IT Service Outsourcing: 3 Types of IT Outsourcing Business Models you should Consider

| Malcolm Adams Last updated 17 Oct, 2022

IT Outsourcing Models — Image Credit: Charday Penn / Getty Images Signature

IT Service Outsourcing allows businesses to cut expenses while increasing their competitive edge. Organizations can also overcome existing skill gaps and advance more extensive initiatives through outsourcing.

Nowadays, there are several possibilities for outsourcing. Some outsourcing firms operate on a “turn-key” basis, while others offer to scale up your in-house staff. Although outsourcing is a wise decision, selecting the correct outsourcing model is critical for success.

Outsourcing your IT needs can help you save money and enhance your overall business performance. But how can you decide whether a particular model is right for your business? Below, we review many types of outsourcing models to assist you in making the best choice.

On this page:

Why Outsource your IT?
3 Types of IT Outsourcing Model Structures to Consider
IT Outsourcing Pricing Models
Choosing the Right Outsourcing Model for your Business Needs
Next Steps

Why Outsource your IT?

IT outsourcing is the transfer of responsibility for IT-related procedures to a third party, allowing compensation for the company’s lack of experience and internal resources.

IT outsourcing is a broad phrase that encompasses a variety of procedures, from the creation of a specific solution to the execution of individual IT services.

When businesses refer to IT outsourcing models, they tend to mean one of two things:

IT Outsourcing Model Structure, or
IT Outsourcing Pricing Model

Each of these is a different aspect of IT outsourcing and can be further separated as follows:

IT Outsourcing Model Structure: There are predominately 3 types of structures that businesses can adopt to fulfill their IT Outsourcing needs. These are:

IT Staff Augementation
IT Project-Based
Dedicated IT Team

IT Outsourcing Pricing Model: This refers to the method by which the outsourcing services are charged. These are:

Fixed-Price Outsourcing Model
Time and Materials (T&M) Model

Both these models complement one another, and if you are considering outsourcing aspects or even all of your IT services, it is vital that you understand these models.

Below we delve into each of these IT outsourcing models in more depth. But before we do, let’s examine why outsourcing your IT function is so popular with businesses.

Benefits of IT Outsourcing for Businesses

The outsourcing of IT operations to external providers affords businesses significant benefits. These include:

Ability to Focus on core Business Objectives

Businesses maintain the opportunity to focus on the critical internal responsibilities of their firms when outsourcing. In practice, outsourcing everything but your core business operations is feasible.

Outsourcing IT services allows your company to grow and increase its ROI by allowing specialists to manage IT operations instead of you.

Cost Savings

Outsourcing allows you to save money. Outsourcing is usually less expensive than building an in-house workforce.

And it’s not only about hiring, office supplies, equipment, insurance, vacations, and corporate parties. Because of decreased overheads, you boost your profit margins.

Building, training, and supporting in-house people, as well as dealing with related issues, much outweigh the cost, especially if a firm has a one-time project.

Capability Increase

Developing the necessary skills might take months or years, but an outsourced team can supply them quickly.

You include high-quality deliverables and substantially reduce the time it takes for your product to reach the market.

As a result, you can transform your ideas into products considerably faster while keeping track of what your third-party development and design teams are doing.

Regular Monitoring and Support

The extensive expertise of outsourced professionals allows them to resolve issues quickly. With external IT specialists, a business can continuously monitor its workload.

A professional team can resolve issues faster and more effectively than a single in-house support engineer.

IT Outsourcing Challenges

While the benefits of IT Outsourcing will appeal to many businesses, outsourcing parts or all of your IT can be challenging. Here are some of the challenges you should consider:

Communication Challenges: The distance between the customer and the outsourced workforce and the time difference impedes communication
Cultural and linguistic hurdles. Language and cultural problems may be considerably hampered by the interaction between the client and service provider teams
Security Concerns: Access by third parties to assets and sensitive data may pose a security risk.
Reduced Control: The dispersion of IT specialists hampers monitoring and management
Time to Implement: Adjusting to the client’s preferences costs time. Even service providers specializing in a specific sector or business domain must tailor their operations to the requirements of each customer
Hidden Expenses. Costs may arise from benchmarking and analysis, selecting a business partner, transferring company processes and expertise to an external source, and personnel assistance

3 Types of IT Outsourcing Model Structures to Consider

It is critical to understand the three basic outsourcing models used by diverse IT organizations worldwide. It will assist you in adequately strategizing the process and avoiding potential disputes or roadblocks.

Staff Augmentation Model

Using the staff augmentation model, you can extend your internal team’s capabilities by complementing the skill set with additional expertise.

Outsourced specialists or freelancers become an extension of your in-house team, working closely and collaborating with your personnel. You may maintain complete control over the project using this outsourcing technique.

The staff augmentation outsourcing strategy may be the ideal solution if your development process is too long, you lack rare or sophisticated talent, or you require 1-3 professionals to help the project rather than the complete team.

The outsourcing model is best suited to situations where you do not have the time to go through the entire recruitment process and do not need those experts in the long run.

Pros

Developers are available quickly
Cost-effective
The most diverse skill pool
Flexibility
Complete control over the project’s progress

Cons

You are solely responsible.
Professionals for integration and management were outsourced.
Gaps in communication
Difficulties with collaboration

When should organizations consider the staff augmentation outsourcing model?

You already have a team of backend engineers, but they are insufficient to meet the deadline. Rather than wasting money on the recruitment process and terminating employees once the project is complete, you may augment the necessary team.
You have a complete Android development team and three intermediate iOS developers. You can increase the team to compensate for the lack of iOS experience.
Your senior professionals have departed the organization. You can supplement the project’s senior-level specialists to bridge the knowledge gap.

Process-based outsourcing model

Under this scenario, you can pass over complete control of the technical process to the IT outsourcing business. They will be in charge of leading teams, managing projects, comprehending customer needs, and even accepting responsibility for failures and hazards.

When your company’s in-house staff lacks an understanding of a particular IT product, the process-based outsourcing strategy is chosen. It can also be used when your teams are overburdened with other projects, and there are no immediate plans to hire extra people.

As a client, you supply project requirements. After the service agreement is signed and the service provider begins work, you simply wait for the deliverables within the time range specified in the collaboration model or work methodology.

This outsourcing approach requires the least time from the customer. However, it also gives you the least control over the project.

Pros

You won’t have to deal with or oversee the work of the outsourced personnel. As a result, you can focus on your businesses core competencies
With this outsourcing strategy, there is no incentive to bear responsibility for project failures or risks.
You should invest minimal effort into managing outsourced teams and outsourcing duties.

Cons

When you pick this approach, you lose control over the business process.
The hired personnel will not interact with you directly. This might lead to a breakdown in teamwork and communication.

When to consider using the project-based outsourcing model?

When you have a clear vision of a product you want to produce but lack the personnel and do not want to recruit one
If the project is not your primary product and you do not want to disturb the project management, employ your own team that works on other projects, or simply do not have the necessary tech stack for this specific project,
When you are a startup and require an external service provider to give everything you need to begin your project.

Dedicated Team Model

The supplier will offer you a dedicated team of professionals to work on your project in this IT outsourcing approach. The team can include several different types of roles, such as analysts, designers, project managers, and engineers.

You and the outsourcing partner are both responsible for the project’s direction. Your project is allocated to a single member of staff. The outsourced PM manages the team, and the team is not affiliated with your company.

The scope of your project also determines the number of outsourced positions. Based on your project needs, your outsourcing service provider should be able to assist you in deciding what and how many roles you need.

Accountabilities, timetables, outcomes, and scope will all be agreed upon by you and your team under this paradigm. Furthermore, effective communication is essential for guiding the project’s course.

The outsourcing company’s best interests are served by manually selecting a group of employees who work well together and can provide a positive output.

Pros

You can work effectively with your team and allocate responsibilities following your company’s demands.
Working with you will be more comfortable for the team. As a result, the working environment will continue to develop.
These outsourced teams are trustworthy enough to be trusted with your job. You won’t need to oversee them because they are experts at what they do.

Cons

This outsourcing approach isn’t appropriate for short-term tasks.
You must wait until the vendor has assembled the right team for you.

When to use the dedicated team outsourcing model?

When you are an early-stage startup with high growth expectations, the dedicated team model will allow you to swiftly form a team, save money on recruitment, hiring, and personnel maintenance procedures, and focus on the development process.
When you are managing complicated, long-term initiatives that have the potential to grow, when you require a strong development team of design and/or development/QA professionals but already have an in-house team for a portion of the technology, you may engage a dedicated team from an outsourcing partner to handle a portion of the development process with their support.
When you want assistance in a single area of development – for example, if you currently have a complete web development team in-house, with a project manager and testers, but you need to build a mobile application for which you do not have a team,
When you still want to be involved in every decision-making process since you have complete control over the development process with specialized staff.

IT Outsourcing Pricing Models

Outsourcing your company requirements should also assist you in controlling expenses and scaling your operations. The price structure for outsourcing services evolved through time and was customized to the demands.

As an outsourced service provider, we opted to concentrate on the two most significant models to examine.

Fixed-Price Model

The fixed price model identifies the total cost of development. Typically, the agreed-upon sum is charged monthly or upon completion of the entire job. To estimate the pricing and satisfy the client’s expectations, the service provider must have precise information on the delivery expectations.

To estimate the work, this pricing model requires complete project scope information.

Furthermore, you must be aware of all the features that should be included in the generated program. This model does not allow you to change them in the meantime (as they are already estimated).

Moreover, once a fixed pricing model has been agreed upon, changing the scope of the task takes significant time, money, and energy.

As a result, projects produced under these pricing structures are neither flexible nor adaptive.

Time and Materials (T&M) Model

The time and materials pricing approach is based on the amount of time spent on the specified assignment. The service’s total cost is comprised of the specialist’s hourly fee and the actual time spent on the project.

Despite appearances, corporations frequently discover that the T&M approach is less expensive in the long run.

This pricing approach provides customization and flexibility. The ultimate cost is determined by the billing time. However, the service provider is not bound by a set scope of work and can adapt to any necessary adjustments.

Furthermore, the time and materials model frequently leads to higher service quality. Both parties may pay more attention to details and change the project to new facts, requirements, and ideas.

Choosing the Right Outsourcing Model for your Business Needs

As a business owner, you must address all aspects of the project with the outsourcer. Before deciding on an outsourcing strategy for your firm, there are several variables to consider.

The size of your project’s scope
The project’s expected completion date
The way of project management is most commonly used
If the development process necessitates the addition of new members to the team
The project’s level of technical innovation
The degree of adaptability you require
Competencies and talents of the in-house team

When negotiating a contract with an outsourcing provider, keep these factors in mind. You should ideally engage the help of your potential technical partner while making a decision.

Describe the project’s objectives, needs, timetable, and budget constraints. Include whether or not you have internal workers and how much flexibility you expect.

Next Steps

When considering the best model for outsourcing your business IT, the above information will be beneficial to get you to your decision. Each model has some advantages & disadvantages, and the price-to-quality ratio will vary from model-to-model.

When a firm implements new technology or service, in-house personnel must be trained. Some organizations hire new employees, putting additional strain on management and HR departments.

Outsourcing services have grown widely in the IT industry due to this. Outsourcing is the process of a business handing over a particular business operation or service to a third-party organization.