As per Deloitte’s 2016 Global Outsourcing Survey, 59% of the respondents believe that outsourcing provides an opportunity to businesses to reduce costs while 35% of respondents are already focused on measuring the value of innovation in their outsourcing relationships.
Continuing further, while businesses now view technology outsourcing as a medium “to activate, create, integrate, and amplify business value”, substantial cost benefit is still the driving factor when it comes to making outsourcing/ offshoring decisions.
To make sure that you derive maximum benefits from IT sourcing decisions, choosing the right pricing models for offshoring projects is essential for your success. In short, a pricing model is the foundation over which you build your technology outsourcing program
Which IT pricing model to go for?
Pricing models can be understood as contractual agreements between a service provider and a gainer to account for the effort put in for the development of a software product. Remember that there is no right or wrong pricing model. It’s your business need that dictates which model is a right fit for your requirements.
In this blog, we have covered 4 major pricing models that are generally offered by service providers. These are just indicative and an experienced offshore service provider like Kays Harbor will evaluate your needs and requirements before suggesting you the right model.
1. Fixed Cost Pricing Model for offshoring:
This is the most common pricing method also known as a transaction-based pricing model, which means it includes an agreement to get paid a fixed price for pre-decided services, to be delivered within a fixed time.
If you have a clear set of requirements which won’t change during the software development cycle, then this model is a well fit for your needs. An hourly price is bid for hard set requirements and agreed upon for a well-defined timeframe. It’s a perfect option for small or medium scoped projects where there is a uniform budget and no hidden or variable costs involved. The process involves enquiry, negotiation, a final proposal and agreement between the parties.
Some of the benefits that fixed cost model offers can be:
- Low risk due to high predictability
- Predictable project planning and scheduling
- Clear requirements
- Less client supervision
- Assured defined deliverables
- Known costs before project commencement
If you are planning to go with this pricing model for your IT offshoring plan, it is important to know that apart from the predictability and known service costs, this pricing plan can vary based on the market scenario. Plus, there are high chances of “surprises” in case your internal demand fluctuates.
If your requirements tend to fluctuate as per the needs, there are other pricing models you can plan for such as the Time & Material model.
2. Incorporating the Time and Material Pricing Model:
This model is more suited for software development projects that do not have a pre-decided end goal or a vision where flexibility is required from both the parties.
This model is fully negotiable and can use hourly, daily, weekly or monthly rates for the service delivery. Based on your feature specifications and use-cases, the service providers provide a detailed plan, development strategy, level of complexity, foreseen challenges and the pricing of each task, to which you can assign a priority.
If your requirements are not precise and have a constant scattered flow of tasks, this pricing model can benefit your business in several ways like:
- Facilitates Agile Development – development is incremental
- More client control over the project
- Task Prioritization
Keep in mind, this model needs strict control when it comes to final costs and requires more commitment and client involvement on a timely basis.
So, if you want to follow a strict time schedule but anticipate fluctuating requirements in between the project, you might want to opt-in for a mixed mode offshoring model.
3. Reaping the benefits of offshoring via Mixed Mode Pricing Model:
When your requirements are not specific but you want the job to be done in a strict time frame, a combination of fixed price as well as time and material model can come to your rescue.
This model leverages the best of the both the worlds, i.e. fixed duration/cost incurred along with dynamic set of requirements catered by the Time & Material model.
The pros of going ahead with this model include:
- Saves extra costs due to unplanned project schedules
- Better control over timelines
In short, you go for fixed cost model for those areas where your requirements are clear and are not bound to change, while you opt for T&M model for all the other areas.
If you are looking for complete control over the resources that will undertake your project, these IT outsourcing pricing models might not be beneficial for your organization. In this case, consider going on-board with staff augmentation.
4. Considering the Staff Augmentation Pricing Model for outsourced projects:
This model allows you to add staff to your team based on the additional skills required to support a project. What makes it beneficial – you get a dedicated resource for your project for a pre-decided duration under your own control.
This model comes with its own set of pros:
- Lowers overhead cost of hiring a full-time employee
- Control over staff
- Specialized skill inclusion – gives you the choice to choose an employee as per the skills and expertise required
- Aggressive timelines are met with ease
- Efficient support
This model can still pose a problem due to excessive reliance to internal processes which might slow down the development cycle. Augmented staff may require industry specific internal trainings which might increase the cost and duration of the project. Along with this, if you are not looking to consume your management resources in augmenting staff, this model would not work for your organization.
|IT Pricing Model||Description||Requirements Variation||Timelines||Client Supervision|
|Fixed Price Model||A model that includes an agreement to get paid a fixed amount for a pre-decided scope of services for example bug fixes, small/moderate feature enhancements.||Less||Strict delivery timelines||Less|
|Time & Material Model||A model that agrees on periodic payments for a long-term project, for example new product development and enhancement, legacy modernization, enterprise automation.||High||Incremental delivery timelines||High|
|Mixed Mode Model||A hybrid of the fixed cost and time and material model, for example a mix of enhancements and development at a fixed cost.||High||Incremental delivery timelines||High|
|Staff Augmentation Model||A model that requires dedicated skilled resource for a project, for example projects with maintainence and support.||High||Dynamic but strict delivery timelines||Very high|
Choosing the right IT business pricing model for offshoring can be a very complex decision. However, a carefully strategized and outlined decision is essential to your business. Mostly a hybrid model that combines the best of these pricing models is adopted to experience best results.
When you’re unsure of the right model based on your current and projected workload, ask our business solution consultant at Kays Harbor to get you on-board with the best business pricing and service models that will help you complete your projects on time at affordable costs.