Models of cooperation and settlement in software outsourcing

Over the last few years, there has been a significant increase in the share of services provided using outsourcing on the IT market. Growing salaries of IT department employees, increasing difficulties with their recruitment and the need to  respond quickly to the changing world cause that an increasing number of enterprises are opting for IT outsourcing.

Advantages of outsourcing Broadly speaking, software outsourcing, as in other areas, is to lead to savings or to increase revenues. One of the biggest benefits of using outsource in IT is that there is no need to hire your own team of programmers. Especially in the case of irregular or one-time projects, it is the most beneficial. In this case, it is much easier to use the services of a company that has the appropriate skills and the right team of specialists. Long-term recruitment, high costs of maintaining the IT department or just reluctance of employees to work in a company, where the future is uncertain after the project is finished, make it much cheaper to outsource programming work to the appropriate contractor.The specialization is also extremely important in IT. To get the right effect, it is worth having a team of specialists with different qualifications and different experience. In small projects, it would be impossible to involve so many specialists, this can be offered to us by an outsourcing company that can ‘sell’ us the competences of its people to a small part or for a short time. Thanks to that, we pay for the competences we need at a given moment, without the need to keep employed specialists for a long time. Therefore, even if the cost of employing a specialist by an outsourcing company is higher, we can bear this cost for a shorter period.Many companies from outside the IT industry also pay attention to problems related to the management of a team of IT specialists. Nowadays, these employees are among the most demanding and devastating. Due to the nature of the work of this group, it is also difficult to control and study the quality of work without having appropriate managerial competences. Appropriate management and experience, however, does certainly have an outsourcing company that implemented similar projects to ours.In fact, experience is also one of the most important arguments. Many companies do similar projects so you can easily use that experience in future projects. In the case of projects in the IT industry, this type of experience can significantly reduce the time needed to implement a new product or change.All these factors contribute to the fact that we are able to respond to changes much more quickly and introduce new products. In a rapidly changing world, too much time may pass from implementing an idea to the moment it remains current. For this reason, every day is important and, undoubtedly, the support of outsourcing will be more efficient than recruiting specialists.

“Fixed Price” and Time & Material – the main methods of settlement in IT outsourcing

A company that decides to outsource is faced with the choice of the method of settling accounts with the account. Unfortunately, in the case of the IT industry, it is not so easy and the choice of the appropriate method significantly affects our project. The most popular methods include ‘fixed price’ – the price determined at the beginning of the project or ‘time and material’, i. e. the initial scope of the project determined at the beginning, then the settlement based on the work done. Both approaches have their advantages and disadvantages.

The advantages and disadvantages of the Fixed Price model

The basic, original model of accounting in outsourcing was ‘fixed price’. This settlement model is closely related to running projects in the waterfall methodology. The initial analysis of the project and an attempt to estimate the project allows you to specify the price for completing a given task. This significantly limits the risk on the part of the ordering party, because they know the price from the beginning. On the other hand, the risk is transferred to an outsourcing company, which as a result of the analysis, may not have noticed some difficulties.The biggest disadvantage of ‘fixed price’ is that this method of settlement is difficult to combine with agile software development methods, which are currently much more popular. In today’s world, requirements change very quickly, so determining the scope and its valuation at the very beginning can be dangerous. This approach significantly narrows the ability to make changes to our ideas over time.

The disadvantage of ‘fixed price’ is also the long time necessary for analysis. In the case of agile methods, it is assumed to work on the solution from the very beginning. In the fixed price approach and the waterfall method, it is first necessary to analyse the scope of requirements carefully. Unfortunately, this increases the time needed for the final delivery of the solution.

The advantages and disadvantages of the Time and Material model

Due to the low flexibility of the ‘fixed price’ model, we encounter the ‘time and material’ approach more and more often in the modern approach to outsourcing. Accounting for the work done allows more flexibility. For this approach, there is no need for a detailed analysis at the beginning of the project and the scope of work can be changed quite freely. The time and material approach allows for much easier implementation of agile methods.

Unfortunately, at the expense of this approach, a risk appears. At the beginning of the project, contracting authority does not know exactly how much time the work will take – so the final cost is not known at this stage. Often in the case of ‘time and material’, the problem is also the inability to control the costs actually incurred by the contractor. ‘Time and material’, however, promotes better quality. In contrast to the ‘fixed price’ approach, it is profitable for a contractor to provide a solution in the highest possible standard.

Dedicated Development Team vs Team Extension

If you decide to outsource, there is a serious dilemma, whether you want to decide on hiring a whole team of developers (Dedicated Development Team) or finding only some specialists via an outsourcing company (Team Extension). Every manager who decides to outsource meets that dilemma, and again, there is no unambiguous answer.

The big advantage of the Dedicated Development Team approach is a significant reduction of worries and organizational problems. We fully reflect the process of preparing our solution for an external company, which should ensure that everything is in order. Theoretically, we do not have to worry about anything. In practice, however, this approach also generates many problems. First of all, if a whole team are from an external organization, it will certainly lack the knowledge about the functioning of our own company. It can lead to the implementation of unnecessary solutions. Second of all, the lack of trust may also be a problem. An external company means unknown employees who are hard to entrust with some responsibilities – such as the treatment of confidential data.The answer to these problems can therefore be Team Extension – that is, employing only specialists who are missing in our project. On one hand, we reduce costs (we do not have to hire a whole team), on the other hand, we do not lose all control over our project. Our employees who have appropriate business knowledge and appropriate qualifications participate in the undertaking.

Summary

In summary, outsourcing is certainly the right method of implementing software innovation in our company that has many advantages. The choice of the scope and the method of accounting for our contractor may be crucial for the profitability of this type of undertaking, therefore it is worth considering the issue carefully.

 

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