Deciding which pricing model to choose for cooperation with your software development vendor can be hard. If it is a first project you want to outsource to the external software development team you may not be aware of the engagement models available, as well as about the main purposes and risks they bare.
In this article, I will highlight the main risks you as a client can face while working under each of the cooperation models. And of course, I will mention the possible ways to omit each of the risks you can bump into on your way to the successful project.
There is a bunch of pricing models that IT outsourcing providers work on around the globe. However, the main three models used in today’s outsourcing industry are Fixed Price, Time and Materials and Dedicated Team (aka Extended or Augmented Team).
Fixed Price Model
Let’s start with the Fixed Price (FP) cooperation model.
When to use
Fixed Price is the most convenient option for software project development if:
- It is a short term project (3-5 month);
- Your technical requirements specifications are very detailed and clear, the functionality is fully described;
- Significant changes are unlikely;
- As a client, you don’t want to be involved in project management
Fixed price model risks and challenges
First, potential risks take place when none of the above-mentioned conditions is met. In case you do not have a clear understanding of your future product architecture and are not sure what features you want to build, you will most likely have a desire to change something in the process of your software development.
While project changes are still possible within an FP engagement, implementing them will take longer than within a T&M model that will be described below in the article. As far as FP goes, your outsourcing provider can’t go beyond your specified project budget so each change request will have to be paid separately as a standalone task.
Even in cases when all of the basic rules for a Fixed Price project are met, you need to bear in mind the following potential risks:
Long preparation of the project kickoff
You need to understand that it takes time to create a sufficient project specification and pass every document related to the project to your development team (i.e. architecture specification, wireframes, functional and non-functional specs, etc.) and let them go through it and clarify what is still unclear.
The success of this stage is predetermined by the quality of the communication between your Product Owner and a development team. To minimize the risk of misunderstanding at this stage, you’ll need to have a couple of meetings with your provider and write down as many crucial details as possible.
Difficulties changing things when the project is in progress
I’ve mentioned this before. You assume that there will be no changes to your project spec but almost always there will be something quite important to be added or removed. The only solution I can propose here is to perceive it as a rule of thumb that if there is a crucial change you want to make to your specification, make sure to create a change request and renegotiate the final budget with your solution provider. That may go relatively fast if your vendor has a wide experience working within the FP model but I’d recommend you to plan ahead and estimate the time you’ll spend if at least one change needs to be implemented (bureaucratic issues + the change itself). By adding it to the scope of your project, you will be safe from missing the deadline and paying overheads.
This risk is directly connected to the previous one. In case you need to change something while your project development is underway, you’ll need to pay extra. Changes are not included in the budget so be ready to spend more depending on your change request complexity. It is better to overestimate the budget you need for an FP project and add an extra layer to your internal budget that can be spent on change requests.
Minimal client involvement may lead to software quality issues
As well as it seems to be an advantage, the low engagement in project development may work against you. Your dedicated software team will most probably not contact you during the process. You wrote everything down, agreed on minor details, what could possibly go wrong? Many things, to be honest. As a rule, everything that can go wrong will go wrong. By not being involved, you, as a client, lose an ability to control the progress of your project and define in a timely manner if something seems to be different from what you wanted originally. Fixed Price based cooperation has many communicational drawbacks that are not common in other models such as Time & Materials and Dedicated Team.
As a result of possible miscommunications that both parties are not aware of, in the end, you can get an outcome that is a far cry from what you expected.
Time & Materials (T&M) Model
Now let’s take a look at a Time & Materials engagement model. As you remember, this one is a lot more flexible compared to the FP, including:
- An ability to start without a completely ready specification;
- The flexibility of time and budget;
- Better client communication with the development team
- Agile approach to work (iterations, milestones, demos, retrospectives)
When to use
Using T&M is recommended if you want to start fast and develop fast. T&M is perfect for creating an MVP and testing it on the market. It is suitable for projects where specifications and priorities can change fast.
T&M engagement risks
Despite being my favorite type of cooperation, a T&M model can also lead to some risks that you should be aware of.
The project can take much longer than expected
And I do mean much longer! Let’s say you wanted to be flexible, start developing fast and clarify your needs in the process. However, starting immediately doesn’t mean that you’ll finish faster. Lack of a clear understanding of what kind of solution you’re looking to build and lack of in-depth research before the project kickoff can lead to the surprises afterward. The technology chosen may appear to be unsuitable, or the time to be spent on a feature development may unexpectedly double. The only thing you can do with this is to conduct comprehensive research after the project start. You’ll find out almost all possible challenges that will be awaiting your development team and will need to re-estimate the time scope of the project. Be prepared to finish later and do not bind important things to the end of the development work, because the deadline most probably will be shifted.
Low budget control
Remember, you are paying by hours spent. In case the project takes more time than expected you’ll pay more. You should be careful with this one because unreliable vendors will try to exaggerate the time their team spent on this or that feature. You should always ask to confirm why the feature development took more than was estimated at the beginning of the project. However, we advise you to work only with trustful vendors who already have experience and a good track record in the industry.
Another way to avoid overcharge by your outsourcing provider is to estimate the minimum, most expected and maximum budget for a project. In this case, you won’t pay more than the maximum rate and your development provider won’t be able to charge you over the maximum amount while at the same time being obliged to finish the project according to the specification.
You need to be involved to avoid project failure
T&M is kind of a cooperation model that badly needs your direct involvement. If the team works iteratively, meaning it delivers a working part of the software, let’s say, every 2 weeks, you will need to check it at the end of each iteration. You will need to have a progress call with the team at least once a week (if not every day) to understand what they are working on and synch up on the issues and forecasts
Believe me, communication will take a lot of your time but will positively influence the quality of your entire project. To get the most out of your calls and meetings always come prepared: bring all the documents you may need, establish high-level agenda prior to the meeting and make sure you spend no more than 30 minutes on regular progress calls.
Dedicated Team Model
Last but not least, one of the most popular engagement models in outsourcing today is a Dedicated Team.
When to use
As we’ve discussed above, the best case is to hire an extended/augmented dedicated team for long-term complicated projects with tight deadlines. As a client, you will be fully responsible for candidates selection and hiring, team onboarding, management, and communication, and as your dedicated team, your allocated programmers will be fully devoted to your project and concentrate on priorities you establish. Furthermore, your Team can work in full compliance with your in-house corporate mission, values, culture and work ethic. Literally, it’s going to be your extended software development department set up outside of your home country to save costs, access vaster talent pools abroad, and leverage provider’s internal expertise, experience with similar projects, and tribal knowledge.
Despite the advantages that this engagement model has over FP and T&M models, dedicated teams may have some drawbacks too.
Dedicated Team Model risks and challenges
You need to be involved almost 100% in team management and communication
As in the case of the Time & Materials cooperation model, you will need to devote your time and resources to manage the team and get the best value from your offshore endeavors. Of course, you can hire an outsourcing manager to work on site (together with your remote team) to track team progress and help set up communication and other internal processes.
If you can’t afford to hire a site manager to work day-to-day with your external team of programmers, make sure your outsourcing provider can hire/assign one for your team and this person reports directly to you (while also keeping the provider informed on all issues and challenges).
Slower project start
Similarly to the Fixed Price model, your team will need to work closely with you for some time to understand your project goals and requirements, investigate everything regarding the solution you want to build and put together a good spec.
Your new team members will need to get used to your work standards and to work together as a committed team so onboarding and project ramp-up can be pretty time-consuming and last for up to 3 months. But when you leverage your offshore team for long-term benefits, haste is the last thing you want to have on your project! So it makes a lot of sense to wait longer for the project start while making sure you hire the right people for your long-term project development. Once your team is up to speed and works like a well-oiled machine, you’ll enjoy shorter time to market compared to your peers/competitors who use FP/T&M or in-house resources for their product development.
Changes to the project plan
It is pretty common in the outsourced software development that after the first analysis of the specification the development team would decide to change something in how the solution should be built. Whether it will be a new choice of library or tool to use, it should be up to your team to make a decision everyone agrees on.
To conclude with, what I really want to highlight here is, whatever cooperation model you choose, you should focus more on choosing the right development partner to work with on your bespoke project development. The one that is not only experienced and aware of tools and methodologies but rather the one who will dig deeper to understand your real problems and how to solve them, and will guide you along your entire digital transformation journey. Make sure you look for a cost-effective strategic partner with proven capabilities to build, deliver and add value to your digital solution, not just for a cheap subcontractor (cheap solutions always look and feel cheap, so be always focused on cost-effectiveness rather than low price alone). That may sound dull for small projects or part of the projects that are outsourced but it is not. Trust me. You need to look for a company that will go the extra mile to investigate deeper, understand your needs as clearly as possible and develop a solution that will not just help solve your current issue but will allow your business to scale and be prosperous in the future.
Hope an article was useful for you! Will be happy to hear your thoughts in the comments below!