IT Outsourcing Types, Models, And Pricing Structure

Modern business runs on software. But that doesn’t mean building that software themselves makes sense. Often the talent and capabilities needed just aren’t there. These circumstances have propelled the rapid rise of several IT outsourcing types designed to meet the needs of all kinds of organizations. Whether you need a massive enterprise solution or a […]

by Dilyan Dimitrov

March 18, 2024

7 min read

It Outsourcing Types, Models, And Pricing Structure

Modern business runs on software. But that doesn’t mean building that software themselves makes sense. Often the talent and capabilities needed just aren’t there.

These circumstances have propelled the rapid rise of several IT outsourcing types designed to meet the needs of all kinds of organizations. Whether you need a massive enterprise solution or a more boutique and niche product to serve a very specific need, there’s a type of IT outsourcing that can meet those needs.

What Is IT Outsourcing?

IT outsourcing refers to the process of hiring a third-party provider to perform some type of IT work. This could be IT support, custom software development, consulting, etc. While organizations use IT outsourcing for a wide variety of reasons, they are most often driven by cost-savings, scalability, flexibility, and the ability to access new capabilities.

Major Types of IT Outsourcing

Considering the immense variety of IT outsourcing types, really understanding it requires looking at how it breaks down by model, geography, pricing structure, and more. These factors will help you consider what your own needs are and how to balance the variety of outsourcing options available.

IT Outsourcing Types Infographic

IT Outsourcing by Cooperation Model

A fundamental question an organization needs to ask when considering IT outsourcing is how they would like to structure that relationship to ensure interests are aligned. Here there are three basic types of IT outsourcing models to choose from.

Dedicated teams

As the name implies, this model is built around hiring a complete team that will be solely dedicated to working on your entire project or one part of it. One advantage is that this model enables you to quickly access all the benefits that come with an experienced team that knows how to work together to get a project done. 

But for that same reason, it may be more expensive as that entire team needs to be ready to work on your project at the same time.

Staff augmentation

This IT outsourcing model enables you to hire additional people to work on your existing projects on a temporary basis. So, for example, if you just need an extra three people with a very specific technical skill set for two months. Instead of going through the hiring process and then needing to decide what to do once those skills are no longer needed, staff augmentation enables you to access exactly what you need when you need it and no more.

Full process

The most hands-off IT outsourcing model, full process means you hand over the entire workload to the outsourcing vendor. You as the client will only provide inputs like requirements, iterative feedback, etc. For that reason, this model is more popular for highly complex projects that require extensive and close interaction between everyone working on them. Costs may also be higher as this is a very involved model.

IT Outsourcing by Business Model

Aside from the question of how you’d like to structure that relationship, there are 3 types of IT outsourcing business models you need to consider.

Onshoring

Onshoring is the process of outsourcing work to another location within the same country. For example, a company based in an expensive city might outsource some IT development work to a company based on a smaller and less expensive city to save on costs. This is a relatively simple type of outsourcing but the benefits it provides aren’t as robust as the other two models.

Nearshoring

By contrast, nearshoring involves outsourcing work to a nearby country, generally in the same region and with some cultural or linguistic similarities. This balanced approach often allows organizations to access more talent and lower costs while still working with a partner who is relatively close to them physically and culturally.

Offshoring

The final and perhaps most well-known type of IT outsourcing is offshoring. This involves sending IT work to farther away places like India, China, or The Philippines. These locations are usually quite distant both in terms of geography and culture, so they may present additional difficulties. But this model usually provides the greatest cost savings, so you’ll need to balance those elements when considering this model.

IT Outsourcing by Geography

Whether you’re looking at nearshoring or offshoring, it’s worth considering the most popular destinations for IT outsourcing globally. Choosing the right option will come down to factors like time zones, language, cost, accessibility, and local conditions.

Eastern Europe

A combination of geographic proximity to the rest of Europe, world-class technical talent, lower costs, and occasionally EU membership have made eastern Europe one of the most popular destinations for all types of IT outsourcing. Countries like Bulgaria, Poland, and Romania have boomed as destinations for both IT outsourcing and even setting up local offices.

Central and South America

For US and Canadian based companies, outsourcing to Central and South America offers locations in the same or similar time zones. In some cases, like Costa Rica, English is also prevalent enough for entire teams to be efficiently set up to work in that language. But even in the rest of the region, there are many options for nearshoring IT support.

South Asia

India has long been a major IT outsourcing destination owing to the lower costs and prevalence of English found there. Those years of experience mean you will have a wide range of options when looking at this region. That said, cultural differences can present their own challenges, which has in part driven the recent shift from offshoring in regions like south Asia to nearshoring.

East Asia

Countries like China and The Philippines have long offered competitively priced technical talent for many types of IT outsourcing. However, here again businesses face the challenges of different time zones and cultures which can impact working relationships. That said, this remains a highly competitive region.

IT Outsourcing by Pricing Structure

IT outsourcing by price - infographic

Aside from the business model and location, there are many ways to structure a successful IT outsourcing relationship to build better alignment and create the right incentives for success.

Fixed price

While not nearly as common as it used to be, fixed price IT outsourcing does still exist. This model sees vendors charge a fixed rate each month for IT services. However, this is only feasible if the scope and requirements of the work are very clear and relatively fixed. In today’s more dynamic business environment, that’s quite rare.

Time & Material (T&M)

This model simply charges based on the time spent and material resources used to complete a project. As a result, it’s quite transparent and flexible, enabling work to be scaled up or down without necessarily needing to renegotiate the terms of the agreement. Assuming the vendor has the resources to meet that changing demand, this may be a good option.

Outcome based

The outcome based IT outsourcing model is all about creating the right incentives to align both parties for success. By fixing costs to the ultimate outcomes of the project, the client doesn’t need to worry about what time or other resources went into the project. It also encourages vendors to deliver more value more efficiently to maximize their own Return On Investment (ROI).

Value based

Closely tied to the outcome based model, the value based model is all about aligning both parties around a set of Key Performance Indicators (KPIs). The payment will be tied to these KPIs, often with bonuses if they are exceeded.

Subscription

The subscription model is a type of fixed price model where the client pays a fixed fee each week, month, quarter, or year for IT services. This has the benefit of predictability for both parties, but it also needs to consider how elastic the client’s needs may be.

Dedicated time

The final common type of IT outsourcing is the dedicated time model. Here the client simply pays an hourly or monthly rate for a set period of working hours. This is more often used for simpler tasks like ongoing support rather than more complex work like building custom software.

Choosing the Right Type of IT Outsourcing

With so many types of IT outsourcing out there, how can you effectively evaluate your options to choose what works for you?

Start by using this article to build a list of the outsourcing factors that are most important for you. From the type of IT outsourcing business model to the geographic location, consider what weight you want to give each factor before developing a final list of requirements. 

You can begin with choosing whether onshoring, nearshoring, or offshoring is right for you. Then, you can evaluate the various geographic regions to see which best suits your needs. At that point you can begin building a list of possible vendors with an eye on the pricing and cooperation models they offer. Of course you’ll also need to consider whether those vendors have the specific capabilities you need, whether that’s IT support, custom software development, or something else.

Now you’re ready to make a choice and unlock all the benefits IT outsourcing offers.

A reader who loves writing, a marketer who loves tech, a nerd who loves sports. Dilyan, our resident writer, half-jokes that his days are filled with everything you can think of - except free time. He joined our team several years into his copywriting career - and he seems to feel at home here. Because, as he puts it, “there’s always cake at the office”.  If he doesn’t have his nose buried in a book, you can typically find Dilyan writing his latest piece, tinkering with his PC, or off swimming/cycling somewhere.