Understanding different types of software development outsourcing models

11 min read
July 29, 2022

For companies and business owners still skeptical about outsourcing and remote work, the recent pandemic may have been a huge wake-up call and proof of concept.

It showed that virtual team collaboration wasn’t only viable but it was also the future of software development.

No surprise that 45% of companies said they plan to do more outsourcing soon.

If you’re planning to outsource app development, know there’s no one-size-fits-all solution. It pays to know the models and setups you have available to you.

Location-based software development outsourcing models

These software development outsourcing models are determined by the distance between the client and the team or service provider.

Often this is done due to cost reasons since developer rates tend to vary widely around the world:

cost of hiring an app developer around the globe

Source: Aglowid

Location-based outsourcing also allows firms to access expertise not available in their current area.

For example, a fintech app developer in Asia might need to hire a US-based financial consultant, as the American financial market tends to be more mature.

Here are some outsourcing models to consider:

Onsite outsourcing

Onsite outsourcing is where the outsourced team works on your physical location. Often, a third-party provider will handle the hiring process and send that team onsite once completed.

onsite outsourcing

Source: DECODE

An onsite outsourced team functions just like your in-house staff. The big difference is that they’re still a third-party service provider and not technically your employees.

The good news is that you don’t need to spend on onboarding, training, and benefits, which makes this model cost-efficient.

Another advantage of onsite outsourcing is that the external team adapts quicker to your systems since they’re onsite.

software development outsourcing

You don’t need to change your setup to accommodate a virtual workflow. Thus, it’s easier for your in-house team to collaborate with them.

Of course, onsite outsourcing means you hire domestically, which might not be the best option for you.

For example, the labor costs can be quite high if you’re in the US, Europe, or Australia. You’re also limited by the talent available in your region, which might not be top-tier.

But onsite outsourcing can be a good choice if your app project requires tight collaboration and a fast turnaround time.

Onshore outsourcing

Onshore outsourcing is where you partner with an external team in the same country as yours, but not necessarily the same city.

For example, a tech company in New York can work with a development team in San Francisco.

onshore outsourcing

Source: DECODE

The main reason you want onshore outsourcing is convenience and a seamless transition.

Since you’re both from the same country, no language barrier or cultural gaps are involved.

Time zone differences tend to be non-existent or minimal at best if you live in large countries like the US or Russia.

That means your team can start work on the project immediately with minimal adjustments.

However, like onsite outsourcing, the biggest drawback is that you’re limited to domestic talent. That might lead to high developer rates or a lack of qualified talent.

Generally, nearshore outsourcing is for mid to large companies that can shoulder the higher developer costs in exchange for easier communication and a potentially higher-quality development team.

Offshore outsourcing

At the other end of the spectrum is offshore outsourcing, where you work with a development team in another country, often halfway across the world.

An American firm working with a development team from India is a classic offshore setup.

offshore outsourcing

Source: DECODE

Offshore outsourcing is the most common model many firms adopt. That’s because it’s the most cost-efficient model.

You have the option of hiring the cheapest developer that’s within your quality range.

The time zone difference can also work in your favor because the development team often works during your company’s off hours.

That means you can assign work during the day and possibly get it first thing in the morning.

But doing offshore outsourcing work can be challenging. Aside from the time zone difference, there’s also potentially a language and culture barrier.

That means you need to have your communication protocols on point.

It’s also riskier to hire offshore. It will be harder to verify if the third-party service provider is legitimate.

And in case they go rogue or run off with your app, it will be extremely difficult and costly to pursue legal action in another country.

Nevertheless, if you partner with a reputable team, offshoring is a great move for firms of any size and budget.

Nearshore outsourcing

Nearshore outsourcing is a model where a client hires a development team in a neighboring country.

Often, a nearshore country has a less than 3-hour time zone difference from your home country.

A good example of a nearshore setup is a firm in Germany that hires our team in DECODE, located in Croatia.

nearshore outsourcing

Source: DECODE

Nearshore outsourcing can give you the best of both onshoring and offshoring. You benefit from lower developer costs and a wide talent pool while minimizing time zone differences.

You can even reduce language and culture barriers if you pick a country that speaks the same language as you.

However, nearshoring still suffers from the same risk issues as offshoring. You’re technically working with a team in another country, which can still make legal actions challenging.

Multisource outsourcing

Why pick one model when you can do them all? Multisource outsourcing is where you hire several teams to handle sections of your app project.

For instance, a London-based fintech app project can hire a financial consultant from the same city (onshoring), a UX design team from France (nearshoring), and a development team from India (offshoring).

Multisource outsourcing

Source: DECODE

Outsourcing to multiple vendors gives you the utmost flexibility. You can get more expensive specialists to work on critical project areas while outsourcing the bulk of the work to lower-cost generalists.

When done right, multisourcing allows you to optimize your app costs while finding the best teams for the job.

The drawback, however, is that it’s harder to communicate and manage multiple teams.

This is especially true if one team’s work depends on another team’s output, which means small delays can ripple out and slow down your entire project.

Multisourcing can be a great option for complex app projects with many moving parts, particularly if it uses microservices architecture.

Relationship-Based Software Development Outsourcing Models

Relationship-based models are determined by the dynamics between the client and service provider.

Do they work as part of the in-house team or as an independent contractor?

What does the workflow look like?

Here are some examples of relationship-based outsourcing models.

Staff augmentation model

The staff augmentation model, also known as the extended team model or outstaffing, is where you hire a third-party provider to bolster your existing in-house team.

Augmented staff can either be onsite or remote.

In essence, it’s like hiring an employee to your team, except that the added staff is still a third-party service provider in this case.

You don’t need to worry about normal employee costs like onboarding, training, or benefits.

Asking an agency to provide a freelance UX designer because you don’t have one on your payroll is an example of staff augmentation.

extended team model

Source: Global Lux Soft | Medium

Staff augmentation is a cost-efficient approach to cover any skill gaps in your in-house team or to help you finish an app on time.

It’s best for short-term cooperation or if you suddenly find yourself with a shortened timeframe.

However, you should also be aware of the limitations of staff augmentation.

The biggest is that it can be challenging for the extended team to integrate with your in-house team, especially if they come in the middle of a project.

Dedicated team model

A dedicated team model is where an agency creates an entire team to tackle your app project from start to finish.

Functionally, it’s like having an in-house team, except that you don’t hire them directly.

Dedicated Team Model Detailed Architecture

Source: Cubet

DECODE is a good example of a dedicated team.

Once you hire and discuss your project with us, we’ll assemble a development team pulled from an internal pool of 70+ experts across different specializations.

That ensures the team has the right skills to solve issues and finish the project.

This flexibility and adaptability is perhaps the biggest advantage of the dedicated team model.

Having a cross-functional dedicated team also means you can enter niches you don’t have any experience in.

Cross Functional Teams

Source: Chisel

For example, if you want to develop a health app, you can create a dedicated team with experience in that niche. You can also consider adding health consultants to your team.

However, managing and communicating with a dedicated team can be challenging. There’s also the risk of misunderstandings due to cultural differences.

Fortunately, this is easy to avoid by hiring teams that speak your language.

Project-based model

In a project-based model, you outsource everything to a third-party agency. They’re now responsible for every aspect of the project, from planning to release.

This model is similar to a dedicated team, except that project management also falls to the service provider.

How project based outsourcing model works

Source: Cleveroad

A project-based approach is for clients with zero experience or technical expertise in creating an app. A good example is a retail chain that doesn’t have an in-house app development team.

 In this case, they can outsource the entire app project to a service provider.

For clients, this approach is the fastest and most convenient. You don’t need to worry about project management, development risks, or technical issues.

That leaves you to focus on your business.

However, compared with other outsourcing models, you have the least control in a project-based approach. You’re 100% reliant on the vendor, so picking the right one is key.

It would help if you also were keen on contract breaches in case the agency doesn’t deliver on its promises.

Contract-Based Software Development Outsourcing Models

Contract-based models focus on one thing: how the third-party provider gets paid. There are two possible options here:

Fixed-price model

In a fixed-price model, the client and service provider agrees on a set rate at the beginning of the project. This is based on the estimated time and resources needed to complete the project.

Fixed price model

Source: Bay Tech Consulting

This is perhaps the simplest payment scheme to set up. It also has the advantage that clients tend to avoid overpayment.

However, the pros end there. The biggest problem with fixed-price models is that they can’t account for changes in the project’s scope, which always happens.

For example, usability testing might reveal that an app feature isn’t sitting well with users. But revising it will take more time and money.

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If the project price is fixed, either the client will keep the unrevised app and risk a subpar result, or the developer will fix it but lose money in the process.

As you can see, it’s a lose-lose situation. As such, fixed-price models are best for simpler projects with rigid requirements.

Time and materials model

In a time and materials model, the service provider bills the client for the actual time spent on the project.

Time and Material Pricing

Source: Bay Tech Consulting

Because of this, the time and materials model is fairer on both sides.

Developers get the right compensation for their work, and the client receives a quality product proportional to the money they spent. It also creates less stress and friction, enabling everyone to focus on the output.

That’s why we consider the time and materials model as the best approach for most app projects.

Shifting scopes and changing requirements are the norms; thus, you need a flexible payment scheme to match.

Pros and cons of a TM contract 2

Source: Imaginary Cloud

Of course, you need to consider that you’ll potentially go over budget when you use the time and materials approach.

An inferior development team will also spend more time on the project, leading to unnecessary costs.

Our opinion on the best outsourcing model

Ultimately, the best outsourcing model for your project will depend on your situation, budget, and project scope.

But we believe that, for most app projects, a dedicated team using the time and materials model is the best approach.

It ensures an exceptional app quality and stress-free development experience while keeping costs reasonable.

It’s why we prefer to do it that way in DECODE.

So if you want to reap these benefits for your project, we highly recommend working with us.

Talk to us today to get started!

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Written by

Ivor Cindric

Business Development Representative

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