What are the types of IT outsourcing models and how to pick the best for your company

August 9, 2023
IT Outsourcing models

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Outsourcing your IT needs can be a great way to save on costs and improve efficiency. It’s an easy decision to make, and it can help you improve your overall business efficiency. But how do you know which model is best for your business? In this article, we are going to present different types of outsourcing models to help you make the right decision.


What is IT outsourcing?

Outsourcing refers to the strategic arrangement where a company entrusts certain aspects of its operations, functions, or services to third-party providers, whether they are located domestically or internationally.

These providers possess the expertise to handle the delegated tasks efficiently, allowing the company to tap into external capabilities. This approach is particularly beneficial in scenarios where cost-effective solutions are sought, and internal resources need to be concentrated on core competencies. This practice encompasses a wide spectrum of activities, ranging from IT services and customer support to complex knowledge-based processes.

For instance, in the realm of software development, a company might grapple with the decision of hiring vs outsourcing for its projects, determining which approach is more viable for their specific needs.

We can divide different types of outsourcing models into three different categories:

  • location based,
  • relationship based,
  • pricing models.

Today, we are going to go through all those outsourcing models and take a closer look at each of them. Let’s start!


Importance of Outsourcing in Modern Business

In the rapidly evolving global business landscape, outsourcing has assumed a pivotal role for companies seeking to remain competitive, agile, and innovative. The importance of outsourcing can be attributed to several key factors:

  1. Cost Efficiency: Outsourcing enables companies to reduce operational costs by tapping into economies of scale and taking advantage of lower labor costs in certain regions.
  2. Focus on Core Competencies: By outsourcing non-core functions, organizations can direct their internal resources, time, and energy towards activities that define their unique value proposition and differentiation.
  3. Access to Expertise: Outsourcing allows companies to access specialized skills and expertise that might not be available or economically feasible to develop in-house.
  4. Scalability: Outsourcing provides a flexible approach to scalability, allowing companies to expand or contract their operations in response to market fluctuations.
  5. Time Zone Advantage: Certain outsourcing models offer the benefit of operating in different time zones, facilitating continuous business operations and faster turnaround times.
  6. Risk Mitigation: Collaborating with external providers can help distribute risks, as the outsourcing partner shares responsibility for delivering quality outcomes.
  7. Global Reach: Outsourcing enables companies to tap into a global talent pool, fostering diversity and fostering a broader perspective on problem-solving.

Location based IT outsourcing models

As your business grows, you may find yourself needing to outsource certain areas of work. But understanding where the best options are can be tough. Nearshore outsourcing, onshore outsourcing and offshore outsourcing are the three most popular models for outsourcing. Each has its own advantages and disadvantages, so it’s important to understand which one is right for your business.

Onshore outsourcing model

Onshore software development means that you outsource your software development in the same country or region as your company residence. What does it mean? It means that your team may be located in London, and required, additional resources will be outsourced from the company located in Birmingham.

Onshore development outsourcing

This model of outsourcing is considered as a local outsourcing and the most convenient option among all of them. The benefits of this model are:

  • no language barriers nor cultural differences,
  • the onshore team is potentially more accessible,
  • it is much easier to communicate, to have meetings or provide trainings as the outsourced team speaks the same language,
  • time zones will be the same or with not much difference.

What would be a downside of this kind of outsourcing then? If you choose outsourcing to reduce your development costs, hiring an onshore team located in the same country may not be that efficient, especially if you live in Australia, Canada, the UK or the USA. All those countries set the highest development hourly rates. That is why, in some cases, it may cost much more than offshoring or nearshoring your work.


Nearshore outsourcing model

Nearshore model refers to outsourced work done in close proximity to your country – usually, it takes place in the neighboring country that is a short distance away. For example, if you live in Germany you may hire a team from Poland, Czech Republic, the Netherlands, Belgium, Switzerland, Austria or even France.

Nearshore development outsourcing

Working with the nearshore team means that the travelling time difference between your company and the outsourcing company shouldn’t exceed approximately 3 hours.

Choosing nearshore software development brings many different benefits such as:

  • the pool of available talents is much more expanded than in your country,
  • labor costs may be reduced which does not always happen with onshore development,
  • time zones differences are significantly reduced in comparison to offshore development (approx. maximum 1h of difference),
  • the nearshore team is still quite accessible on-site if necessary.


Offshore outsourcing model

The offshore model indicates that the hired company is located in another country (including the other side of the globe) with a different time zone.

Offshore software development brings a lot of benefits:

  • you can hire expert team at a lower cost,
  • the pool of available talents is infinite as it does not limit to any borders,
  • you get a great access to the team of experts with higher experience, from all around the world,
  • you get access to the specialists of technologies that you may lack in your own country.
Offshore development outsourcing

On the other hand, with offshore outsourcing model there are many more downsides of this kind of outsourcing:

  • there may be a significant time zones difference that may become a bottleneck for the project,
  • the working culture may be completely different,
  • you may lose control over the project if it is not managed the proper way (you may read our article on how to organize remote cooperation in an IT Outsourcing Project).

Appstronauts is an outsourcing company located in Poland providing .NET, Angular, React and mobile experts. Check out our articles on why Poland is one of the best places for IT outsourcing and 8 facts why Poland is one of the best IT outsourcing destinations.

Location based types of IT outsourcing – the comparison


Nearshore Onshore Offshore
Access to the talent pool Limited Expanded Broad
Cost effective Limited Expanded Broad
Time zones The same 1h difference Significant
Language or cultural differences None Small Feasibly


Types of IT outsourcing models – relationship-based

There are three different types of relationship-based outsourcing models:

  • Staff Augmentation,
  • Dedicated team model,
  • Project based model.

      Staff Augmentation model

      staff augmentation model is about extending your current team with additional IT specialists. You should go with this one, once you have your own team and lacking some experts. The actually hired people may vary as it depends on your needs.

      Staff Augmentation Model

      When to use the staff augmentation outsourcing model?

      • You already have a team of backend developers but the team is too small to deliver on time. Instead of spending money on the recruitment process and then firing people once the project is delivered, you can augment necessary staff.
      • You have a full Android development team and three mid iOS specialists. To fill the lack of iOS expertise you can augment the lacking staff.
      • You have a complete Vue.js front-end team but your senior experts left the team. To fill the expertise gap you can augment senior-level experts only to deliver the project.

      Staff Augmentation model (also known as extended team) is an attitude to fill the gaps in the team instead of going through the full recruitment process. Especially, when you do not need those experts in the long run and temporarily need to supply your in-house team with additional expertise.

      Outsourced specialists become temporarily a part of your in-house team of specialists. You still have full control over project management and the process, augmenting only necessary positions.

      Usually, the staff augmentation model is used for short-term services but can be a great solution in a long-term commitment as well. When to use staff augmentation in the long run then? You can use this model once you need to cut costs on recruitment, fill the skill gaps or you can’t find in-house experts in any field. Instead of waiting for this perfect expert, augment it from a service provider who will supply you with the necessary people.


      Dedicated team model

      A managed team model, also called a dedicated team means that you hire the whole development team for a specific scope of work. The team outsourced this way does not always work directly with your in-house team (yet they can) but they do definitely report their work to your project manager, CTO, or directly to the client.

      This model is suitable for complex, long-term projects, which potentially can be expanded in the future. Especially, when you want to find a product-market fit and need a discovery stage.

      Dedicated Team Model

      When to use the dedicated team outsourcing model?

      • When you are an early-stage startup with the expectation to grow quickly. The dedicated team model will help you to build the team quickly, save money on the recruitment, hiring and maintaining employees processes and focus on the development process.
      • When you are running complex, long-term projects with the potential to expand. When you need a strong development team of design and/or development/QA experts and already have an in-house team for part of technologies, you can hire a dedicated team from outsourcing partner to manage part of the development process with their assistance,
      • When you need support in a specific area of development – for example you already have a full web development team, with the project manager and testers in-house but you need to develop a mobile application that you do not have a team for,
      • When you still want to be involved in each part of decision-making as with a dedicated team you have full control over the development process.

      The same, as with the staff augmentation model, the managed team is assigned to your project. They do not become a part of your in-house team. They work independently under your or they own PM – the way you work with the managed team depends on your needs. Either you can outsource Project Manager as well and then the team reports to the PM or the team reports to your PM or any other person who manages the team.

      The number of outsourced roles also depends on your project. Your outsourcing service provider should be able to help you decide what and how many roles you need based on your project requirements.

      Project-based model

      By contrast to the previous models, in a project-based model you outsource the completion of the entire project to the third party company. In the first place, after you pick your development company, you need to explain the full project requirements of the project and then, the service provider will be responsible for the development team and its deliverables.

      The main advantage of this approach is that the large part of the work is off your hands and the outsourcing company will be responsible for the project from start to finish. They form the development team, deliverables for each sprint while working in Agile Scrum (the most popular one among software houses), carry out the project management and quality assurance parts of the project.

      Project-Based Team

      When to use a project-based outsourcing model?

      • when you have a clear idea of product that you want to build but you do not have the workforce and/or you do not want to hire one,
      • once the project is not your core product and you do not want to bother the management of the project, use your own team that work on other projects or simply, you do not have the right tech-stack for this particular project,
      • when you are a startup and you need an external service provider to provide everyone that you need to start your project.

      The project-based model is actually one of the most traditional and popular forms of software development outsourcing. As a client, you simply deliver project requirements and once the service agreement is signed and the service provider starts work, based on the cooperation model or the methodology of work that is used, you only wait for the deliverables in a scheduled time frame.

      This outsourcing model out of all of them has the least time-consuming from the client side but at the same time you have the least amount of control over the project as all parts of development are on the development company side. It’s up to you and the company how often you meet and discuss the process, challenges and delivered parts of the software.


      Relationship-based types of IT outsourcing – the comparison


      . Staff Augmentation Dedicated team Project-based
      Flexibility High Medium Low
      Control High Medium Low
      Responsibility Client Client/Provider Provider
      Project management Client Client/Provider Provider
      Scalability (team) High Medium/High Low/Medium
      Tech expertise (client) Required Recommended Not required
      Communication Daily Frequently Occasionally


      Read more regarding outsourcing:

      1. Software development outsourcing – how to protect your business idea and rights.

      2. 5 secrets about Intellectual Property protection in IT Outsourcing.

      3. 10 questions to ask your potential software outsourcing provider.

      4. A successful software development project transition plan + checklist.


      Outsourcing pricing models

      Outsourcing your business needs should also help you control costs and scale your operations. Over time, the pricing structure for outsourcing services were changed and adapted to the needs. As an outsourcing service provider ourselves, we decided to focus on the two, most important models that you should consider.

      Fixed price Model

      The fixed price model brings the final cost of the development to the table. Usually, the agreed amount of money is charged monthly or after the whole project delivery. For the service provider it is important to have the detailed information of the delivery expectations to be able to estimate the price and meet client’s expectations.

      Fixed price Model

      This pricing model requires full details of the project scope to be able to estimate the work. What is more, you have to know all the features that should be included in the developed software as this model does not give you a possibility to adjust them in the meantime (as they are already estimated). What is important, once a fixed price model is already agreed it requires a lot of time, money and energy to change the scope of the work. That’s why projects delivered in these pricing models are not flexible nor adaptable at all.


      Time and Materials (T&M) Model

      The time and materials pricing model is based on the time that was spent to complete the assigned project. The final price of the service consists of the hourly rate of the specialist and the actual time that they spent on the project. Even though it seems otherwise, companies often find out that the T&M model is cheaper in the end.

      Time & Materials Model
      This pricing model allows for flexibility and adaptability. The final cost depends on the billing time but the service provider is not tied to specific scope of work and can adapt to any required changes. What is more, the time and materials model often results in a better quality of the service as both parties can pay more attention to the details and adjust the project to the new facts, requirements and ideas.

      How to choose the right outsourcing model?

      There are several factors that you should consider when you need to choose the right outsourcing model for your company. To make a right decision you should consider:

      • the amount of resources (skills and capabilities) you already have in your team,
      • the amount of flexibility you need,
      • if you have the project manager ready to work on the project,
      • time of the project delivery,
      • how big part of the project you need a support with,
      • possibility to hire your in-house team or certain specialists without additional consequences (too high cost, too long on boarding process, no work for them after the project etc.).

      Future Trends in Outsourcing Models

      The landscape of outsourcing continues to evolve in response to technological advancements, changing market dynamics, and shifting business paradigms. As we peer into the future, several trends emerge that are poised to reshape outsourcing models, optimizing their efficacy and aligning them with emerging needs.

      Automation and AI’s Impact on Outsourcing

      The convergence of automation and artificial intelligence (AI) is set to revolutionize the outsourcing landscape. Automation tools, powered by AI algorithms, are increasingly capable of handling repetitive, rule-based tasks, enhancing operational efficiency, and reducing the need for manual intervention. This trend has a dual impact on outsourcing:

      • Efficiency Boost: Routine tasks that were once outsourced can now be automated, leading to streamlined processes and reduced operational costs.
      • Shift in Focus: Outsourcing partnerships will likely be redefined, emphasizing complex, high-value tasks that demand human creativity, problem-solving, and emotional intelligence.

      Reshoring and Rebalancing of Outsourcing Strategies

      The future of outsourcing involves a reevaluation of the traditional offshore model. The practice of reshoring, wherein companies bring previously outsourced functions back to their home countries, is gaining traction. This shift is driven by considerations such as quality control, intellectual property protection, and the desire to foster closer collaboration between teams. Simultaneously, organizations are rebalancing their outsourcing strategies, seeking a more judicious blend of onshore, offshore, and nearshore partnerships. This approach aims to strike a balance between cost savings and proximity-driven advantages.

      Potential New Models or Hybrid Approaches

      Innovation is an inherent driver of progress, and the world of outsourcing is no exception. As industries become more specialized and multifaceted, new outsourcing models may emerge to cater to unique demands. Hybrid approaches that combine elements of different outsourcing models could become prevalent, allowing companies to harness the strengths of various strategies. For instance, a hybrid model might involve a combination of onshore resources for critical project phases, offshore teams for development, and cloud-based tools for seamless communication.

      As businesses traverse the uncharted terrain of future outsourcing trends, adaptability and a forward-looking mindset will be paramount. Embracing technological innovations, reimagining geographical considerations, and refining partnership dynamics will empower organizations to navigate this evolving landscape, ensuring their outsourcing strategies remain not only relevant but also pivotal to their sustained success.


      Conclusion – how Appstronauts can help you?

      Outsourcing embodies the dynamic nature of the global economy, reflecting the continuous evolution of industries, technologies, and market forces. The trends we explored—automation, reshoring, cloud integration, and hybrid models—reflect the adaptability required to thrive in this ever-shifting landscape. As businesses navigate challenges and opportunities on an international scale, outsourcing serves as a beacon of flexibility, enabling them to pivot, optimize, and excel.

      In the symphony of modern business, outsourcing plays a multifaceted role, orchestrating collaboration across borders, fostering innovation, and expanding access to talent and resources. However, it’s important to remember that while outsourcing can be a powerful ally, it’s not without its considerations. Intellectual property protection, data security, cultural nuances, and effective communication are among the nuances that demand meticulous attention.

      If you have any questions about our outsourcing approach, our experts that you can hire in staff augmentation or dedicated outsourced team models or want to learn more about how it can benefit your business, please do not hesitate to contact us! Let’s make Appstronauts your oursourcing partner!

      Appstronauts in numbers:

      • 7+ years on the market,
      • Twenty 5* reviews on Clutch,
      • 150M+ our apps users,
      • .NET, Angular and React experts.

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