The demand for IT solutions like websites, web applications, and mobile apps are on the rise now. This has increased the trend of choosing outsourcing development partners to meet the ever-increasing demand of the market.
As per Statista, in the year 2019, the global market of outsourced services has grown by $92.5 billion.
Majority of the businesses in the US & European countries prefer to go for offshore options while planning to outsource. This clearly means that the global market of IT outsourcing will keep on increasing in the coming years.
As per the Deloitte’s 2016 Global Outsourcing Survey, 59% of the people who responded to the survey said that they went ahead with outsourcing aiming to reduce costs.
Not only that but there are other 35% who are focused on measuring the value of innovation in their relationships through outsourcing. Though businesses are opting for outsourcing services to increase their business value, the cost reduction that comes with this service is definitely attractive. It can even be said that the most important driving force for businesses to choose outsourcing for their business is the cost-benefit that it offers.
When it comes to choosing IT outsourcing services, the aim is to get the best output and this can only be achieved by choosing the right pricing model offering maximum benefits.
Which IT Outsourcing Pricing Model To Choose From?
Pricing model is a concept which has been brought up as an agreement between the service providers and businesses. Based on this agreement contract, the price of the software development service is decided between both the parties. The pricing models are to be chosen based on the needs of the business and there is no right or wrong one in the market.
Different Pricing Models For Software Development
Before we get into detail, let’s see different IT pricing models in an overview.
| Pricing Model | Description | Variations in Requirements | Timelines | Client Supervision |
|---|---|---|---|---|
| Fixed Price Model | In this transaction-based model, a fixed price is decided between both the parties before the work commences and the work has to be delivered within the said fixed time. | Less | Delivery timelines are strict | Less |
| Time & Material Model | In case the software development project does not have a pre-set goal and the project needs to have a lot of flexibility, then this kind of pricing model will be best suited. This model will offer the needed flexibility to both the parties. | High | Timelines are based on incremental fashion | High |
| Mixed Mode Model | In case your project requirements are not specific but you need to complete the project within a set timeline then you should think about this pricing model. It is a proper combination of time and material model along with fixed price. | High | Timelines are based on incremental fashion | High |
| Hire Dedicated Team Model | With this kind of arrangement it is possible for you to hire a dedicated team for a specific period of time and throughout that time interval, you will be able to leverage their expertise in the best possible manner. | High | Delivery timelines are strict but dynamic in nature | Very High |
Fixed Cost Pricing Model
The fixed cost pricing model is the most common option that you will find in the market. As mentioned above a fixed rate is decided between both the parties before the work commences and the work has to be delivered within the said fixed time frame.
If you already have a set of requirements, decided and you are sure that it won’t change during the course of software development, then opting for this model can be the best thing to do. For the hard set requirements, an hourly price is bid and both parties agree in delivering the project within a well-defined time frame. This kind of pricing model can be good for projects with small or medium scope, where a proper budget is set and there are no chances of encountering any kind of variable costs. For such type of pricing model, the process followed is very simple, which starts with an inquiry, negotiation, a proposal and finally an agreement.
Some Benefits Of Fixed Cost Pricing Model Are:
- Clear requirements
- Less supervision needed
- Project planning and scheduling is predictable
- Defined deliverable
- High predictability leading lower risks
- Cost pre-defined before project commencement
As said above, this can be a suitable option for you if you know the requirements well in advance and have a fixed cost to pay for it. However, based on the changing market scenario, the price plan may vary. Again, if your project demand fluctuates within your business, you can expect surprises in the end.
Pros of Fixed Cost Outsourcing Model
- No distrust
- No hidden charges
- No turn-ups
- No supervision needed
Cons of Fixed Cost Outsourcing Model
- Limited control
- Preparation takes longer time
- Issues with communication
If you think that fluctuations tend to happen during the course of project development, it would be better that you go ahead and choose other pricing models.
Time And Material Pricing Model
In case the software development project does not have a pre-set goal and the project needs to have a lot of flexibility, then this kind of pricing model will be best suited. This model will offer the required flexibility to both parties. With this kind of pricing model you can carry on with much negotiation and the service can be obtained on hourly, daily, weekly or monthly rates. Based on the specifications of the project and the different use-cases involved, the development team will come up with a proper plan explaining everything, complexity level, development strategy, different anticipated challenges and the cost of completing each task. Here based on what you want to get developed first, you can assign priority.
If you are not clear about your requirements and don’t have a constant flow of tasks set, then by going for this model, you will be able to enjoy some benefits.
The Benefits You Enjoy Are:
- Task prioritization
- Flexible
- Helps with agile development
- Project has more client control
- Agile methodology
- No cost for preparation
- Flexible budget
- No set deadlines
- Time needed for participation
- Budget control is low
- You can control the timelines in a better way
- Saves extra costs for unplanned schedules of the project.
- Proper control over the workforce
- Less expensive as you don’t have to hire full-time employees
- Strict timelines can be met with ease
- Based on the project needs specialized skills can be included in the project
- Reliable team
- Very much effective
- Higher flexibility
- Direct communication
- It is expensive
- More time is needed
- Management effort needed
This kind of pricing model needs more involvement of the client regularly, and there should be strict control when it comes to deciding the final costs.
Pros of Time and Material Pricing Model
Cons of Time and Material Pricing Model
Now, if you want your project to follow a strict time schedule while keeping the project needs to have fluctuations in terms of requirements, then you should rather consider choosing the mixed model for pricing.
Mixed-Mode Pricing Model
In case your project requirements are not specific, but you need to complete the project within a set timeline, then you should think about this pricing model. It is a proper combination of time and material model along with a fixed price.With such a model, you can be sure you can set a fixed cost or duration for your project all the while keeping the requirements dynamically.
Some of the benefits of choosing a mixed pricing model for your software development project are:
In case you want to have complete control over your project and its resources, then you should consider going for a model which will let you hire your staff.
Hire Dedicated Development Team
With this kind of model, you can add in more members to your existing team based on the requirements of your project. You can choose members based on the needed skills to carry out project development. With this kind of arrangement it is possible for you to hire a dedicated team for a specific period of time and throughout that time interval, you will be able to leverage their expertise in the best possible manner.
The Benefits of Using This Model Are:
If you are planning to scale up your team and extend its capabilities easily and quickly, hiring dedicated staff can be a cost-effective method. So, if you are comfortable working with such a team, then choosing this option can always offer you a competitive edge over others.
Advantage you can get by hiring dedicated development team
Disadvantage you had to bear while hiring dedicated development team
It is a fact that choosing the right pricing model for your software development project is a daunting task. If you are not clear about your needs with your project, then you might end up choosing the wrong model. They may lead to project delay and unplanned and unexplained expenses.
For the success of your IT project, you need to make decisions that are well-thought of and strategically considered. So, when it comes to choosing the IT pricing model for your project, take your time to weigh different options or ask the right business solution consultant.
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