What are the popular types of IT outsourcing models?

In 2022, over 80% of small businesses had outsourced their work. 

After two arduous years of the pandemic, a war inflicted a major blow to the global economy, wreaking havoc on the IT outsourcing industry and reshaping the competitive landscape. Eastern Europe, which previously reigned supreme in IT outsourcing, is now out of the running. Companies in North America are now on the hunt for new outsourcing hotspots that offer the same quality of service at a reduced cost. Alongside the search for new directions, it is wise to clear out the requirements and type of outsourcing model that will help better navigate and find a reliable partner.

Other countries of Eastern Europe, not affected by war, are now gaining more traction as new outsourcing destinations with a huge talent pool and lower rates than other destinations. Check out outsourcing rates and comparisons by country.

Now that we have discussed IT outsourcing, its benefits and challenges, rates, and statistics, let's review types of IT outsourcing, grouped as follows:

• Location-based
• Relationship-based
• Pricing models

Location-based types of outsourcing

When we think of outsourcing, we may instantly picture an international business relationship, but in reality, there are various types of outsourcing based on location.

Onshore outsourcing 

What is the Onshore outsourcing model?

The model involves contracting with a company within the same country to perform a task or service. Onshore outsourcing is often used when a company wants to retain control over the outsourced task or service or when it is more convenient to work with a company located within the same country, time zone, and cultural peculiarities. 

Pros of onshore outsourcing

• Increased control
• Easier to manage risks
• Increased security

Cons of onshore outsourcing

• High rates
• Limited talent pool
• Limited resources

Central Europe, the United States, Australia, and Canada have the highest rates for IT services (starting at $150 per hour).

Nearshore outsourcing

What is the Nearshore outsourcing model?

The model involves contracting with a company located in a nearby country to perform a time-sensitive task or service. Nearshore outsourcing is often used to take advantage of the time zones and cultural similarities between the two countries.

Pros of nearshore outsourcing

• Location
• Little to no difference in time zones
• Cost-effective

Cons of nearshore outsourcing

• Limited partnership options
• Imperceptible cost difference

For example, in the USA, nearshore outsourcing will be possible with Mexican and Brazilian companies. They may share the same time zone, but it may not be cost-efficient and there still might be cultural differences. 

Offshore outsourcing

What is the Offshore outsourcing model?

The model involves contracting with a company in a different country to perform a task or service. Offshore outsourcing is often used to take advantage of lower labor costs in other countries.

Pros of offshore outsourcing

• Lowest rates
• Increased efficiency
• Access to the global talent pool
• High competition of vendors driving improved quality
• Great flexibility

Cons of nearshore outsourcing

• Security risks
• Language differences
• Political instability
• Cultural differences

Offshore outsourcing challenges are managed by dedicated relationship owners who provide smooth onboarding and communicate closely with stakeholders. 

Have you ever outsourced your business processes? What was your experience?  Explore the outsourcing rates to popular destinations before decision-making. 

Extra model: Domestic outsourcing

This model involves contracting with a company within the same city to perform a task or service. Domestic outsourcing is often chosen by location-sensitive businesses striving to retain control over the outsourced task or service.

Location-based types of IT outsourcing – the comparison

Relationship-based IT outsourcing models

Relationship-based IT outsourcing models prioritize establishing a particular type of partnership and maintaining a high level of collaboration and communication within this model to achieve mutually beneficial goals. It is crucial to agree with the service provider on an outsourcing model that best performs for both parties. 

The dedicated team outsourcing model

What is the Dedicated team outsourcing model?

The dedicated team outsourcing model is a way of working with an external vendor to provide services or develop a product. In this model, the vendor provides a dedicated team of professionals who work exclusively on the client's project. The team operates as an extension of the client's in-house team, and the client has complete control over the team's workflow and priorities. The client is also responsible for managing the team and providing necessary resources or support.

Pros of a dedicated team outsourcing

• The most cost-efficient
• Feels like an in-house team
• Complete control
• Better communication
• Minimal risks
• Higher security and transparency
• Agile marketing process

Cons of a dedicated team outsourcing

• Project responsibility fully on the client’s side
• Longer recruitment process

A dedicated team model, also called a managed team model, is more suitable for long-term projects with ongoing maintenance.

The full-process outsourcing model

What is the Full-process outsourcing model?

Full-process outsourcing (FPO) is a business model in which a company outsources all or most of its internal processes to an external vendor. It can include product development, marketing, customer service, and more. The vendor becomes responsible for managing these processes and delivering the desired results to the client.

In the FPO model, the client typically retains ownership of the product or service and its intellectual property. However, the vendor assumes full responsibility for the delivery and execution of the processes.

Pros of a full-process outsourcing

• Cost-efficient
• Improved efficiency
• No management efforts

Cons of a full-process outsourcing

• Loss of control
• Communication challenges
• Risk of vendor failure

In full-process outsourcing, the critical thing is to set clear communication and expectations between the vendor and the client.

Staff augmentation outsourcing model

What is the Staff augmentation outsourcing model?

With staff augmentation outsourcing, a company hires a third-party vendor to provide additional staff to supplement its existing workforce. Depending on the company's needs, this can be done temporarily or permanently. The outsourced team is hired to fill the gaps in the in-house team without going through the time-consuming process of recruiting a new in-house staff. 

While at first sight, staff augmentation and dedicated team outsourcing models seem identical, the devil is in the details. Staff augmentation provides the client with one or more employees contracted by the service provider, either on a temporary or permanent basis. The vendor provides the shortcut to the recruitment process, but the work organization, employee onboarding, and further communication are handled by the client.

Sometimes, the client is involved in the time-consuming recruitment stages (shortlisting the candidates, interview stages), and when the final candidate is chosen, and onboarding starts, the vendor is out of the game. Often, it involves the risk of quitting fast when the chosen candidate is not engaged in the project long-term.

While in a dedicated team model, the vendor is also responsible for the effective management of the resources hired together with the client. 

 Pros of a staff augmentation outsourcing

• Quick access to the global talent pool
• Lower costs 
• Flexibility
• Full control
• Easy to scale up and down

Cons of a staff augmentation outsourcing

• Possible communication gaps
• Onboarding processes

Staff augmentation outsourcing can be a useful strategy for companies that need to temporarily or permanently increase their workforce. Still, it is important to carefully evaluate this approach's benefits and risks.

Project-based model

What is the Project-based outsourcing model?

Project-based outsourcing is a model in which a company contracts with a third-party vendor to complete a specific project or set of tasks. The model can be a useful strategy for companies needing specialized skills or expertise temporarily or not having the internal resources to complete a project.

Pros of a project-based outsourcing

• Clear timeframes
• Time and cost-efficient
• Short recruitment process
• No micro-management

Cons of a project-based outsourcing

• Inflexibility when updates are needed
• Less control 

Project-based outsourcing can be a useful strategy for short-term collaboration, but it is important to carefully evaluate the benefits and risks of this approach.

Which relationship-based outsourcing model sounds more suitable for your company? 

Relationship-based types of IT outsourcing – the comparison

IT outsourcing pricing models

The pricing model of outsourcing is mostly agreed upon at the first stage of collaboration, which frees stakeholders from further stress. The more you communicate and collaborate over this point, the more efficient the partnership will be. 

Time and material pricing

In the time and materials (T&M) pricing model, the client pays for the amount of time and materials used during the project. The vendor is responsible for providing the necessary resources and personnel to complete the work. Also, T&M comes with an adjustment, like T&M with a cap or a fixed minimum fee, which implies a monthly or weekly cap of hours that shouldn't be exceeded. Thus, the client has a sense of the project's scale.

Pros of a T&M pricing model

• Flexibility
• Transparency
• Alignment of incentives

Cons of a T&M pricing model

• Lack of predictability
• Potential for scope creep
• Risk of inefficiency

This model is typically used when the project's scope is not well-defined and allows for flexibility as the project progresses.

Fixed price

What is the Fixed price model?

The fixed-price outsourcing model is a pricing model where the client pays a fixed fee for the delivery of a specific scope of work. This model is typically used when the project's scope is well-defined and can be completed within a certain timeframe.

Pros of a fixed price model

• Predictability
• Cost control
• Alignment of incentives

Cons of a fixed price model

• Lack of flexibility
• Risk for the vendor
• Communication and collaboration issues

The vendor is responsible for providing the necessary resources and personnel to complete the work within the agreed-upon timeframe and scope.

Shared risk-reward model

What is the Shared risk-reward model?

A shared risk-reward model is a type of outsourcing arrangement in which the outsourcing vendor and the client company share the risks and rewards of the project. It means that both parties are equally invested in the project's success and are motivated to work together to ensure its success. In this model, the vendor is typically paid a fee based on the project's success rather than a fixed fee. This aligns the interests of the vendor and the client, as both parties stand to benefit when the project is successful.

Pros of a shared risk-reward model

• Aligned interests of client and vendor
• Can be cost-effective

Cons of a shared risk-reward model

• Higher risk for both client and vendor
• Complexity

The shared risk-reward model can be a good option for startups looking for a professional workforce but not having the resources to afford to outsource.

Which outsourcing model is the best fit for your business? Conclusion

Outsourcing can provide a significant competitive advantage if a well-managed partnership is established, even if the provider is thousands of kilometers away. If you consider outsourcing partnerships a new practice, start with small steps. Handle small tasks and projects to fill the ground and make sure your in-house team feels comfortable with a new team. Once you have figured out the location-based model, move on to the relationship-based model and choose the pricing model that best fits your internal policies and available resources.