Have you considered how IT offshore business models can help your business? Pricing models for offshoring can transform your business and give you a competitive edge. As you consider your options, pay careful to available outsourcing pricing models to make optimal use of your financial resources. To help you make the decision that’s best for your company, consider the following four pricing models for offshoring that can affect your IT offshoring decision.
Recommended Resource: Buy Offshoring IT: The Good, the Bad, and the Ugly by Bill Blunden
IT Offshoring: Can it work for you?
Outsourcing and offshoring are similar terms. Outsourcing is the practice of paying a third-party provider to perform some of your business functions. Offshoring is when you outsource to a foreign firm. Offshoring IT jobs has long been popular because of widespread access to high-speed voice and data connections.
For decades, American companies offshoring has used cheap labor in places such as India, China and Mexico to improve efficiency, customer service and profitability. In other words, offshoring often results from a desire for companies to survive rather than a willful desire to abandon the U.S. economy. The benefits of offshoring IT can help you compete in the global marketplace.
Offshoring often results from a need to either expand a range of business services or to improve the speed of delivering deliverables. Either way, offshoring benefits companies that face increasing pressures from global competitors and domestic taxation and regulation. When you recognize the benefits of offshoring, you will want to quickly get started.
As you weigh the pros and cons of offshoring, don’t forget to consider two important things. First, the offshoring of US jobs has become a political hot potato. Donald Trump’s presidential campaign highlighted the history of offshoring and its results on the economy.
Secondly, what we consider here, you should consider the pricing model as you compare offshoring advantages and disadvantages.
1. Offshoring fixed cost model:
Offshoring with the fixed cost model involves a service agreement for a particular duration in exchange for a pre-negotiated hourly price to guarantee budgetary conformance.
Do you have a project with clear-cut objectives and static requirements: If so, fixed-cost might be the most appropriate choice for you above all available pricing models for outsourcing. When you choose this model, you can base your negotiations on your fixed requirements. As a result, you can expect to get a set price for the services that you can use for budgeting.
Fixed cost offers your company important benefits:
* Simplifies planning.
* Eliminates surprises.
* Known service level cost and quality.
Before starting a fixed-cost IT offshoring engagement, you should ask for an in-depth service proposal that documents the cost and scope of services provided along with a compatible timeline. You should also have a written warranty from your service provider that explains the resolution process for disputes.
The fixed-cost model helps you make firm budgetary and scheduling commitments. Still, in about 90-percent of all cases, businesses start projects that have dynamic requirements and an uncertain duration. If that case describes your projects, you should consider other pricing models for outsourcing, such as the time and material model.
2. Offshoring via time and material:
Your IT provider will create a proposal for services based on your initial estimates and create cost factors that allow for variations in your service level requirements.
The T&M (time and material) model for IT offshoring will work well for you if you need ongoing IT services with fluctuating requirements. Some of the uncertainty affecting your projects might include changing markets or unclear requirements. Preparing for a T&M agreement requires that you create initial estimates and define contingencies. Doing so will help you minimize the possibility of service interruptions.
Your company will enjoy benefit from a time and material pricing model in several ways:
* No need to renegotiate contracts as your requirements change.
* Routine project updates.
* Balance timely services with cost
When you begin a project, you might not have accurate information about the time, budget, and specifications you must accommodate. In some settings you might find out that you must execute projects with some known and rigid components mixed with components that require flexibility. For those cases, you should consider a mixed pricing model. Of all the pricing models for offshoring, this one might be the most often used.
3. Offshoring with the mixed mode model:
Your project with a mixed mode pricing model will accommodate you when you have fixed details about your scope and duration but have dynamic specifications.
When you have a project with well-defined requirements, but still have some questions about its specifications and other details, you should pursue mixed-mode pricing. The mixed-mode model will help you control costs where possible while ensuring the availability of a variety of services.
- Leverage the best of two IT pricing models.
- Save money over the T&M model.
Whenever possible, you can reduce your T&M costs by creating well-defined time and budget schedules. Still, you depend on your service provider to manage the work. If you need direct control over the people working for you, consider augmenting your staff with the employees of a service provider.
4. Outsourcing with the staff augmentation model:
Choosing to augment your staff will ensure that you always have immediate onsite access to the skills you need to complete a project.
Staff augmentation also gives you more control over the performance of your third-party resources. Such a case gives you a chance to understand offshoring vs outsourcing. The above pricing models work well at a distance (offshoring), but staff augmentation works best with outsourcing. You’ll need a local or regional service provider to furnish you with the talent you need to operate.
In some cases, offshoring your IT services might be impractical. You might, for example, have a project that requires a specific set of skills. In such a case, you can add a person from a service provide to your staff. Such a person works for your service provider but responds to your direct management and supervision.
Staff augmentation offers some distinct advantages:
- On-demand access to vital talent.
- Strong control.
- More flexible than hiring employees.
When you prepare for a project for which you do not have an adequate staff, you can use the staff augmentation pricing model to put the necessary human resources at your disposal without dealing with the hassles of hiring an employee. Staff augmentation lets your staff scale with demand, so you only pay for hourly services as needed.
Each of the above four business pricing models for your IT offshoring decision has strengths. After considering offshoring pros and cons, you must decide which model to pursue. In many cases, you might need to choose multiple models, depending on how many different types of projects you manage, so you can enjoy a balance of cost, control and service.
Contact Bruce Tyson to get a quote for outsourcing or offshoring IT decision-making services.