Software Development Outsourcing Models — Which Is Best?

Published November 14, 2022, updated March 7, 2023
by Jeffery Thompson
19 min read
Software DevelopmentSoftware Outsourcing

If you’re looking to outsource for the first time, you might be wondering how to go about doing it. You start by knowing about the different software development outsourcing models

Software Development Outsourcing Models — Which Is Best

Software development outsourcing is set to increase by 70% from 2022 to 2023. Yes, outsourcing is as in-demand as ever. 

If you’re looking to outsource for the first time, you might be wondering how to go about doing it. 

You start by knowing about the different software development outsourcing models. Today, we’re going to tell you about each model’s advantages. Plus, we’ll give you tips on deciding which model to choose.

Primary Software Development Outsourcing Models

Primary Software Development Outsourcing Models

There are many software development outsourcing models. But this guide will focus only on primary models. We’re talking about those that are based on location, relationships, and contracts

But first, let’s get back to basics. 

Back to Basics: Why Outsourcing Software Development Matters

Why should you be outsourcing software development in the first place? There are many reasons, of course, But allow us to summarize them into three basic statements:

  • To develop software faster
  • To get access to cheap software talents
  • To expand your in-house capabilities

Let’s proceed to the models below.

Location-Based Software Development Outsourcing Models

Location-Based Software Development Outsourcing Models

You can define software development outsourcing models according to your partner’s location. 

Your outsourced resources could come from the same country as yours. Their location could also be in another country or even continent. 

So what are the different location-based software development outsourcing models? Here they are:

Onsite Outsourcing Model

Onsite Outsourcing Model

What Is the Onsite Software Outsourcing Model?

In the onsite software outsourcing model, your partner sends developers to your office. Work engagement is normally for a fixed period of time.

The service provider (or vendor) can send one software developer. Or they may choose to field a dedicated team.

Note that some companies do not distinguish between onsite and onshore models. But you will soon find out as you read along that the two have subtle differences.

What Are the Advantages of the Onsite Outsourcing Model?

  • Cost Savings

You can save on onboarding and training costs. Your outsourcing partner will be the one shouldering those expenses. They will also cover employee benefits. 

  • Quicker Adaptability

The outsourced team can adapt faster because they are onsite. 

  • Easier Collaboration

If you already have an in-house team, they can collaborate better with the external team. 

When Is the Onsite Outsourcing Model Ideal?

The onsite outsourcing model is ideal if your project requires a fast turnaround. Your external team can adapt faster because they’re physically present within your premises. There are no location-related barriers to communication. 

It’s also perfect if your project needs close collaboration between teams and members. You can arrange meetings quicker. 

Onshore Outsourcing Model

Onshore Outsourcing Model

What Is the Onshore Software Outsourcing Model?

With onshore software outsourcing, you get a team from the same country as yours. Note that the external team might be working from a different city or even state. 

A common example is a startup in Chicago working with a software company from Dallas. Case in point, BIT Studios is a Texas software company. But we can partner with any business within the US.

Sure, your business relationship might cross city or state borders. But you’re still partnering with a company within the United States. 

What Are the Advantages of the Onshore Outsourcing Model?

  • Zero Language Barriers

There is no communication barrier. It is because your external team can speak your native language. 

  • Absence of Cultural Gaps

The outsourced team shares your culture. Let’s say you’re targeting US customers. An external team that understands your target market is a plus.

  • No Time Zone Differences

You’re working with a development team from the same country as yours. Thus, you can sync production hours without a problem.

When Is the Onshore Outsourcing Model Ideal?

It’s ideal if you want to explore development options within the US. You are not limited to onsite providers only. In other words, you can broaden your search for a partner that truly fits your needs.

Of course, you need to ensure you have the budget. Software companies from other cities or states may cost higher.

Nearshore Outsourcing Model

Nearshore Outsourcing Model

What Is the Nearshore Software Outsourcing Model?

Nearshore outsourcing involves getting a software development team from a neighboring country.

It’s wise to choose a nearshore country that has a less than three-hour time zone difference. 

Let’s illustrate this model through an example. If your company is in Germany, you can choose a nearshore partner in Ukraine.

Why outsource software development to Ukraine? It happens to have one of the cheapest developer rates in Europe. Moreover, it only has a one-hour time zone difference from Germany.

What are the Advantages of the Nearshore Outsourcing Model?

  • Lower Developer Costs

You can hire software developers from neighboring countries with cheaper salary rates.

  • Access to Deeper Talent Pool

You can select a country with a robust developer community. You can have your pick between seasoned developers or hungry young coders.  

  • Three-Hour Time Zone Difference

Yes, the work hours may vary a bit. But you or your external team should be able to adjust just fine.

When Is the Nearshore Outsourcing Model Ideal?

Nearshore outsourcing is ideal for small or medium-sized companies looking to expand fast. They might be planning to boost their current development capabilities. Or they might be searching for a specialized skill to add to their team. 

Either way, they can go cheap and still get quality developer talent. Nearshore outsourcing makes that possible.

Offshore Outsourcing Model

Offshore Outsourcing Model

What Is the Offshore Software Outsourcing Model?

In offshore outsourcing, you partner with a provider from a faraway country. 

The most common example is a US company working with an Indian software company.

This model is the most frequently used option for various reasons. Proceed to the next section to find out what these reasons are.

What Are the Advantages of the Offshore Outsourcing Model?

  • Most Cost-Effective Model

You are not hampered geographically. In other words, you can choose the cheapest developers, wherever they may be.  

  • Continuous Production Hours

You can actually leverage the time zone difference. You do it by assigning tasks during your business hours. Your external team will work on it during your off hours. By the time you get back to work the next morning, the task is already done.  

  • No Shortage of Providers

Offshore outsourcing is popular across the globe. This means that you will never lack options when looking for a partner.

When Is the Offshore Outsourcing Model Ideal?

First, the offshore outsourcing model is ideal for those who want to save on costs as much as possible. It helps companies with limited budgets.

It is also perfect for those looking to get part-time or one-time engagements only. With offshore outsourcing, you can hire an external team to do what’s needed. And you never have to worry about making them permanent or full-time employees. 

You can also choose offshore outsourcing for one-time projects. You need only pay for the hours they worked on the project. After delivery, your engagement with them is over. But you can connect with them again if you have a new project.

Relationship-Based Software Outsourcing Models

Relationship-Based Software Outsourcing Models

Outsourcing models may differ according to the nature of the business relationship.

The relationship may involve your partner adding new members to your existing team. Or it may entail forming a new team altogether. Also, it may revolve around projects that need focus at any given time.

We can summarize the variations we just mentioned into the following categories:

Staff Augmentation Model for Software Development Outsourcing

Staff Augmentation Model for Software Development Outsourcing

What Is the Staff Augmentation Software Outsourcing Model?

In the staff augmentation model, your partner adds manpower to your existing team.

Staff augmentation is helpful for companies that only need to expand their bandwidth.

A great example of this is when you already have your own software developers. But you need specialized skills, like UX / UI design. Staff augmentation can help you. 

This outsourcing model can also be flexible. It can either be remote or onsite.

By the way, the staff augmentation model is also known as the extended team model. Other companies simply refer to it as outstaffing.

What Are the Advantages of the Staff Augmentation Model?

  • Quicker Recruitment Process

You won’t have to busy yourself with recruiting new team members. Your outsourcing software development partner will handle that for you. 

  • Zero Onboarding, Training, or Employee Benefits Costs

You have new team members. But they’re not your employees. In other words, you can do away with onboarding and training costs. You can also say goodbye to shouldering employee benefits. 

  • Cheap Way to Cover Skill Gaps

Staff augmentation is a cheap way to cover the gaps in your team’s skill set. 

When Is Staff Augmentation Ideal?

Staff augmentation is ideal when you suddenly find yourself with a shorter timeframe. In other words, you need reinforcements fast to complete a project on time.

There are times when you need staff augmentation to fast-track an existing project. The reason could be a shift in market demand or when you’re trying to beat the competition.

This model is also ideal when you have a side project. And it’s one that you don’t want your in-house team to focus on. The solution is to have extended team work on your side project.

Dedicated Team Model for Software Development Outsourcing

Dedicated Team Model for Software Development Outsourcing

What Is a Dedicated Software Development Team?

A dedicated team is synonymous with an outsourced managed team. So what exactly is a dedicated team?

It is a team assembled by your service provider to do the software development for you.

It can handle all the responsibilities of an in-house team. It can even execute the software development process from start to finish. The main difference is that it is an external team, technically speaking.

Also, you are not hiring a dedicated team directly. Your partner is the one handling the recruitment and the assembly.

What Are the Advantages of a Dedicated Software Development Team Outsourcing Model?

Having a dedicated development team has its advantages. They are:

  • Flexibility

Your outsourcing partner can assemble a cross-functional team for you. What exactly is a cross-functional team? It means your team members have different skill sets. But they all work together to complete a software development project. They could include developers or designers. Sales or marketing experts may also be on the team. 

  • Access to Certain Types of Development Skills

Let’s say your project is a healthcare software product. Your partner can help you hire the team you need. And it won’t just be any team. It will be one with experience in healthcare software development.

  • Faster Turnaround Time

Hiring skilled developers can take time. That’s why you need to partner with an experienced firm, like BIT Studios. The faster they assemble your team, the sooner they can get work done. More importantly, the quicker the project will complete.

When Is the Dedicated Team Model Ideal?

Startups can benefit the most from dedicated teams. It’s because they’ll need the experience of dedicated teams to get a project up and running.

The dedicated team model is also ideal for projects with unclear requirements. A dedicated team has the expertise to adapt quickly. Even if the requirements change, they can still roll with the punches.

Project-Based Model for Software Development Outsourcing

Project-Based Model for Software Development Outsourcing

What Is Project-Based Outsourcing?

You’ve probably heard of a project-based outsourcing engagement before. Well, it sounds exactly like what it’s called. 

In this model, you outsource entire software development projects to your partner. They will oversee the whole software development process. And then, they’ll deliver the final product once done. A project-based model usually involves outsourcing project management too. 

Let’s say you’ve just put up a business and sales are doing good. In fact, revenues are now enough to fund the expansion of your brand. And you’re thinking of launching an eCommerce platform or a mobile app. 

Unfortunately, you don’t have an in-house development team. So you outsource the whole ecommerce project to a third-party software development company. And that is how project-based outsourcing works.

Of course, you can also use project-based outsourcing even if you have an in-house team. But because your in-house team is focusing on existing projects, they can’t work on new ones. 

That’s where this model can play a huge part. The external team can handle projects your in-house team can’t at the moment.

What Are the Advantages of the Project-Based Outsourcing Model?

  • Increased Productivity

This is particularly true for companies with busy in-house teams. Their developers might be working on more mission-critical projects. So other projects don’t always get the focus needed to get done. But thanks to project-based outsourcing, your company can be more productive. You can ensure no task gets left behind. 

  • Even Weight Distribution

Yes, mission-critical projects will always bear more weight. But other projects that get delayed will begin to get more weighty the more they’re deferred. Project-based outsourcing to the rescue! You can balance the weight distribution by having an external team pick up the slack.

  • Clearer Expectations

Your partner will set clear expectations before the engagement begins. You will get a better idea of the timeline and deliverables.

When Is Project-Based Outsourcing Ideal?

If you have no experience handling a software development project, this model is for you. Your partner will take care of the entire project from start to finish. Meanwhile, you can focus on your business.

But what if you do have an in-house team? Can project-based outsourcing still work for you? Yes, it can! It can help your team avoid getting overloaded. 

Bonus tip: Project-based outsourcing is also ideal for a project with simple requirements. You can just delegate that project to your outsourcing partner. The project manager will oversee everything. And it may require minimal involvement on your part.

Contract-Based Software Development Outsourcing Models

Contract-Based Software Development Outsourcing Models

You can also differentiate outsourcing models according to the terms of their contracts.

A software development contract includes many things. One of the most important inclusions is the conditions for payment. 

There are many methods for determining how your outsourcing partner gets paid. There’s the time and materials method. And you also have a fixed-price arrangement. Let’s tackle them one by one below.

Time and Materials Outsourcing Model

Time and Materials Outsourcing Model

What Is the Time and Materials Software Outsourcing Model?

With the time and materials model, you pay only for the actual number of hours spent on the project.

Most believe this model to be fair for both companies and their outsourcing partners.

But bear in mind that if unexpected delays happen, you’ll be paying for the extra hours spent. So always be careful in getting quality developers to work on your project.

What Are the Advantages of the Time and Materials Outsourcing Model?

  • Scalability

You may find yourself working on something that has no set project scope or requirements. Leverage the time and materials model to scale up or down as needed. Even if there are changes, the rules of the model can apply, nonetheless.

  • Versatility

You can apply the time and materials model to any other outsourcing approach. Whether you’re nearshoring or offshoring, the pay-for-hours-spent condition remains the same. You can also use the mode for staff augmentation or dedicated team setups. 

  • Simplicity

It’s a simple agreement that should appeal to both parties. But what if there are sudden changes to the project? Not a problem at all. You can still make adjustments. And you won’t complicate the original contract with the software development company.

When Is the Time and Materials Outsourcing Model Ideal?

This model is ideal for projects with no clear scope right from the start. 

It is also best for long-term or large-scale projects. These tend to have flexible requirements over time. So with a time and materials model, you can be scalable as needed.

Is there a best practice for the time and materials model? We can think of several, in fact. One is choosing a reliable outsourcing partner. This ensures that you won’t go over budget because of delays caused by low-quality work.

Another best practice is to define requirements ahead. Never underestimate the importance of proper planning.

Lastly, make sure communication channels are open. By doing so, you can get updated on project deliverables. Lean on project management to detect signs of deliverables not finishing on time. Detect early to prevent issues later.

Fixed-Price Outsourcing Model

Fixed-Price Outsourcing Model

What Is the Fixed-Price Software Outsourcing Model?

The term fixed-price contract is quite common in any industry. Of course, the field of software development is no exception to this. 

In a fixed-price model, you and your partner agree ahead on the contract price. 

Of course, you can’t just make up any amount right on the spot. Both parties should base the contract price on the time and resources needed for the project.

Note that time and resources may vary over the course of the engagement. This is why it’s vital to estimate them carefully before signing the contract.

What Are the Advantages of the Fixed Price Outsourcing Model?

  • You Won’t Go Over Budget

In the end, you’re expected to pay only the agreed contract price. This model is clear about the expected costs and the budget you need to prepare.

  • It Helps You Plan Better

Obviously, knowing the budget in advance matters a lot. But by being more careful in cost estimation, you can plan better. The extra vigilance you put into planning can help you execute the project better too.

  • It Provides Clear Deadlines

Yes, fixed-price models tend to be less flexible than time and materials. But the advantage is that you get a fixed deadline. With that knowledge, you can plan your post-launch efforts.

When Is the Fixed Price Model Ideal?

Use a fixed-price model when you have small or short-term projects. By the way, how long are short-term projects? They usually don’t go beyond three months.

This model is also ideal for prototyping. For instance, this model is for you if you want a partner to build a minimum viable product (MVP).

Fixed-priced setups don’t allow that much room for changes. If you have a project with a tight budget or timeline, choose this model. The same goes for projects with precise requirements.

How to Choose the Software Development Outsourcing Model for Your Business

How to Choose the Software Development Outsourcing Model for Your Business

It’s not exactly rocket science. But you can pick the right software outsourcing model with the help of these tips.

Gauge the Flexibility You Need

Why does the level of flexibility matter? Well, it can dictate which outsourcing model best fits your business right now. Note that flexibility can apply to various aspects. It could refer to your business hours, budget, or team capabilities. 

Review Your Current In-House Team

If you already have an in-house team, check their strengths. While you’re at it, review their weaknesses too. Don’t forget to look into your team’s size. Do you have enough team members to take on complex projects? Study the workload. How busy are they? Can they handle additional assignments?

Determine the Level of Focus Your In-House Project Manager Can Provide

Project management matters too. Do you have in-house PMs or Product Owners? How many are they? Can they handle multiple projects? Are they qualified to manage projects with changing requirements? Do they need reinforcements? 

Questions You Need To Ask When Choosing an Outsourcing Model

We took the liberty of summarizing the tips we mentioned above. Look below, and you’ll see a list of questions. Let them serve as your guide when choosing a software outsourcing model.

What Are Your Business Goals? 

Get back to basics. Review your business objectives. Remember that the outsourcing model you choose should always align with your goals. 

How Flexible Do You Need To Be? In What Areas Should You Be Flexible?

As we mentioned earlier, flexibility can apply to different areas of business. Identify those areas in advance. Is it the budget? Is it the production hours? Is it the manpower?

Is Your In-House Team Qualified To Handle the Project?

Review your in-house team’s skill set. Find out if you have team members who have the expertise needed for the project. Of course, this is assuming you have already studied the project requirements ahead.

Do You Have Enough Manpower?

It’s not enough to gauge the level of expertise. Look also into your team’s size. Try to see if they can handle more than one complex project. You don’t want your team to be spread too thin.

How Involved Can You Be in Overseeing Outsourced Work?

The time and effort you’re willing to put in can decide which outsourcing model you should choose. Remember that the staff augmentation model will require a lot of your attention. If you don’t have time and energy, go for the project-based model.

How Much Control Are You Willing to Let Go?

If you’re okay with relinquishing some control, choose project-based outsourcing. If not, go for staff augmentation. In this model, you get to retain control.

How Critical Is the Project?

If you’re looking at a high-priority project, choose staff augmentation or dedicated teams. These models allow you to keep control. For low-priority projects, the project-based model is the way to go.

Software Outsourcing Models: A Summary

It’s important to know about the different software development outsourcing models. Doing so can help you choose the model that best fits your business needs.

Software development outsourcing models can be based on location, relationships, and contracts. Each model has its benefits, and you need to align those with your project requirements.

Are you looking for a software development outsourcing company? Do you want to know more about software outsourcing? BIT Studios happens to be an expert in that field. Contact us now, and we’ll be happy to answer your questions about the development process.

Jeff eats and breathes technology. His undying passion for software development inspired him to establish BIT Studios, a reputable custom software development company that caters to SMEs and Fortune 500 companies. Jeff is a strategic thinker who combines creativity and expertise to build digital ...
Originally published November 14, 2022, updated March 7, 2023

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