Recently, outsourcing services has grown from a fairly simple concept to a complex set of different options and models. World practice has developed in this issue three basic pricing models of cooperation in IT, which we will consider below and focus our attention.
There is a dilemma of choosing one of the available pricing options for software development. Very often the customer chooses how to cooperate, and it is important enough for him to understand how to build relationships with the contractor.
A proper planning phase is important. It’s not only about thinking ahead but also about being on the same wave with your outsourcing provider every day and benefiting from their expertise, as opposed to viewing outsourcing merely as an easy way to offload commodity work. You need to select the proper engagement model that is transparent to both parties and provides strong governance for all aspects of the relationship.
Below we will make IT models comparison, give recommendations on the choice with a description of the pros and cons of each of them.
What Things to Consider Before Choosing the Model of Cooperation
Choosing models of cooperation with a software provider is determined by the specifics of the project, the scope of work on development, integration or software testing, the degree of certainty of the requirements and the customer's involvement in the direct management of the project team. Below we will consider how to choose cooperation models as Fixed Price, Dedicated Team and Time & Material for your own project.
1. What projects should use Fixed Price model
Always companies use a fixed price model of cooperation with IT partners for small software development projects with clear requirements, specifications, and timelines. These can be prototypes or simple solutions for internal use. The project requirements for a fixed price pricing model are well documented. Moreover, as a rule, they do not change during the implementation of the project. Typically this model is also used for short-term software development tasks that do not require close supervision by the client.
How do you know if this model is right for you?
If you are in doubt as to whether to choose this option, simply answer the questions below and if you can answer “yes” to them, then this is what you need.
Is it possible to fully describe the functionality of your product and the stages of its implementation?
Is the development process expected to take less than a few months?
Can you trust the project management function to a representative of the development team?
Can you agree to the terms of the workflow overview?
Is it unlikely that you will have to make any significant changes to the final version of the product?
2. What projects should use Dedicated Team model
When requirements are not precise or specifications cannot be clearly defined;
When at the first stages the project is still “raw”, and there is not enough data to correctly estimate the final cost;
When a client has a constant stream of tasks or improvements, but they are scattered over time and cannot be predicted in advance;
When the scope of the project is unknown or the implementation spreads over several months or even years;
When a customer requires a high level of flexibility or change requests, they often appear in the development process;
When the client wants more direct control over the process or provides certain resources that can influence the implementation of the project;
When the project is related to emerging markets, new technologies or untested facilities.
3. What projects should use Time & Material model
If you doubt whether such a model of cooperation with an outsourcer will suit you, just answer the questions that you see below. If the answers to them are positive, then this method of cooperation is most likely suitable for you:
Are you going to develop a complex product?
Do you want to personally manage the development process?
Are you thinking about expanding your business in the future?
Do you need a team dedicated exclusively to your project?
TIME & MATERIAL
From the name you can guess that this option involves the payment of a fixed amount of money for a certain amount of work.
The fixed-price model is ideal for small and medium-sized projects, where requirements, specifications, and schedules can be clearly identified before project development begins. If the client cares more about the results that will be achieved, this model is more than appropriate. After a customer request, the service provider analyzes the scope and complexity of the project, provides a project implementation schedule and a fixed budget for the full development of the product for customer approval.
Advantages of Fixed Price model
- Good for small and medium projects.
- Clear requirements and clearly defined goals and milestones.
- Low risk for customers, because the responsibility for successful completion of the project lies with the contractor.
- Relatively little customer control is required.
- Fixed price based on a project estimate prior before the start of the project.
- Assurances that the project will be completed within the agreed budget and deadlines.
- The performer is very motivated to be efficient and productive.
Disadvantages of Fixed Price model
- It takes time and resources to fully and expertly determine the requirements, results and eligibility criteria.
- Lack of control over the project, the implementation process, staff participation and material costs.
- Developers rarely communicate directly with customers and cannot discuss every problem, and using the Waterfall makes it even harder to make changes after the approval of each development stage.
- There can be problems with the quality of the final product since the project is managed only by the contractor.
- The customer must pay separately for any significant deviations from the original requirements of the project.
Dedicated Team is a business model in which both parties mutually agree with the workload and project requirements with an indication of the required amount of time, and the outsourcing providers IT specialists who meet the requirements of the customer, who fully concentrate on his projects. The customer has full management control over the project and the team, and the performer does the function of recruiting staff and administrative support.
Advantages of Dedicated Team model
- Full control over the selection, motivation and management of the dedicated team members.
- Daily communication and management using web tools.
- Flexible approach, fully predictable costs and budgetary control.
- Workload and volume are not fixed, and change requests can be made at any time.
- A loyal team of external personnel, with which the client can establish the same working relationships and rules as with the core staff.
- When individual team members work with the client for some time, they have a deep understanding of the client's expectations and clearly see the goal for success.
- Team cohesion and stability.
Disadvantages of Dedicated Team model
- Low efficiency for short-term projects.
- More expensive models than Time & Material and Fixed Price.
- Selection of team members may take some time and postpone the start of the project, while during development, when using the Time & Material model, work may begin in the near future.
- Dedicated team members have fewer opportunities to learn new techniques outside their field in the project.
- The client must play an active role in communication and negotiations and invest a lot of time in management.
Time and material (T&M)
What to do if all the details of the project are not known in advance and it is impossible to predict all the details? What to do if there is no complete vision of the final product and its implementation features and if it is not possible to divide it into several smaller stages. Here you will come to the aid of the model T&M, which will be the best model of cooperation with IT company that allows you to control the development progress and the cost of the final product more. In some cases, this option may be more efficient than the regular fixed price model. One of the biggest advantages of the way of cooperation is the prioritization of tasks for development projects.
Advantages of Time and material model
- The customer pays per hour regardless of the duration of the software development project.
- If the client wants to develop any additional functionality, the contractor is paid only for the time spent by his staff on a specific set of tasks.
- The main advantage for customers is that using the Time and Materials model, their changing requirements easily influence and correct the workflow of the contractor.
- Flexibility with the Time and Materials model is unlimited.
- Using this model, the client can be sure that he receives a high-quality and proven product.
Disadvantages of Time and material model
- There is a risk of loss of profits by the developer due to the establishment of prices below the average market rate.
- Some customers may request discounts at the hourly rate of the developer;
- For the customer, the contractor’s lure may be the temptation to increase the estimated software development time;
- The absence of strictly defined terms or guarantees in the completion of the project;
- Budget estimates can be different from the final cost and be less controlled.
It is up to you to decide which cooperation model you choose; everything will depend mainly on the type of project and the predictability of time and costs for this project. For short-term development with a clear description of the functionality and the concept of the finished product, the fixed price method will be the best choice. For long-term cooperation and in case you are going to change the vector of activity, choose two other models.
Consider Geniusee Your Trusted Partner
Modern digitalization creates very strict requirements for the rapid introduction of changes in knowledge and technology. Therefore, Geniusee relies only on innovative, reliable partnerships and building long-term partnerships. We offer our clients only the best services and optimal solutions from industry professionals.
Our IT specialists carry out work from conceptual modeling to providing technical support to users of the final product and preparing updates for the release of new versions.
What we offer:
Discovery Phase for detailed product overview in 2 weeks
MVP for startup and business in 2-3 months
Complex cloud solutions implementation, e.g. Amazon Web Services, Google Cloud, Azure
Dedicated team with proven expertise & certifications
User-centered product design by UI / UX experts
Data science: proof of concept (POC) based on analytics & modeling
Web / mobile product development
Client care, maintenance, and support
Legacy reengineering service
You can see our works in the Portfolio / Case Studies webpage.
It is up to you which partnership models in IT to choose, everything will depend mainly on the type of project and the predictability of the time and costs for this project. For short-term development with a clear description of the functionality and the concept of the finished product, the fixed price method would be the best choice. For long-term cooperation and in case you are going to change the direction of activity, choose the other two models. Hope you our Geniusee comparison of IT models cooperation was helpful for you.
And remember that a pricing system that has worked well for a specific organization and a specific contractor may not always be the best choice for launching your project.