Key Service Models in IT Outsourcing

Ever commissioned a service only to realize later that it wasn’t what you needed?

When a lawnmower forgot to mention that it is you who were responsible for providing the equipment, the whole experience is frustrating, but not much of a loss. However, when it comes to IT outsourcing, a suboptimal service model might become a costly mistake, leading to overspending, missed deadlines, and a loss of competitive edge.

But here’s the deal: in the IT outsourcing space, the term “service” gets used pretty liberally. So let’s establish some clarity first:

A service has:

  • a clear scope (boundaries) stating what’s included and what’s not.
  • terms of engagement, outlining how it will be delivered and what’s expected from you as a buyer.
  • fair and transparent price, matched by respective service levels.

In this context, an IT outsourcing service model is a framework used by vendors to structure and establish responsibility scopes and terms of engagement.

Keeping the definition above in mind, let’s take a closer look at the three common types of IT outsourcing models.

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1. Advisory & Consulting

IT advisory and consulting services have the broadest scope, covering the different aspects of creating, developing and aligning technology strategies with the company’s objectives (both current and future).

In short, the goal of advisory service model is to:

  • Articulate the customer’s problems and needs
  • Propose and assess several viable solutions
  • Suggest an implementation roadmap for the selected one(s)

For example, Accenture recently consulted Magneti Marelli, an automotive supplier, on a major digital transformation project, aimed at upgrading the company’s manufacturing process. As part of the advisory services, Accenture:

  • helped define the optimal information technology and operational technology (IT/OT) application suite that would support the future industrial IoT platform.
  • proposed proof of concept solutions to improve operation’s monitoring efficiency in real-time.

IBM also offers a host of tech advisory services and hands-on consultancy when it comes to implementing their products. In the case of Etihad airlines, for instance, the IBM team hosted a workshop that helped the carrier refine their customer experience objectives and determine the optimal stack of needed technologies. Further, IBM supported the implementation of these.

In general, IT advisory services can cover any type of strategic, operational, implementation, or architectural need your company has.

Advisory services are:

  • Targeted short-term engagements
  • Flexible and customizable up to your needs
  • Have clear deliverables and implementation steps

Edvantis’ Vision

Edvantis chose a narrower scope for our IT consulting service model: We primarily focus on  operational and strategic readiness assessments for IT outsourcing. As part of our client engagement process, our IT consultants will help you:

  • Select the optimal IT outsourcing service model
  • Optimize internal processes to accommodate an external vendor 
  • Mitigate possible risks or blockers to effective collaboration

With our IT consulting service model, you receive a set of clear steps for tailoring your outsourcing partnership to fit your business needs.

When Advisory Service Model Makes the Most Sense

The advisory service model is sharp and acute: its result is a set of guidelines and steps you should take to achieve the desired outcome (e.g. migrate to a new ERP system within 6 months).

However, even the best advisory will fall flat if your company does not have the “muscle” for implementing the proposed changes.

To gain the most benefits from IT advisory service model you should:

  • Have strong support and engagement on a c-suite level
  • Allocate sufficient resources for implementing the proposed suggestions
  • Focus on the under-structural changes first, crucial for further success
  • Proceed to the next stages only after the cornerstone suggestions are adopted company-wide.
  • Make sure that every stakeholder follows through on the required steps
  • Have established change management processes.

2. Project-Based Outsourcing Service Model

A project-based service model is outsourcing in its “classical” sense. You have a certain task that you want to hand on to a third party. Your outsourcing partner will completely relieve you of the burden of management and get the job done according to the predefined specification, timeline, and budget.

Managed projects have:

  • A fixed scope, price, and pre-defined timeline
  • Reduced delivery risks as the vendor takes most responsibility regarding its success.

The latter commands higher development costs (compared to the capacity service model). However, it leaves you with greater peace of mind as you don’t have to be actively involved in project management.

Still, there are certain risks and managed projects do tend to fail. In most cases, this happens for three reasons:

  1. Unrealistic budget/timeline expectations for the project
  2. Suboptimal vendor selection, driven by Good-Fast-Cheap mentality
  3. Lack of product vision, market research, and target audience segmentation.
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To minimize the risks of failure you should:

  • Understand what you are buying: ask the vendor to provide a clear description of the service scope and walk you through additional add-ons. Proactively ask questions and request clarification to any gray areas.
  • Lay the groundwork: prepare a list of business and tech requirements or a more basic project specification document clarifying the key quality attributes of your product. Outline your vision, add a list of target personas, etc. If you lack either of these, look for an IT vendor who offers help close the gaps in your product concept via discovery.

When Project-Based Outsourcing Model Makes the Most Sense

Managed project is a fixed-price outsourcing model with strictly limited scope. Thus, it is best suited for small-to-mid-scale initiatives that can be formalized in a list of clear requirements. It’s also a good starting point for MVPs (minimal viable products).

The option can work well for:

  • People who are new to IT outsourcing, but have strong product expertise
  • More seasoned buyers who want to diversify software development risks and focus more on business development, rather than engineering.

3. Capacity Outsourcing Service Model

As the name implies, this IT outsourcing model gives you access to more talent – on-demand, on your terms, and within your budget.

The capacity service model is an excellent means to close the gaps in your needs with the right people, especially in the face of the ever-increasing IT skills gap.

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This outsourcing model entails two capacity types:

  • Staff augmentation model – additional people with the required skill set to work on the project in conjunction with your internal team. Your outsourcing partner overtakes the recruitment process, covers turnover costs, and offers administrative support (office space, equipment, HR support, payroll assistance, and perks). You pay a monthly fixed rate per employee and cover day-to-day management and training processes.
  • Managed team model a ready-to-perform delivery unit, assembled based on your needs, that can put down any fires at your end. In this case, your tech vendor is responsible for ensuring high performance of the outsourced team in line with the pre-agreed Software Development Life Cycle, while workload allocation is either a shared or your responsibility.

The key difference between staff augmentation and managed team service models is the scope of your responsibilities as a client.

Staff augmentation model assumes a more hands-on approach to managing people and ensuring that they are well-integrated within your company. A managed team is a well-oiled unit, requiring less ramp up time. The long-term ROI of a managed team is also higher as the team develops a deep tech knowledge of your product, falls into a productive routine of working together and aligns with the rest of your organization. From our experience, though, the managed team model rarely works well for short-term projects under 3 months.

When The Capacity Outsourcing Model Makes the Most Sense

Staff augmentation: Is best when you need to fill specific skill gaps in your in-house team. But since you’ll be directly responsible for managing people and allocating work, having an experienced CTO on board and/or a stakeholder with outsourcing experience will be crucial. Otherwise, you risk ending up with a bunch of experienced developers who remain idle most of the time since you can’t properly collaborate with them.

Managed team: Is a better-fit for long-term projects where you seek to cover a wider tech need and delegate responsibility for team management. For instance, you need a full-cycle, large-scale quality assurance services but have no in-house expertise. So your vendor takes more accountability and assembles the team with relevant roles (PM, tech lead, manual testers, automation testers, test analysts) and overtakes daily workflow management.

If you already have a strong tech DNA and established delivery framework that can accommodate an entire tech team, a managed team will enable you to deliver bigger projects systematically at a fast pace. Meanwhile, with staff augmentation you merely fill in the gaps in current needs or gain resources for a small project.

The managed team model enables rapid, seamless scaling and increases time-to-market for new products. This model also lets you shift resources towards emerging market demands and subsequent project changes.

Switching Between IT Outsourcing Service Models

Economic conditions change and your business needs to adapt. If your IT outsourcing service model no longer meets your needs, your vendor can offer you to transition to another one. However, switching doesn’t happen overnight.

Let’s say you want to transition from Staff Augmentation to Managed Team. Your vendor will need time to fill in new roles and establish supporting workflows for project management.

The best way to ensure a smooth transition between IT outsourcing service models is to be proactive in your communication.

If you keep your IT outsourcing partner informed about plans upfront, they will:

  • Advise you on the most efficient way to transition between IT outsourcing models
  • Have enough time to find additional candidates and resources (if you scale up)
  • Have enough time to transfer knowledge to you (if you scale down)
  • Warn you early on if they have no resources for scaling up

To Sum Up

Most negative IT outsourcing experiences stem from unmanaged expectations. That’s why at Edvantis we aim to (over)communicate the scope, limits, and prerequisites of different IT outsourcing service models as early as possible. After all, we are more interested in having you onboard for the long term, rather than making a one-off sale.

Starting a project? Contact our team of experts for a preliminary consultation on the optimal IT outsourcing service model.

FAQ About IT Outsourcing & Service Models

What is an outsourcing strategy?

An outsourcing strategy is a plan that outlines business processes the company delegates to third-party providers, detailing the criteria and limitations for vendor selection. The strategy determines whether you partner with multiple outsourcing companies or delegate tasks to a single provider. To streamline the decision-making process, the outsourcing strategy roughly describes the desired characteristics you seek in outsourcing partners (tech expertise, domain knowledge, pricing models, cooperation models, time zone differences, cultural similarities, etc.).

What are the risks of outsourcing?

The biggest risk is project failure, caused by the lack of alignment between outsourcing goals, project requirements, and business strategy. Inadequate scope definition and change management can lead to financial risks, additional costs, and prolonged delivery times. Poor day-to-day team management causes a decline in team performance and talent retention. Additionally, cultural differences and language barriers can complicate collaboration issues between your in-house team and outsourced specialists. Lastly, you pose a chance of selecting an outsourcing service provider who lacks claimed tech expertise and customer service. Learn how to mitigate risks in our outsourcing risk management post.

How do I select a good outsourcing partner?

When researching outsourcing companies, your primary goal is to define whether they provide the domain and tech expertise you need, have high service quality and a proven track record of satisfied clients, and offer optimal development rates. Then establish additional requirements and check a potential vendor for regulatory compliance, risk management practices, proximity, language proficiency, sustainable practices, etc. This is the short answer. For more details read our in-depth vendor selection guide.

How do you manage an outsourcing project?

The management of IT outsourcing projects depends on the service model. In a managed project, you will hold regular meetings to refine your product vision. The rest is up to your vendor. With managed teams, you are responsible for change management, budget & time estimations, and specification refinement, while the vendor takes on some of the team management duties. With staff augmentation, you fully manage the project while the outsourcing partner takes care of recruitment and administrative support.

What are the types of outsourcing?

There are three location-based types of outsourcing: onshore, offshore, and nearshore. Onshore outsourcing (also called domestic outsourcing) means delegating software product development within your country. Offshore outsourcing is about recruiting a vendor from all around the world. Nearshore outsourcing means hiring an external outsourcing provider from a nearby country.

How to choose an IT outsourcing model?

Steps to selecting an IT outsourcing model: define your project vision, specify project scope, single out tasks you will outsource and those you keep in-house, and highlight potential skill gaps. Or as an alternative, contact your IT outsourcing company and hold a discovery meeting. During discovery, the vendor will analyze your project information and advise you on the best-fit service model and outsourcing team composition.

What are the benefits of outsourcing?

The benefits of traditional outsourcing are cost reduction, improved efficiency of IT function, access to a wider talent pool, access to niche expertise and innovation, and redistribution of internal resources. With outsourcing viewed as a strategic partnership, the benefits are further expanded with accelerated growth, proactive project scaling, aligned resources, and joint efforts (and responsibility) for project success. Transitioning from contractor-client relationships to value-driven co-creation gives you and your outsourcing vendor a greater return on investment.

What are the types of outsourcing models?

IT outsourcing service models are roughly divided into IT consulting, project-based models, and capacity models. IT consulting entails the assessment of your IT infrastructure and recommendations to help you transform, optimize, or align it with your business goals. The project-based model involves hiring an external company to plan and execute the entire project within a fixed price, scope, and timeline. Capacity models facilitate talent access in two ways: by bridging specific skill gaps (staff augmentation) or assembling an entire ready-to-perform team (managed team).

What are the factors to consider prior to IT outsourcing?

Assess whether IT outsourcing makes sense for your business strategy and if so, set specific goals and objectives you expect from a partnership. Next, identify the key areas where outsourcing could be most valuable and specify your capacity needs. Next, evaluate whether you have appropriate operational processes in place to oversee the outsourcing project or manage distributed teams. Finally, make sure you have a communication plan and knowledge-sharing procedures set up for better vendor integration. For more info, read our IT outsourcing readiness post.

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