The Secret Art of… Software Development Outsourcing – Part III

Types of outsourcing contracts

Software development projects come in a great variety. Some of them take just a couple of weeks to complete, some other can take years. Some have very clear scope, some other constantly change as developers learn more about their target market and come up with new ideas. And that’s just the tip of the iceberg. By choosing an outsourcing contract most suitable to your project, you minimize risks, maximize ROI and ensure that it’s going to be delivered efficiently. Find out all about the most popular outsourcing contracts and make the right decision.

So you have already defined your needs and decided what kind of software development outsourcing services will be the most useful for you? The next step is to pick a type of software development outsourcing contract that is most suitable to your needs and circumstances. Each of them has different pros and cons and there is not a single one that always works well[1]. Before we get to the nitty-gritty of each type of contract, let’s answer a more basic question.

Why does it matter what kind of outsourcing deal I pick?

Are you working on an innovative product for your startup? Do you want an outsourcing company to develop a simple tool for in-house use because you don’t have adequate software development resources to do so on your own?  Or perhaps, you need developers on demand to help you with an ongoing work at your company? Regardless of which of those questions is true for you, there are some things that all of those projects (and any other projects for that matter!) have in common.

• They have a scope that may be very clear or the opposite – unclear and meant to be worked out during the development,
• As a result, they allow for more of less flexibility on the part of the outsourcing provider.
• They have some sort of budget that also may be more of less flexible.
• Finally, they divide responsibilities regarding the project between the client and the provider. Depending on a project, the provider may be in charge of everything, or lend its development resources to the client and let the latter take charge (as well as all kinds of in-betweens of those two extremes).

Since one project can be so different in terms of time, scope, flexibility, budget and responsibilities from another, it’s only natural that various types of contracts were developed to better address those differences and protect the interests of both parties – the client and the provider. Let’s go through them one by one.

Time and materials – for maximum flexibility

Nowadays, to stay competitive, many companies are trying their best to develop software tools and products that really stand out with their features and efficiency. Startups are a big part of it. But innovative projects are not limited to them. In each case, however, many aspects of the project, or sometimes even its final shape, can’t be estimated or easily predicted beforehand. Agile methodologies of software development were conceived to help developers work in such conditions and shape the product in subsequent iterations based on testing and feedback. A contract that takes those uncertainties into account is also needed. And this is precisely why the time and materials (T&M) contract is now so popular.

In the time and materials model, the client pays for the hours spent by the provider on development.  Materials costs are also included in the price. The final price as well as the time of project delivery are only roughly estimated since they depend on the number of hours developers will spend to end up with a product both the outsourcing provider and the client are satisfied with.

WHEN TO CHOOSE: If you feel that your project is rather hard to estimate, innovative and unpredictable and great flexibility in terms of its scope is needed, time and materials is just what you’re looking for.

Time and materials projects all have flexible scope. Aside of that, however, they may vary greatly. The following two are cooperation models that often include T&M pricing:

• Dedicated teams: Some clients do intend to keep some or even most of the control over the project. They also have their own development capabilities. However, they may still be interested in getting some skilled software developers on board. The outsourcing vendor provides those specialists and leaves it to the client to decide to what extent they should remain under the vendor’s control. Sometimes, they become an integral part of the client’s team for the duration of the project. Dedicated teams are often used for long-term cooperation and prove efficient in projects that involve further development of an existing product. Since the vendor works closely with the client and is often involved in project management, knowledge retention is high.

• Staff augmentation: A more basic approach, in which the vendor provides developers, but everyday (micro) management of the entire development process is the client’s responsibility.

Fixed price – straightforward deal for straightforward projects

The fixed price model is exactly what it sounds it is. It fixes the budget, which means, for the most part, that regardless of how much time and effort it will take the provider to complete the project, the price won’t change. Some clients may prefer the fixed price model over the time and materials one due to this very reason. They often find out that they were mistaken.

Since the software development outsourcing provider can’t easily ask for more funds when the task proves more difficult than initially estimated, they may insist on a very high fixed price. This is why the fixed price works best with simple, straightforward projects, in which all the functionalities and stages of implementation can be described beforehand.

What’s interesting, some projects may involve a fixed price, while other factors such as scope or time remain flexible. Since scope is usually the most unpredictable factor, the team may want to introduce some changes to it (e.g. cutting some unnecessary functionalities) in order to stay within the budget.

WHEN TO CHOOSE: When the scope is clear and possible to estimate, and you are not planning to be very involved in the development project itself, the fixed price model may be right for you.

Managed services – get things done and improve your organization

In recent years, a lot of large companies have been increasingly interested in managed services as a way to outsource all kinds of processes without having to increase the number of external contractual workers every time the workload intensifies. In this model, the provider charges the client based on regular (usually monthly) fees for outcomes that are described in the Service Level Agreement (SLA), which also includes all kinds of relevant information[2]. The client usually doesn’t have full control over the external team. Its members may also change on a regular basis. As long as the vendor manages to deliver everything that is included in the SLA, it’s not considered a problem.

This model is very beneficial for organizations that plan on establishing a long cooperation with their outsourcing providers. The provider is hugely motivated to find the most effective way to deliver the agreed outcomes since this is what it is paid for (rather than provided man-hours).

WHEN TO CHOOSE: This model is perfect for large companies that aim to outsource some of their processes in a long-term perspective, as it provides scope flexibility at a relatively low cost. Some of the risks may include relatively high dependency on a single vendor and the inability to assess the completion of Service Level Agreement (when the contract is badly written or not thoroughly discussed by both parties). This is why only top-of-the-line software development providers should be considered for managed services cooperation.

The chart below is a quick summary of the most important differences between various outsourcing deals

If you made it this far, you must be interested in developing a software project. Software Mind is a Polish software house that aims to provide outsourcing services that offer the best value for money. Because of that, aside of quality software development, we offer our experience in making outsourcing work, which we described in our Software Outsourcing Toolbox. Software Mind offers various models of cooperation and outsourcing deals so that every client can pick the one that is most suitable to their needs. So contact us and tell us all about your next fascinating software venture.