Business Models in Software Outsourcing

What software outsourcing business models are there? How do they differ? What business model suits your project the most? 

Choosing the most appropriate business model for a software project may be a hassle, which can lead to frustration and can slow down the whole process significantly. However, if you are informed, you are prepared.

Let’s make this article short and clear. So, the most prevalent business contracts in software outsourcing are

1. Fixed Cost
2. Time and Materials
3. Dedicated Team 

1. Fixed Cost

The name speaks for itself: the scope of the project and, as a result, its final price are strictly defined and will not change. In addition, the duration of the development process is predetermined as well. 

The fixed cost is usually implemented if the client shares his or her vision with a software company in the slightest detail and there is not any ambiguity regarding project scope or requirements. Fixed cost is quite a rare kind of the beast compared to other outsourcing contracts because it is rarely possible to completely specify all of the project variables.

Therefore, the fixed cost model is best for small projects with well-defined scope and requirements that will not change. However you should consider that in the ever-changing market, flexibility is the foundation for success. 

2. Time and Material

In case of the time and material business contract, a client pays for the labor hours and cost of materials (hence the name of the model). The final price of the project is not predetermined. A software company and a client should agree on the hourly rate instead. Consequently, the duration of the project’s development is not specified as well. Unlike, the fixed price business model, the time and material contract is flexible and adjustable, you can change the number of hours invested in the project depending on changes in the scope of the project or its budget. In addition, it allows for changing the size of the development team. 

Time and Material business model is best when

- the scope of the project is not completely known or can change 
- the project requirements are dynamic
- the budget of a project is not constant
- the flexible, incremental approach to the product development is required

Time and Material contract can be intimidating to some people because of the ambiguity that it implies. However, the flexibility that the model provides is more than enough to compensate for this “mental inconvenience.”   

3. Dedicated Team 

A dedicated team is a business model in accordance to which an outsourcing company provides a client with a team of software specialists who work on a fixed monthly salary and are chosen according to the client’s demands. The client has the possibility to manage the team or assign a project manager (PM). The team works only on the project it is assigned to.

Dedicated team contract is best for

- middle and long term projects that require flexible development
- projects without clearly defined scope
- clients who want to manage a development team

We already have an article on this one. You can read it here for more information.