The software outsourcing industry is booming, with businesses of all sizes turning to external service providers to meet their IT needs. Web development, software development, and mobile app development are just a few of the many services that can be outsourced. In fact, according to a report by Statista, the global software outsourcing market was valued at a staggering $92.5 billion in 2020 and is projected to reach $98 billion by 2024.
Hiring an external agencies your IT services can be a game-changer for your business, freeing up valuable time and resources so you can focus on what really matters: growing your business. Whether you’re a seasoned entrepreneur or a small business owner, software development service provider can help you to achieve significant cost savings and help you stay ahead of your competitors.
In this blog post, we’ve got you covered with everything you need to know about software outsourcing. From the basics of this approach to the different categories, pricing models, and service cost calculations, we’ve got the information you need to make informed decisions. So why wait? Keep reading to learn more!
What is Software Outsourcing?
This term refers to the practice of hiring a third-party company to handle your software demand, including software development, testing, maintenance, and support. The outsourced IT vendor is responsible for providing the necessary expertise, infrastructure, and resources to complete the project.
Common examples include web development, mobile app development, software development, cloud computing, and data management. It has become a popular business practice for companies of all sizes, offering a range of benefits including cost savings, access to specialized expertise, and increased efficiency.
Benefits of Software Outsourcing
Whether you’re a small business looking to save money or a larger business in need of specialized expertise and resources, software outsourcing can benefit businesses of all sizes. It offers a wide range of benefits, including significant cost savings, access to specialized expertise, increased focus on core business activities, flexibility and scalability, and improved efficiency and productivity.
Access to specialized expertise
Asking for services from IT vendors can provide businesses with access to specialized expertise in areas such as web development, software development, mobile app development, and data management. This expertise can help businesses to improve the quality of their products and services, as well as increase efficiency.
Cost savings
Looking forward to saving costs for your startup? Software outsourcing may be the answer you’ve been searching for! By hiring service vendors to help with common IT functions, businesses can avoid the cost of hiring and training in-house staff, as well as the equipment and infrastructure required to complete a project. Plus, this approach provides access to a pool of specialized talent that may not be available locally, ensuring that your project is completed to the highest standard.
Increased focus on core business activities
But outsourcing is not just about cost savings – this practice also allows businesses to focus on their core competencies and activities, giving them the freedom to grow and expand without being bogged down by IT-related tasks. Additionally, businesses also have the flexibility to scale up or down their computing requirements as needed.
Flexibility and scalability
By hiring an external service provider, businesses can enjoy the flexibility to scale up or down their computing requirements as needed, ensuring that they have access to the resources they need, when they need them.
Improved efficiency and productivity
Hiring IT services can help businesses to improve their efficiency and productivity, as they can leverage the expertise and resources of external vendors. This can result in faster and more efficient project completion, as well as increased customer satisfaction.
Types of Software Outsourcing
There are three main types of software outsourcing, including onshore, nearshore, and offshore outsourcing.
Onshore outsourcing
Onshore outsourcing refers to hiring a company within the same country as your business. This type of outsourcing can be beneficial for businesses that want to maintain close control over their projects and require a similar time zone and cultural understanding.
Nearshore outsourcing
Nearshore outsourcing involves hiring a company in a neighboring country. This type of outsourcing is beneficial for businesses that want to access a similar time zone and cultural understanding, but also want to take advantage of lower labor costs.
Offshore outsourcing
Offshore outsourcing involves hiring a company in a different country, often in a distant time zone. This type of outsourcing is beneficial for businesses that want to access specialized expertise and resources at a lower cost. However, offshore outsourcing may require businesses to deal with cultural and language barriers, as well as different time zones.
Outsourcing Models
When working with IT vendors, you will be asked to choose from several models, each with different service structures and pricing. To make an informed decision, you need to understand the most popular IT outsourcing models available today.
Staff augmentation is a popular model in which a business hires additional staff on a temporary basis to supplement their existing team. This model is often used when a company needs to scale up quickly or requires specialized skills for a short-term project. The staff augmentation model allows businesses to have more control over the project and the team members, while also reducing the cost of hiring full-time employees.
Project-based outsourcing is a model in which a company outsources a specific project to an external vendor. This model is often used when a business does not have the necessary skills or resources to complete the project in-house. The project-based model allows businesses to reduce costs and increase efficiency by leveraging the expertise of the vendor. This model is often used for one-time projects, such as website development, software implementation, or data migration.
A dedicated software development team is a model in which a business hires a team of developers to work exclusively on their projects. This model is often used when a company requires ongoing development work or has multiple projects that require development resources. The dedicated software development team model allows businesses to have greater control over the project, the team, and the development process. This model also allows for greater collaboration between the business and the development team, which can result in faster development and greater innovation.
An Offshore Development Center (ODC) is a model in which a business establishes a dedicated team in a foreign country to carry out development work. This model is often used when a company requires a larger, more long-term team, and wants to reduce costs by leveraging the expertise and lower labor costs in another country. The ODC model allows businesses to have a dedicated team working exclusively on their projects, with greater control over the team and the development process. This model is often used for ongoing development work, such as app development, web development, or software maintenance.
Pricing Models
When it comes to outsourcing, pricing models play a crucial role in determining the cost and profitability of the project. There are several different pricing models available, each with its own advantages and disadvantages.
The cost-plus pricing model is a model in which the vendor charges the client for the actual cost of the project plus a fixed percentage of profit. This model is often used for projects where the scope is not well-defined, and the costs are difficult to estimate accurately. The cost-plus model provides transparency to the client, as they know exactly what they are paying for, and it allows vendors to make a reasonable profit while ensuring that they are compensated for any additional expenses.
The fixed price pricing model is a model in which the vendor charges a fixed price for the entire project. This model is often used for projects with a well-defined scope, where the costs can be estimated accurately. The fixed price model provides predictability to the client, as they know exactly what they will be paying for the project, and it allows vendors to manage their costs and profitability more effectively.
The time and materials pricing model is a model in which the vendor charges the client for the actual time and materials used to complete the project. This model is often used for projects where the scope is not well-defined, or where there are likely to be changes or additions to the scope during the project. The time and materials model provides flexibility to the client, as they can make changes to the project as needed, and it allows vendors to be compensated for any additional work required.
The rate card pricing model is a model in which the vendor charges the client a set rate for each service or resource used. This model is often used for projects with a well-defined scope and is commonly used in the IT industry for services such as software development, testing, and maintenance. The rate card model provides transparency to the client, as they know exactly what they will be paying for each service or resource, and it allows vendors to manage their costs and profitability more effectively.
Service Cost Calculation
Calculating the cost of outsourcing IT services is a crucial step in determining the financial viability of the project. By understanding the full financial impact of outsourcing, businesses can make informed decisions about whether outsourcing is the right option for them.
The process of calculating outsourcing costs involves four steps:
Step 1: Specify the IT functions to be outsourced
The first step is to identify the specific IT functions or tasks that will be outsourced. This includes identifying associated costs such as hardware, software, and training. Specifying the scope of the project is important in determining the overall cost.
Step 2: Determine avoidable internal costs
The second step is to identify the internal costs that can be eliminated or reduced as a result of outsourcing. This includes salaries, benefits, and overhead costs associated with internal IT staff. By determining these costs, businesses can understand the potential cost savings associated with outsourcing.
Step 3: Calculate the total outsourcing costs
The third step is to calculate the total outsourcing costs, including the costs associated with the vendor, such as fees, taxes, and travel expenses, as well as any additional costs associated with the project, such as hardware, software, and training. It’s important to consider all cost factors to obtain an accurate estimate of the overall costs.
Step 4: Measure the difference
The final step is to measure the difference between the avoidable internal costs and the total outsourcing costs. If outsourcing costs are lower than the avoidable internal costs, then outsourcing may be a viable option for the business. It’s important to note that calculating the cost of outsourcing IT services is not a one-time process. As the project progresses, it’s crucial to monitor costs and adjust the budget accordingly. This will help to ensure that the project remains financially viable and that any cost savings are realized.
Conclusion
In today’s fast-paced business environment, hiring IT services can be a game-changer for businesses of all sizes. It provides access to specialized expertise, cost savings, and the flexibility to scale up or down as required. But to fully reap the benefits of outsourcing, it’s important to understand the different types of outsourcing, pricing models, and service cost calculations. By making informed decisions, businesses can focus on their core competencies and activities, while leveraging the expertise and resources of external vendors. This can result in faster project completion, improved efficiency, and increased customer satisfaction.
Looking for a trusted vendor to outsource your IT services? Look no further than TechHub.asia! Simply specify your business needs and we’ll match you with the perfect IT partner. Our team is dedicated to providing top-notch service and support, so you can focus on growing your business. Ready to get started? Check us out now!