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Software Development Outsourcing Models

We’re living in a time where vast technology solutions are within our reach, among them – IT outsourcing. But before we dive into details about its division along with pricing models, let’s answer the question – what is software development outsourcing? To be as simple as possible, software development outsourcing is creating software using the engineering resources of a third-party software company to handle and work on the development of their product or task. What’s worth noting is that IT outsourcing is becoming more and more popular and prevalent, with the global outsourcing services market being worth $92.5 billion dollars in 2019.

By Wojciech Baranowski

Published: 15 April, 2021

Last update: 26 May, 2023

Software development outsourcing is a broad term that covers different models based on the outsourcing type and location. In this article, we will focus on the former. Speaking of models based on location, three of them can be recognized: offshore, nearshore and onshore.

Software Development Outsourcing Models

Building a team from scratch can be a hard, time-consuming and costly process. From conducting the entire recruitment, through eventual onboarding to setting up a team. That surely is quite a challenge. Instead, companies tend to turn their eyes into a different direction – somewhat similar, but not exactly the same. The growing popularity of IT outsourcing creates an opportunity for companies to outsource dedicated teams to suit their needs and work on their projects.

Choosing the right outsourcing partner and model may seem like a difficult task. The variety of software outsourcing models can also cause quite a confusion. But fear no more, we’re here to help!

Hiring a dedicated team of professionals can greatly influence the company – in a positive way of course. It can make the company employees focus on their tasks, while the dedicated development team works their magic on the entrusted project. Depending on the chosen model, the involvement, costs, time spent, that all can change.

Now, we are ready to dive into different IT outsourcing models.

Staff Augmentation Model

Also known as team extension, staff augmentation is a very efficient IT outsourcing model that can significantly benefit a company. In this model, an outsourcing partner provides a business with remote employees that can work on their project. It is an ideal model for those who currently work or have already worked in software development or for those who know which roles are missing in the team. If you need additional employees to help you achieve your goal, this is your go-to outsourcing model. They can also join your already existing team!

Why is it efficient and helpful, you may ask? Well, it can not only reduce costs of conducting a recruitment, but also enables a company to focus on their current tasks without delegating more of their own employees. Depending on your company’s needs, this model can be applied to short- or long-term projects. This time, project risk is the responsibility of the company.

What’s worth mentioning, we have once been contacted by Shane Carslake from the SHANE company who had a very clear vision of what he wanted to achieve. After consideration, both parties agreed that the best solution would be to partner on the basis of a staff augmentation model to deliver a web application that would introduce an entirely new quality and user experience to the Canadian real estate market and clients.

Of course, not a single thing in this world is without a flaw. It may appear that the staff augmentation model is by far the best one, but it can also cause a slight headache. You should take into consideration the fact that using this outsourcing model may result in some unpredicted problems.

The Pros

  • Reduced costs of the recruitment process, training, development, or HR;
  • Doesn’t require relegating your own employees, which results in maintaining focus of the in-house team;
  • Scalability;
  • Wide range of outsourcing providers;
  • Easier and faster onboarding;

The Cons

  • Onboarding and training still needs to be conducted (to some extent);
  • Managing in-house and outsourced teams may require more effort;
  • Time zone and language differences;
  • Risk responsibility is on your side;

To elaborate on that, let’s say that your company decides to hire a dedicated development team from a different country. Though most countries do speak English nowadays, some technical aspects of the language may still cause quite a bit of trouble. Along with language, time zones may also be the cause of slight communication problems. Depending on the outsourced teams’ location, the time zone gap may change.

In our company, we deal with time zone differences on a daily basis. Communication with customers from the Americas or from farther parts of the globe, like Australia, might be a challenge, though we manage to keep it under control with tools like Asana or Jira to make sure we share a common goal and vision, and with Slack or Google Meet that allow us to talk whenever a real-time synchronization is needed. That enables us to be in touch with our customers and benefits the mutual understanding.

Staff aug model

Team-Based Model

Have you ever found yourself in a situation where you had an idea but had no resources or manpower to make it come true? Here is when the team-based (also known as the dedicated team model) comes into play.

The dedicated team model is an ideal example of software development as a service. Instead of choosing separate members, you hire an entire team. You don’t have to know each and every specific role in it though. You simply need to know what you want to deliver, the rest, i.e. who and how, will be taken care of by the outsourcing company.

The team-based model is one of the outsourcing models that is particularly important for companies who look for an entire dedicated team that can work independently on the assigned projects. The team usually consists of various people in different roles, all of whom can provide in-depth expertise. When it comes to the project risk, it is being shared between the hiring company and outsourcing partner. If you’re looking for more than just a couple of employees, then the dedicated team model might just be the right choice for you. Moreover, you may consider calculating eNPS, which is an important metric that gives insight into how you can retain great employees.

Going back on track, the team-based IT outsourcing model is often used for long-term projects. One of the biggest pros of this model is that you are the decision-maker, as the team usually contacts you on a regular basis with progress reporting and other important issues.

We mentioned it before, but let’s ask that question – what about people? Who should be a part of an ideal software development team? Well, a dream-like team should consist of a project manager, front- and back-end developers, UX/UI designer, quality assurance, and you, the client, who would be in a position of a product owner, which means that you would attend:

  • Planning meetings (where you would share your vision, goals, and priorities);
  • Refinement meetings (where requirements would be clarified, based on the questions from the development team);
  • Review meetings (where you alone or with other stakeholders would verify if the goals have been achieved);

You would not be required to attend all the meetings of course. You could easily skip ones like technical or daily meetings.

The Pros

  • You remain the decision-maker with control over the team;
  • Reduced costs of the recruitment process, training, development, or HR;
  • Scalability;
  • Wide range of outsourcing providers;
  • Easier and faster onboarding;
  • A dedicated team of professionals working exclusively on the assigned projects, which allows you to focus on your business and its goals;
  • No need for learning software development to achieve success, as the team can answer your questions and handle the work;

The Cons

  • Onboarding may require extra resources;
  • Time zone and language differences;
  • Although this model will allow you to focus more on the business goals and end-user needs, it surely is more time-consuming than other models, i.e. fixed price;
Dedicated staff model

Project-Based Model

On the contrary to the team-based model, the project-based model of software development outsourcing is about assigning a single, predefined project to a team. A dedicated team of experts handles the task from the very beginning to the end, taking a huge chunk of the responsibility off your shoulders.

In a project-based model, completing the team is the responsibility of the partner. Similarly, project risk falls on the outsourced team. Though, as safe as this outsourcing model might seem, it still carries certain risks. Usually, the project-based model correlates with fixed price payment, therefore, it is not the most cost-effective solution. Unforeseen problems and issues might appear during the development process. When that happens, the client should be able to cover the expenses by including a money buffer to the project beforehand. Also, out of the three IT outsourcing models mentioned above, the project-based one leaves little space for change.

Though it may seem like a perfect choice, by deciding on this outsourcing model you are obliged to explain in detail the specifics of the project to avoid any potential misunderstandings. You also need to be clear and concise about what you’re trying to achieve.

It is an ideal solution, though, for a company with very specific needs or a clear idea of what they want to achieve.

The Pros

  • The outsourced team focuses entirely on the sole assigned project;
  • A selection of highly-skilled experts;
  • Reduced cost of running a project;
  • Responsibility for project risk falls on the software development company;

The Cons

  • Requires plenty of time and effort for creating detailed documentation;
  • Requires time for estimation;
  • Less control over the development;
  • Time zone and language differences;
  • Some security issues may occur due to the lack of control;
  • Might be more expensive than the team-based model;
  • Ideas, knowledge, or requirements you may have had half a year ago, could be potentially very outdated on the day of the release;
  • Doesn’t leave much room for agility in terms of scope;
  • Not recommended for markets with companies who want to quickly react to the market and client needs;

Software Development Outsourcing Pricing Models

Time and Materials Model

This pricing model is recommended for a company that has a vision for their product but may want to make changes during the development process. Payment terms are pretty simple – you pay for the amount of work that has been done.

You have full control over the project, which means you can make changes at any stage of the development process. Daily work reports, timesheets, or weekly review meetings – you name it – a good software development company leaves nothing to coincidence and makes sure to deliver exactly what you intended on each step of the way. The key factor of this model is transparency between the client and the software developer. If it is present, then only the sky’s the limit.

If you keep wondering when or why you should decide on that payment model, here’s a little summary:

  • It’s a comfortable solution for anyone with a clear vision of their product but without the exact knowledge about its execution;
  • You can make changes at the beginning, in the middle, or at the end of the development process;
  • Payment is calculated by the time spent and the amount of work done by the development team;
  • You have total control of the project costs.

Fixed Price Model

comfortable payment option for those who have a clear vision of their project. This fixed price model should be considered by those who have thought their idea through and calculated the estimated costs. In simple terms, it means that the client pays a certain amount of money for the predefined time and work. This pricing model is usually used for projects with a closed budget, thought-through product vision, and a good idea of its execution with, for example, already-made wireframes, documentation, and – for the best result – a clickable (not working) prototype. Though what often happens is a scenario where a project has to be altered, estimated costs changed, and the time frame extended.

This type of model is not recommended for use on big, complicated, and ambitious projects, due to the dynamic nature of business and unforeseen events. Concepts may also change over time resulting in changes in the project itself, which can additionally extend time frames.

Even if you have a closed budget, a fixed price model can still be the right one. Though, in this case, you should channel your focus on the client and agility at the cost of scope reduction or pivoting. Although, it still can be achieved if you are open to it. Then, along with our workshops, we could achieve the MVP in three months’ time, not necessarily perfect and entirely true to the original idea, but still important and worthwhile.

It is a well-known fact that even the most detailed product specification could be potentially discharged after a year due to the changing technology and updates. Take a look yourself and see how many days have passed since the last JavaScript framework update. Take it with a grain of salt, though.

It’s always best to visualize things, therefore below you can find a little comparison table:

Fixed Price vs Time &Materials

Key Takeaways

If you’re stuck on choosing the appropriate outsourcing model type, try thinking about your project. If you have a very clear vision, try the project-based approach. If you have an idea, but you’re not sure about its shape and form, go for the dedicated team model. And if you simply need additional employees to join your pre-existing team, the staff augmentation model type is your go-to solution. If you’re still hesitating, let me remind you of the most important bits:

  • By hiring a dedicated team to work on your project, you cut down the costs of recruitment and every related process;
  • Different types of IT outsourcing models allow for making a decision based on your needs;
  • You can choose what outsourcing pricing models could be applied to your project;
  • A dedicated team of professionals can provide you with expertise, as they are there to do what’s best for your company and your customers;
  • You don’t have to conduct recruitment and every related process.


And there you have it! Now, you should be able to successfully tell the difference between the outsourcing models and apply them according to your needs. The outsourcing market creates a field of endless opportunities, both for outsourcing companies and the client. It gives you the chance to create something that couldn’t be possible without a proper team. Next time, when a vision of a wonderful product pops up in your head out of nowhere, you should consider one of these IT outsourcing models.

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Wojciech Baranowski

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