Life nowadays has become fast-paced, and businesses struggle for keeping up with the emerging trends to meet the requirements and needs of clients. After this pandemic more and more companies had to shift to remote work. Digital transformation and the need for creating software products have become a prerequisite for the survival and growth of most businesses. And luckily there are software development outsourcing companies in the market that can make this process cost-effective without waste of time and money on hiring an in-house development team, training, and investing in the tools and frameworks. But on the other hand, the guarantee of the success of this process and the highest value contribution is the right pairing system between the contractor and the vendor and the right engagement model. In this article, we try to cover the most common engagement models and billing methods in IT industry, compare them with each other and provide tips on choosing the right one.
We could define the software development engagement model as a group of guidelines setting the relationship between the client and the contractor. It includes details regarding the involvement of developers, responsibilities, obligations, payment terms, time limitations, etc. There are three main types of engagement models: dedicated team, team extension or staff augmentation and fixed bid or project-based model.
Dedicated team model (DDT-Dedicated Development Team) is a widely used outsourcing engagement model. It is typically when full-time working developers, QA engineers, designers, and other professionals from an outsourcing partner company get assigned to a large and long-term project with a duration of 1+ years. So you transfer some portion of your project to a highly qualified self-managed expert team located in a different country and get rid of various administrative issues like hiring, legal documents signing and paying taxes, etc. Usually, dedicated team engagement is performed with the time & material billing method, assuming payments by actual man hours spent on the development process or monthly flat rates are used suggesting fixed amount payments for all features cared by the outsourcing company.
When should you use Dedicated Development Team?
It is mostly used for long-term and large projects upon business expansion when there is a need for additional resources to cover the gap for the needed expertise and/or reduce expenses on hiring extra staff. Dedicated Team engagement model is the best choice when the scope of the project is not defined properly and the requirements change during the development process.
How Dedicated Team Model works
Client provides requirements for the project with the details regarding the technical skills needed, specific and profiles needed.
– The outsourcing partner starts the recruitment process in his local country and provides the list of shortlisted employees to the customer
– Client initiates interviews from his side to provide the final validation of the needed tech skills
– The new staff gets on-boarded by the client and the outsourcing partner to the team
– They start working together on the same project with the clients existing team usually on the same hours, participating on daily meetings, collaborating on the same tools.
So all the processes and workflows and set and managed by the client.
What are the main pros of Dedicated Team model?
– Easily customizable to get fitted to the business requirements as it provides opportunities to collaborate with the expertise of need. Flexible engagement allows the customer to adjust team composition on different stages
– Cost efficient. Monthly salaries for each allocated staff can be discussed with the outsourcing partner beforehand which ensures long term predictable and weighted costs for the contractor. This can contribute to reasonable and effective collaboration.
– Top-notch quality. Developers are fully dedicated to the project and integrated into the business environment.
What are the main cons of the Dedicated Team model?
– Onboarding. There is usually a need to train the supplemented staff to follow the company’s internal processes and embrace the company culture.
– Recruitment time. Usually, it will take time for profile definition, recruitment, and interviews. So perhaps it’s not the best choice when there is an instant need of additional resources.
– This engagement model is not suitable for short-term and small project projects.
Usually, team extension is performed with the time & material billing method, assuming payments by actual work hourly rates, meaning that the costs are changing depending on the scope of the project and workload. Another possibility is fixed price billing when a fixed budget is set for a clearly defined project.
When you should consider Team Extension model?
TEM is ideal for short term projects which don’t have long ramp-up time. Because the augmented staff tends to cost higher for long-term projects. The costs associated with onboarding, training and incorporation into the culture of the company should be considered. Complex projects which have long ramp-up time are not suitable for staff augmentation.
How Team Extension model works
– The process starts with the client addressing the need for extra staff providing details about the required skills, qualifications and expertise.
– The outsourcing company provides list of potential candidates for the job
– The client team manages the further screening process
– When needed staff are selected, the adaption period starts which includes onboarding, training and incorporation into the culture of the company.
– Sometimes adjustments in the workflows and management style are needed. For the better and faster output you may need to create new tools or communication channels.
What are the main pros of Team Extension model?
– Organizations can pull in specific skills sets on a per-project basis, rather than having to hire new employees
– Eliminates the additional cost of having in house employees
– Insures higher level of engagement and motivation of the added staff and therefore higher productivity
– Direct communication and control over the new staff
What are the main cons of Team Extension model?
– Management Capability. Usually, staff augmentation implies capacity building for managing additional staff and the added processes.
– Increased dependence on third-party organizations for talent which add some risk to sustainability plans
– Not an effective model for large projects with long ramp-up periods due to wasted costs inherent there.
Project-based software development model of engagement is the most forthright of the group and the most appropriate one for small and medium-sized software projects. This model supposes that the scope of the work and budget is fixed, and the timeframe is set. So this can be a good fit if the client provides a clear vision for the product and the outsourcing partner takes responsibility for the development and project management. So the whole scope of the project can be seen by the software development company and by a proper estimation and planning the delivery can be made within a preset timeline.
Respectively, fixed-priced billing is the common choice for this engagement model and the payments are made on pre-defined milestones.
It’s important to know that to be able to make a proper estimation the product requirements should be divided to the smallest parts and described at task level. This assumes that the planning phase requires more time than in other cases.
What are the main pros of the project-based model?
– Clarity. All project requirements along with the proper documentation are specified beforehand.
– Liability. The contractor will deliver the project on time and on budget even if it would require extra hours from the team.
– Transparency. The milestones and deadlines are set, so the client can monitor the progress on each stage.
What are the main cons of project-based model?
– Lack of flexibility. A fixed-price model assumes that the scope of the project is fixed and so it is very hard to initiate changes upon need.
– Document preparation takes extra time. Usually writing specifications is hard and approvals from different parties can delay the process.
– Wasted time on planning and estimation. To be clear with estimation you should be able to divide the product requirements to the smallest parts.
Time and Material Plan
This plan suggests that billing is based on actual time spent on the development process (man-hours worked) as well as on the actual cost of equipment and materials used. This is a flexible billing option for clients with changing needs for time and resources. T&M is usually chosen with the projects with agile frameworks like scrum, Kanban and others. The main aim is in providing the most flexible approachto deliver innovative products to a rapidly changing market.
This billing plan is based on cost and time estimates defined by the client’s project details. All payments will be made on pre-defined milestones as the budget is fixed within this particular billing model. This plan is an obvious best choice with waterfall projects when the traditional project management methodologies are used. It fits clear and well-defined small and mid-sized projects. If the client prefers this model they need to create software requirements specification document, provide it to the software development company then wait until they deliver the product without getting involved in the process of development.
Monthly Flat Rate Plan
A monthly flat rate billing plan offers clients a fixed monthly price for all features and all access levels. This is a cost-effective option for short-term projects. This particular pricing model is straightforward and will be suitable for businesses with a tight budget and will enable them to forecast business growth.
Fixed Budget Plan
This plan is very close to a fixed price with one important difference. Here the budget is negotiated and fixed in advance letting the scope change alongside the development process. The main idea is to do the maximum possible within the agreed budget. This may an attractive method of billing but there are risks inherent there. Giving the development party the authority to prioritize the features can result in the loss of control over the project development and thus the success can be at risk.
This plan suggests imposing an upper limit or a cap on the service cost to effectively prevent uncontrolled cost escalations for an outsourced project. A cap that indicates the range of price fluctuation due to inflation and living costs should be considered to avoid unexpected major price changes. Imposing such restraints is worthwhile as it enables a project to ensure that the financial benefits will meet budget expectations. In some cases, a cap can be agreed upon so the outsourcing service provider cannot automatically adjust costs exceeding the cap. If both parties should agree on cost adjustments, the outsourcing agreement may often include a termination clause in case the needed agreement cannot be reached.
Although we cannot mention one cooperation model suitable for any project, choosing the right one can help a client avoid many challenges with project management and align goals around a common outcome. The decision to choose an engagement model can be based on different factors like the workflow of the company, size of the project, client participation preferences, team maturity, delivery time, and envisioned budget.
So this guide can be used to consider the pros and cons of each type of engagement model and understand the billing methods suitable for each of them. Depending on the project specification and features the most suitable option should be chosen and discussed with the software vendor.
If you would have questions regarding the engagement and pricing models and would like to have a consultation with the software development team, contact DevelopWay and we will help you choose the most suitable collaboration model based on your business needs.