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IT Outsourcing Pricing Models and Strategies 2019

Arpatech Jul 25, 2019
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When engaging with a software engineering partner for an outsourced project, it can be confusing to select the right pricing model. You have to balance both parties’ risk and reward while ensuring that your outsourcing partner offers solutions, not guaranteeing that you get the most value for your investment. Fortunately – or perhaps not, considering your point of view – organizations have a number of pricing models to choose from when structuring their next outsourcing contract. We have collected the top four pricing models that provide maximum value for outsourced projects.

IT Outsourcing Price Models for Your Business

There are various kinds of outsourcing models, we’ve mentioned 5 of them which are the outsourcing trends 2019. You can pick the one suitable for your particular project and estimated expenditures.

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Fixed-Price

Out of all the outsourcing strategies, fixed-price development agreement is known to be the most successful one. In this type of agreement, one needs to pay a particular amount of money for a specific job performed. This strategy works efficiently for short-term products whose development requires a few months or less. All the risks involved are put on the outsourcing partner as they wait to make payments until the project is done which consequently protects your budget also.

It involves giving the required details of the future piece of software, website or mobile application-their primary features, design, etc. Since fixed price agreement cannot be readily modified, all requirements should be transparent to both the client and the team.

In case, if any issue arises, you can work on a unique amendment to the current agreement specifying unmentioned points of the first, for instance, improved complexity of the project resulting in a price change, etc. Signing a fixed price contract also implies delegating control of the development to the representatives of the IT business. Usually, customers are not actively engaged in the process – instead, product managers take the head position.

Time and Materials (T&M)

T&M demands your outsourcing partner to bid for the project based on your demands, depth of scope and the amount of work that needs to be done. If your teams are good at outlining project requirements, this model is the right pick for you. In this way, your outsourcing partner will spend less time reworking issues, shortening your project overall time and saving you money.

Be prepared to build effective project management teams to guarantee that the entire project is completed on time and on budget. You will need to keep a close eye on project outcomes and prevent costly project delays. Keep in mind that building a cushion can assist you if the project goes over time or budget.

Time and material model of cooperation does not involve advanced specifications, so it can be used when all of the features of the future product cannot be explained at once. Unfortunately, due to the flexible nature of the cooperation, it is impossible to define the time required to complete the project.

Dedicated team

A dedicated team guarantees productivity and high-quality results. In this type of agreement, the whole focus of the developers will be on your specific project and will be interested in lengthy and productive collaboration. The dedicated team agreement counts among the global outsourcing trends.

Furthermore, if you are working with a dedicated team, customers handle the development process on their own, assigning tasks and altering priorities. The outsourcing firm can only help with some organizational moments, but the entire process is with the owner of the product. It is mostly preferred for long-term and complicated projects as it will result in time and money expenditure on employing skilled staff and supplying them with the necessary tools.

Incentive-based Pricing

You can always choose to go for incentive-based pricing models for your next IT outsourcing. It is often an add-on to the more traditional models mentioned above, incentive-based models involve bonus payments to the outsourced developer as a reward for meeting performance objectives above and beyond what is written in the contract agreement. Incentives can help make up for constraints in fixed-price or T&M models to ensure that the motivations of your partner remain in line with your own.

Adding complexity to your engagement model implies you will need to make sure that your partner delivers measurable advantages to your company. Many businesses end up paying partners for premium services that do not actually benefit them.

Shared Risk-Reward Pricing

Like the incentive-based model, this model contains a flat rate and maintain extra payments until your partner achieves particular goals. Here, however, customers and service suppliers generally share financing for the development of new products, enabling your partner to share in the incentives for a specified period of time. The Shared Risk-Reward Model promotes your partners to develop ideas that strengthen your business by sharing financial risk between both sides and, according to Gartner, assigning responsibilities to the partner mitigates some of the risks associated with new procedures, technology or models.

End Note

We’ve mentioned the most popular IT outsourcing engagement models; you can make use of any of them which fits best for your business. Remember, outsourcing is a partnership, and no party should enter into the debate trying to take advantage of the other. However, communicating your expectations obviously and selecting the right pricing model can go a long way to attaining success.

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