreement is signed. Before initiating the project, both parties’ client and the development company can completely predict the cost and budget allocation. The client is also aware of what they are getting.

● Deadlines and Time limit

During a fixed price model contract between client and vendor, project delivery deadlines are clearly defined and the project completion time limit is also clearly outlined.

● Tracking and assessment

In the Fixed-price model, you can assess the project during the development process because the project quality standards are predefined in the contract before execution.   

● Nominal Project Management

In the Fixed-price model, all important points are predefined and documented in the agreement by both parties. So the nominal project management is required by the client and software development vendor.

● Develop Your desired Product

When you implement the complete Fixed price model, you discuss all project requirements with the software development company in detail before initiating the project. As a result, your technology partner will produce the software with full functionality, and it will fully match your defined technical specifications in the project.

Cons of Fixed Pricing Model:

● Time Consuming

In the fixed-price model, the client and vendor require thorough planning and documentation from both sides. The software development vendor is also required to make a comprehensive roadmap for your development project. It takes several weeks to calculate cost correctly and make a strategy. This is the main reason; a fixed price model will not be an appropriate choice If you want to complete the project in a short period.

● Agreement Limitations

In the Fixed price model, adding more features or modifying existing product features after signing the contract is prohibited. So you are unable to revise, adjust or add more features to the project’s scope when technology trend changes due to evolving market conditions without negotiation with your software development company. There is a massive chance of project delay or exceeding project cost.

● Dedicated Supervision

In the Fixed-price model, the client or software development company requires a dedicated Project Manager to ensure the project is developing according to predefine deadlines and maintain its quality. There is a huge risk of skipping required features to meet the project quality without the supervision of a dedicated project manager.

2-Time and Materials Model

The time and Material pricing model is an extra flexible practice that is very popular in the IT outsourcing world as the cost and material model.  In this engagement model, the client pays in small portions only for the job completed during the billable hours. This model has a pay-as-you-go approach, and it enables customers to pay only for the task completed (which Exactly matches the client’s necessities).

This approach is suitable for long-term projects. In the time and material model, clients can make modifications to the product, change or rearrange its features and they make sure to get the perfect product according to end-user requirements. 

The software development company generates a monthly report to give insights about completed tasks and issues invoices along with these reports.

When Time and Material Model should be applicable?

➤ The time and material model is applicable for those projects in which the product specifications and necessities are continuously changing with time. 

➤ The time and material model is applicable for long-term projects that require dynamic product development, unspecified deadlines, crystal clear and agile project development.

➤ The time and material model is applicable if customers want to constantly interact with the development team and make changes to the product according to market changes and customer needs.

Pros of Time and Material Model:

● Flexibility and Ease of change

The time and material model holds the big benefit of mutation and adjustment in the development process. It allows the customer to make changes in project necessities, the size of the development team throughout the project cycle, and project scope.      

● Exactly match with market demand

The time and material model allows customers to alter project dimensions according to the market trend. This continuous modification and evaluation ability help to develop a product that fully matches the market’s latest trend. You can hire a dedicated project manager or in-house experienced technology expert or Scrum expert to follow the development process closely and minimize the chance of delay or going beyond the budget.

● Full Control and adjustments

The time and material model allow the customer to involve in the project development process. It enables the customer to get continuous development updates and reports from the software development vendor. Customers can give their feedback during the software development cycle, readjust users’ stories, erase misinterpretations, and adjust project requirements after each modification.

The software development companies are excessively utilizing modern project management tools like Azure, Jira, Boards, Trello. Some companies use their developed project management tool to enhance collaboration between the development team and the customer.

Cons of Time and Materials:

● Cost is unpredictable

The project scope and requirements are not thoroughly predefined in the time and material pricing model. The project’s final cost may increase in case of different adjustments and modifications by the client. In this model, you cannot do cost estimation in advance because it may alter during the development process.

● Additional collaboration and effort

In the time and materials model, client and vendor require full collaboration and involvement throughout the project development process. It requires extra time, resources, and effort from both sides. The client has to allocate more time, budget, and resources to collaborate effectively with the vendor to keep the development process on track. It increases management efforts and consumes more time.

3-Dedicated Team Model

The dedicated team model integrates the features of the Fixed price model and time and material model. This model is also a little better than the previous two models. The dedicated team pricing model is a sort of financial agreement with the offshore development company where you engage (QA engineers, developers, designers, Project managers, etc.).

The software development vendor builds a development team as per the requirements of the clients’ projects.  The cost of this agreement includes these features:

1- Salaries of Development Team members

2- A contractual fee for hiring the team, administrative needs (Workplace charges, internet, etc.)

That team incorporates into your in-house IT department without any recruiting and managing process. In this financial agreement, you pay a fixed monthly fee to your software development partner as agreed in the contract for every dedicated IT resource.

When Dedicated Team Model should be applicable?

➤  You want to enhance your software development team but facing a severe shortage of specialist IT resources in your in-house IT team.

➤ You want to implement a long-term software development project with dynamic goals, scope, and high technical expertise.

➤ You have a clear vision and road map for your project, all project necessities are available, and the development is near to begin.

➤ Your specialist in-house project manager directly supervises the entire software development process.

Pros of Dedicated Team Model:

● Enhance in-house Technical expertise

The small and mid-size businesses in the US, Western Europe, and Australia can fill the shortage of domestic skilled IT experts by hiring an offshore software development team.

The dedicated team model enables businesses to fill the gap in their in-house team without losing the quality of products. The dedicated team model enables businesses to enhance technical development capacity, productivity, technical expertise as well as companies can achieve a high growth rate.

● Predictable Cost

In the dedicated team model, the cost is more predictable and transparent because all terms and conditions are clearly defined in the contract between the client and the software development company.

● Adjust according to Market trends

The dedicated team model offers flexibility, this model helps businesses to adjust team size, project scope, and requirements according to market trends. This engagement model enables you to extend your development team in a short period.

● Get Competitive advantages

A company spends a lot of time and resources to hunt the best full-stack engineers, the well-known tech giants like Microsoft, Google, and Facebook always attempt to hire the best IT professionals. Hiring the best IT staff from US domestic market is extraordinarily expensive and in short supply.

The dedicated team model enables companies to take the competitive advantage of hiring skilled IT teams from offshore outsourcing partners in South Asia and Eastern Europe, at the lowest cost with a high standard of expertise. Businesses can hire a dedicated IT resource from South Asia or Eastern Europe at cheap rates like $40 to $55 per hour, as compared to the US IT resources are taking $100 per hour.

● Effective Control

The dedicated team model allows you complete control over the software development cycle and financial structure. In this model, clients need to pay full-time attention. If you appointed the right dedicated team, then the project management will become quite easy to monitor the software development process with the help of the project manager.

Cons of dedicated team model:

● Suitable for long term projects

The dedicated team model is not appropriate for short-term development projects. It is a very time-consuming process to hire an offshore development company, setting up communication protocols for a new development team. This type of collaboration model is suitable for long-term projects with changing necessities. Mostly offshore IT outsourcing companies are not providing dedicated technical teams for less than six months of project duration.

● Time taking Process

In a dedicated team model, exploring the right offshore development partner is a time-taking process, and it also requires communication, evaluation, and negotiation regarding a contract. First, you need to analyze your project requirements, scope, and whether a dedicated team model is the best choice for your project or not.

● The hiring of a Project Manager

The dedicated team model requires full-fledge control of all development tasks. In this model, the clients need to pay an extra cost to hire a private project manager to keep the project in the right direction. The Project Manager will take care of the routine team management tasks.

Final Thoughts:

It is always challenging for businesses to choose the most appropriate outsourcing engagement model to negotiate with an offshore software development vendor. You can read our previous article: Top 5 IT offshoring delivery Models for the right selection.The selection of a perfect engagement model depends on the size of the project, time, budget, and scope of work. You need to consult with the right outsourcing provider like Zepto systems having 13 years of IT outsourcing experience. The Zepto systems use its experience and professional expertise to prepare the contract aligned with the client’s project requirements.

When Zepto systems would understand the scope of your project, required skill sets, expected budget, and time duration to complete your software development project. After a thorough evaluation, Zepto systems will suggest the most appropriate engagement model, and it may be the Fixed Price, Time-and-material, or dedicated team model. You can check this article to know about Top 5 IT outsourcing Countries.

You can make the best decision for the most appropriate outsourcing engagement model after a quick consultation with Zepto systems, a reliable, scalable, and goal-driven IT solutions provider.