The choice between different software development outsourcing models touches not only financial questions. In other words, this is not only about pricing. It touches also such aspects as project management, control, and versatility in terms of changing project scope as the whole. In this post, we explain the difference between the three pricing models in IT managed services:
The fixed-price pricing model means the exact cost of a software development project is predetermined. That is to say, a vendor estimates in advance how much he will charge for the project to complete and you know the exact price before you enter a contract.
This is the most desired pricing model for those who need clear price points. However, the model is not as straightforward as it is mistakably considered to be. So, let’s give it special attention.
The fixed-price model is simple for you as a customer. However, you need to define the project scope clearly in advance. In other words, you preliminarily run business analysis (BA) to understand the exact needs the solution should cover and requirements it should meet. BA results in a detailed software development specification for the project and includes all its features, technology stack, quality metrics, etc. A company you apply with your outsourced IT project assesses its scope and quotes it with its price.
Of course, a fixed price is very appealing to your budget policy. But don’t let it be the only thing you know about the model. Here are some other important details for you to be aware of, so you can make an informed decision and understand it pitfalls and your options within a fixed-price contract:
The time and material model means you engage an IT outsourcing company for their managed services on a “when-actually-employed” basis. Here, you pay for the hours your outsourcing developers actually spend on your project.
The time and material model is great to use in agile software development. That is to say, when it is impossible to assess all the requirements the ever-changing business environment poses on the project. When it is impossible to identify all the features software should have. At last, when it is impossible to guarantee the requirements and, thus, features of the solution will not change during project execution. To conclude, when there is no rationale in project scope assessment once and for all.
Though providing you with great flexibility in terms of changing and improving the final build value, this model is still kinda “to avoid” for many customers. The reason here is it demands a lot of trust in the vendor’s reliability and his commitment to your goals.
The dedicated development team (DDT) model means your vendor builds a team regarding your project needs and assigns them to your project on a full-time basis. While it is your vendor’s responsibility to payroll them, actually, it is you who pay them on a monthly rate.
The DDT model is great when you have a project of a large scope in a highly variable business environment and long duration. From this point of view, the model resembles a T&M model but here you get developers to use their skills on a full-time basis. As if you would employ your in-house developers.
Often, this IT outsourcing model is associated with a long-term T&A model. However, this is not true. Here are the factors that make DDT stand apart from T&M:
As it always happens, there is no “right-for-all-the-cases” model. A fixed-price contract is great for a small project but can be a nightmare for large ones. A time and material contract is great for a large project but still doesn’t provide great control over the project pipeline. A dedicated development team contract provides this control but irrational for small projects. So, selecting an outsourcing contract model is always answering the “What is your exact case, and what do you want to get?” question.