5 Offshore Outsourcing Pricing Models

Substantial cost benefit is perhaps the driving factor behind companies when they decide to outsource work to companies in far away locations like for example India, China, Romania, Ukraine or Poland.

With the growth of internet and superior technology, the power of outsourcing began to be leveraged to its full capacity.

According to Deloitte’s 2016 Global Outsourcing Survey report, 59% of the respondents believe that outsourcing helps in reducing the costs, while 35% have already started measuring the value of innovation in their outsourcing strategies.

It is imperative to know which pricing model to choose when you are engaging an outsourcing contractor because that is a huge measure of your success while developing your project. In fact, the right pricing model (in the article abbreviated as “PM”) is the foundation on which you start an outsourcing program.

So what is a pricing model?

PM’s are contractual agreements drawn between a company/organisation/business and an offshore outsourcing service provider to decide on a monetary benefit for the completed task. So it all depends on the convenience of the parties involved.

There is nothing wrong and right about a PM, however, there are some standard models you can refer to when you are creating your own model, or you can assume them as they are.

Here are the five different pricing models companies generally refer to while outsourcing projects. Go through them while evaluating your needs and requirements to make it easier for you .

1. Fixed Cost PM

As the name suggests, the pricing criteria will be fixed. The job will be delivered on time, and according to agreement. Hence, it is also known as transaction based PM.

This is more suitable for projects with a clear set of requirements, especially when the requirements don’t change throughout the course of the project. There will be a well-defined timeframe, while the requirements will be agreed upon prior to the starting of the project, and are hard set.

This is more suitable for small-to-medium sized offshore projects, where there are no hidden costs or complications involved. It is perfect for a simple project that has a proper, clear cut procedure and a planned end.

The project goes through series of negotiations during which the aim of the project will be clearly defined, the stages of testing identified and a final proposal will be charted at the end of negotiations.

The model at a glance:

    • Clear-cut requirements
    • Fixed deadline
    • Ideal for small or medium projects
    • Uniform budget, no hidden costs

The benefits:

    • Predictable planning, no unpleasant surprises
    • Less client supervision
    • Assured & defined deliverables
    • Costs are known

2. Full-time developer (FTD) model

This model would give you a developer exclusively for your project. Throughout the course of the project, the team would be working only on your project, so it would be somewhat like having an extension of your internal staff, minus the perks and the bonuses, of course.

Once you choose the offshore outsourcing FTD model, you can choose the developer’s qualifications, skills and knowledge. Choosing a team where the client decides the level of experience. This would really work when you need people with specific skill set for this particular project. Perhaps you wouldn’t be needing them for another project, because you are looking for a different skillset.

If your focus is on getting more flexibility and budget predictability, then choosing the FTD model would be a good idea. And the developers would be working directly under them, so you have control over the project the entire time.

At a glance:

    • Choose skills for a particular project
    • Developers who work exclusively for your project
    • Ideal for businesses looking for flexibility
    • Better control over project

The benefits:

    • You get to work with developers who dedicate their time wholly to your project
    • They have a vested interest in the outcome, it is not just any task for them
    • The developers would be aware of the challenges the business is facing.
    • Control over project throughout its course

A Full Time Developer in India might cost between 2000 US Dollar to 6000 US Dollar per month.

3. Time and Material PM

The Time and Material Pricing Model is perfect for software development projects with no specific goal in mind. If you need to change your specifications from time to time, this would be the ideal way to go.

This is also negotiable, and can be converted into hourly, daily, weekly, monthly basis. You can name your specifications to the service provider, who will then provide a detailed plan based on the complexity of the project, the time of people involved, milestones to be covered, challenges, pricing at the end of each task and so on.

At a glance

    • There is great client involvement throughout the course of the project
    • You can follow strict time schedule, but still prepare for fluctuating requirements
    • This model is negotiable

The benefits:

    • Idea for Agile development
    • Flexible projects
    • You have more control over the outcome
    • Prioritize the different tasks

4. Mixed model PM

As the name suggests, you could go for this offshore outsourcing structure when you need the benefits of both Fixed Price model and the variable price model. If you have a dynamic set of requirements, but a fixed time-frame to roll out your project, this would be a good model for you.

At a glance:

    • You can control the project, because you have the benefits of two models
    • Ideal for changing requirements

The benefits:

    • Enjoy the best of both worlds
    • Better control of your timeline
    • Avoid extra costs

5. Performance Based PM

In the performance based pricing model, you pay the vendor based on their performance. If you are happy with their service and if they are delivered according to demand, you can reward the team with incentives. In the reverse, if the quality of work is not at par with your expectations, the vendor would pay a penalty.

At a glance:

    • Vendors strive for quality
    • Rewards and penalties motivate them to work
    • Quality guaranteed

Benefits

    • Good work ensured
    • Deadlines met

Pondering thoughts

These pricing models, though complex, may help you ease the process of making essential decisions related to your business. If you are unsure of the business model that would promote your project, you can get in touch with a business solution consultant with the vendor to help you complete your projects at affordable costs.

Interesting posts:
Outsource2India gives some insights into different PM’s
Harbinger Systems gives an overview of PM’s in IT

Flickr.com// Pete/ Mark


About the author: Reema works as Thought Leader at PHPBabu.

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1 Comment
  1. Awesome article!

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