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November 4, 2023

Choosing the Best Pricing Model For Your Outsourcing Engagement

So you’ve decided to outsource your software development, but how do you know if you're getting the most bang for your buck? 

Whether it be nearshore outsourcing, offshore outsourcing, or any kind of outsourcing, they all have something in common, they all have a price. When engaging with a software engineering partner for an outsourced project, selecting the right outsourcing pricing model can be confusing. You want to have an outsourced team that has good customer service, team model, and project management, but most importantly cost saving. However, some companies prioritize cost saving over everything else which will do more harm than good. One of the biggest outsourcing mistakes is picking the cheapest option without seeing if it is a good fit. Often an outsourcing company that provides lower rates has to compensate by taking on more projects to meet their quota. This may result in poor customer service, undesired end product, and a new search for another outsourced team. Business process outsourcing is a very involved process and finding a dedicated team that has your best interest in mind both in terms of budget and quality is critical. 

A step that teams can overlook when deciding on an outsourcing partner is the pricing model that the project will use. An outsourcing provider can bring a viable specialized skill to the table, however, without the right software development outsourcing model, business needs may not be met. In these situations, you have to balance the risk and reward for both parties while ensuring that your outsourcing partner provides solutions, not empty promises.

When it comes to outsourcing models, the pricing structure is a key component that can greatly impact the success of a project. Different outsourcing models come with their own set of advantages and disadvantages, and it's crucial to choose the one that aligns perfectly with your business requirements and goals. By thoroughly evaluating the various pricing models available, organizations can make informed decisions that minimize risks and maximize rewards.

The right choice of outsourcing model ultimately depends on the specific needs and objectives of the business. It is crucial for organizations to thoroughly assess their requirements, project scope, budget, and timelines before making a decision. Additionally, it is essential to conduct due diligence and evaluate the capabilities and track record of potential outsourcing partners to ensure that they can deliver on their promises.

Luckily, organizations have a number of outsourcing models to choose from when structuring their next outsourcing team agreement. The question is — how do you pick the right outsourcing model for you? We’ve gathered the top four pricing models that ensure your service provider is delivering maximum value for outsourced projects.
Accelerance has gathered the top four pricing models that deliver maximum value for outsourced projects.

1. Fixed Price Models 

Lacking the bells and whistles of newer outsourcing models, fixed-price contracts can still be very advantageous to projects with a clearly defined scope and a stable set of requirements. Fixed-price contracts put all of the risks associated with the project not being completed on the outsourcing partner by not paying them until the work is completed, conveniently protecting your budget as well. With this outsourcing model, there won't be any surprise costs that pop up, both your development team and your outsourcing provider will know exactly what to expect. The outsourcing contract in this model will be clear of the drivers of costs.

Fixed-price models are perfect for long-term projects with a high value to the outsourcing partner since they incentivize them to complete the work more efficiently and derive more value from the contract. However, be prepared for your partners to ask for flexibility in payment terms. Some outsourcing providers will ask you to pay a percentage of the contract price based on the achievement of certain milestones, like completing the front-end design.

Open communication and transparency are essential for establishing an outsourcing model that adequately addresses risks. Clearly defining responsibilities, expectations, and the scope of work can help minimize misunderstandings and ensure that both parties are aware of their respective obligations. By fostering a collaborative relationship, you can build trust and confidence in the outsourcing arrangement. Since they’ll be assuming all of the risks, they will want to make sure they aren’t left high and dry. If you’re too rigid on terms, you may end up costing your business more in the long run, as some providers will build the cost of risk management into their pricing.


2. Time and Materials (T&M)

The well-worn old shoe of pricing models, T&M requires your outsourcing partner to bid for the project based on your requirements, depth of scope, and the amount of work that will be completed. This model works well if your teams are great at outlining your project needs. That way, your outsourcing partner will spend less time reworking problems, shortening your project completion time and saving you money. However, this outsourcing model will require a lot of heavy lifting on your part. Whether it be your project manager or internal development team, they need to do their due diligence on what your software development project will typically cost in the market. This project based model is dependent on the complexity needed for your software outsourcing. 

In this particular outsourcing model, the key principle to remember is that the more effort and information you invest, the greater the rewards you'll reap in return. Opting for this outsourcing model requires your project manager to thoroughly explore and comprehend the true scope of your software development project. It is crucial not to overlook any aspect during this crucial step. Leave no stone unturned and meticulously document every single detail and functionality that should be included. By providing an exhaustive list of requirements, you provide your outsourced software developer with a solid foundation to build upon. The more comprehensive and detailed the information provided, the more effectively they can shape the development process and deliver outcomes aligned with your expectations. This level of clarity minimizes the chances of miscommunication or misunderstandings, enabling your outsourced team to work in sync with your vision and goals. So, embrace the power of thoroughness and ensure that no aspect is overlooked when diving into this outsourcing model for software development projects.

Be ready to build effective project management teams to ensure the entire project gets finished on time and within budget. You will need to tightly track project performance and avoid costly project delays. Keep in mind, that building in a cushion can help you if the project goes over time or budget with this outsourcing model.


3. Incentive-based Pricing Models

Often an add-on to the more traditional models described above, incentive-based models contain bonus payments to the outsourced developer as a reward for meeting or exceeding performance goals as stated in the contract agreement. Incentives can make up for limitations in fixed-price or T&M outsourcing models, and ensure your partner’s motivations stay in line with your own.

Incentive-based models can be highly effective in bridging the gaps that may exist in fixed-price or time and materials (T&M) outsourcing models. While fixed-price and T&M models have their own merits, they may sometimes have limitations when it comes to motivating the outsourcing partner to go above and beyond. The inclusion of incentives in the outsourcing agreement ensures that the motivations of the outsourced developers are aligned with the goals and expectations of your own business. By offering these bonuses, you provide a clear incentive for the developers to consistently deliver high-quality work and strive to meet the established performance targets.

Moreover, these models also promote a sense of accountability and responsibility among the outsourced developers. With clearly defined performance goals, the developers are fully aware of the expectations placed upon them. This transparency not only enhances their commitment to delivering satisfactory results but also provides you with a reliable means of measure to gauge their performance.

Adding complexity to your engagement model means you’ll need to rigorously ensure that your partner drives measurable benefits for your business. Many companies end up paying partners for premium services that don’t actually benefit them.


4. Shared Risk-Reward Pricing Model

If you’re looking for a model with a bit of extra flair, the Shared Risk-Reward Pricing model may have you coming in on Saturdays. Like the Incentive-based model, this model contains a flat rate and holds additional payments until your partner achieves specific objectives. Let's delve deeper into how this model works and the benefits it can offer.

Similar to other outsourcing models, the Shared Risk-Reward Pricing model involves setting a predetermined flat rate for the services rendered. However, what sets it apart is the additional element of shared funding for the development of new products or projects. In this model, both the client and the service providers contribute towards the financial investment required for the development phase. This builds reliability and accountability into the outsourcing contract. Your outsourcing provider has their own risks and benefits tied to this project so they want the project to succeed as much as you.

By pooling their resources together, the partnerships formed in the Shared Risk-Reward Pricing model create an environment of mutual investment and commitment. The client becomes actively involved in the development process, providing valuable feedback and suggestions while also sharing the financial risk with the service providers. This collaborative approach fosters a sense of shared responsibility and encourages both parties to work towards achieving common objectives.

The Shared Risk-Reward Model encourages your partners to develop ideas that improve your business by sharing the financial risk between both parties and, according to Gartner, assigning responsibilities to the partner mitigates some risks associated with new processes, technology, or models. Be ready for a detailed - and we mean detailed - level of oversight. The result of your partner’s work may be difficult to measure, so you’ll need to be prepared to enjoy the upsides and weather the downsides.


We’re Here to Help

Remember — outsourcing is a partnership, and neither party should enter into the discussion attempting to take advantage of the other.  Effective communication of expectations and selecting the appropriate pricing model are two key factors that greatly contribute to the overall success of any outsourcing venture.

Outsourcing has become a popular option for businesses looking to optimize their software development processes and leverage the expertise of global talent. With the vast array of options available, it can be challenging to determine which model is the most suitable for your organization. This is where Accelerance comes in. Accelerance’s software development experts can help you choose the best model for your engagement. Whether you’re offshore outsourcing, nearshore outsourcing, or onshore outsourcing your software development, contact us to get started!

Andy Hilliard

As CEO, Andy leads and advocates for the globalization and collaboration of great software teams with companies in search of talent, innovation and a globally-distributed extension of their engineering function and culture. Andy founded the ground-breaking nearshore software development services company, Isthmus Costa...

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