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Different Types of IT Outsourcing Models and How To Pick The Right One?

Aymen Mehreen

16 August, 2023

20 minutes

Have you ever wondered what the secret behind a successful business strategy is? Well, there can be a number of factors but choosing the right software development outsourcing model is the main driver. Software development outsourcing has been around for several decades. It is the prominent strategy businesses use to leverage external expertise for various services.

Software development outsourcing means hiring external professionals or teams to complete your entire software development project or a part of it. It has become popular in recent times as it is the ultimate solution for problems like developers’ shortages, increased wages, skills shortages, and lack of resources and infrastructure.

Now the question is How to determine what type of outsourcing model is right for your business? Most of the time business owners fall prey to outsourcing providers that provide very basic services and have less knowledge about catering to the unique needs of a specific business. Also, the market is full of IT outsourcing service providers with unique plans and endless options. This can also mislead business leaders.

In this blog, we have explored four different types of outsourcing models and help you choose the right one.

Let’s get started.

3 Types of Outsourcing Models & How To Pick The Best One?

There are three main types of IT outsourcing models for software development projects. These IT Outsourcing Engagement Models are based on:

1. Location-Based Types of Outsourcing

• Offshore Outsourcing:

• Onshore Outsourcing (Onsite Outsourcing):

• Nearshore Outsourcing:

• Hybrid Outsourcing: (Multisourcing)

2. Relationship-Based IT Outsourcing Models

• Managed IT Services:

• IT Staff Augmentation (Team Extension)

• Dedicated Development Teams:

• Project-based Outsourcing:

3. Contract-Based Software Development Outsourcing Models

• Fixed Price Model:

• Time and Material Model:

• Build-Operate-Transfer (BOT)

1. Location Based Types of Outsourcing

There are 4 types of outsourcing based on location. These IT Outsourcing Types Includes;

• Offshore Outsourcing:

Offshore outsourcing is a software development outsourcing model in which a company hires an offshore software development team or individual offshore developer from another country to handle the entire project or some parts of it.

Why you should consider it: This is a cost-effective way to access a global pool of talent and can allow companies to scale their development efforts quickly.

When is the right time for it:

If you are a company looking to:

  • Scale your team quickly for projects of varying sizes and complexities
  • Leverage the advantage of different time zones
  • Hire workforce for temporary projects
  • Explore different markets, work cultures, and regulations for the international expansion of your business

Then offshore software development is the right option for you.

Related Article: What is Offshore Software Development – Everything Your Need To Know

• Onshore Outsourcing (Domestic Outsourcing):

In this type of outsourcing model, the software development team is located within the same country as the company that is outsourcing the work.

Why you should consider it: This can be a good option for companies wanting to maintain close communication and control over the development process and access specialized skills or expertise that may not be available in-house.

When is the right time for it:

If you are a company:

  • Preferring to work within the same work culture and proximity
  • Avoiding language and time barrier
  • Looking for face to face interaction with the team
  • Concerned about the security of the data

Then you should definitely go for this option.

• Nearshore Outsourcing:

In Nearshore outsourcing, the development team is located in a nearby country, typically one that shares a similar time zone or language.

Why you should consider it: This can be a good option for companies that want to take advantage of lower labor costs in another country, but still want to maintain relatively close communication and collaboration with the development team.

When is the right time to consider it:

If you are a business looking for low-cost labor but also want to maintain control over the project and work in the same time zone, then this outsourcing model will work for you.

• Hybrid Outsourcing: (Multisourcing)

This is when a company combines elements of offshore, onshore, and nearshore outsourcing to create a customized solution that meets their specific needs. For example, a company may use a team of offshore developers for some parts of the project, while using onshore or nearshore developers for other parts.

Why you should consider it: There are certain projects that can’t work on a single outsourcing model. So, hybrid outsourcing helps businesses leverage the advantage of all the three outsourcing models and create a customized solution that caters to their needs.

When is the right time to consider it:

Hybrid outsourcing should be considered for projects:

  • Having fluctuating workload
  • Requiring speed to market
  • Requiring added resilience
  • Targeting a specific demographic or audience

2. Relationship Based Types of IT Outsourcing Models

There are 4 outsourcing types based on relationship. These relationship based outsourcing types includes;

• Managed IT Services:

Managed Services mean delegating the entire management and control of an IT project to a third party also known as Managed Services Providers (MSPs). These MSPs also provide servers, networks, desktops, and other storage systems. So, organizations short on infrastructure and resources prefer to work with MSPs.

Why consider managed IT services:

Businesses choose managed IT services to cut down unexpected costs, cost of hiring and training resourcing, avoid managing and arranging IT equipment and handle security threats. Also, MSPs provide insights and expertise at a manageable monthly cost rather than an upfront cost.

When is the right time to consider it:

Managed IT services are best for companies:

  • Facing challenges staying up to date with the latest technological trends
  • Having issues with managing the licenses of technologies they are using
  • Having skill gaps in the internal team
  • Having the threat of frequent cyber-attacks and wanting to be resilient.

• IT Staff Augmentation (AKA Team Extension)

IT Staff augmentation means hiring additional IT personnel to support an organization’s existing staff.

Why you should consider it: IT Staff augmentation services provide additional expertise and fills a skillset gap. This model also helps businesses effectively handle an increased or seasonal workload. The augmented staff can work onsite at the organization’s facilities or remotely, depending on the organization’s needs.

When you should consider it: Staff augmentation is for you if you:

  • Want to scale up your in-house team quickly due to time restraints?
  • Looking for temporary resources.
  • Require project-specific expertise.
  • Looking to distribute the workload.

• Dedicated Development Teams:

The dedicated development team model provides a complete team to businesses including developers, designers, managers, and businesses. This team is allocated to one single project for a given time.

Why you should consider it: The dedicated development teams work like an in-house team since the team can be controlled directly by the client. It is a customized and collaborative approach to software development

When you should consider it:

Hiring dedicated development teams is best for:

  • Companies working on long-term projects that are likely to grow in the future
  • Start-ups looking to grow and expand their team without worrying about the costs associated with in-house hiring
  • Projects with no defined scope or requirements

• Project-based Outsourcing:

Project-based outsourcing is a type of software development outsourcing model where a company outsources a specific project to external providers. It is a temporary engagement depending on the size and period of the project. Once the project is complete the engagement ends unlike managed services.

Why Consider this model:

This is one of the best outsourcing strategies if you are looking to retain ownership of the project while outsourcing. Also, it focuses on achieving project-specific goals providing optimized outcomes.

When you should consider it:

Project-based outsourcing is for businesses that:

  • Are working on projects with specified goals, budget and timelines
  • Want to retain control over the project
  • Have budget constraints

3. Contract Based Software Development Outsourcing Models

There are four different types of IT outsourcing pricing models these are following;

• Fixed Price Model:

As per the fixed price model, the client and the software development outsourcing company agree upon a standard rate. This rate is charged monthly, and the deliverables are pre-decided in accordance with the rate.

Why you should consider it:

Here are some of the reasons to consider this type of software development outsourcing model:

  • Predictability
  • Less cost management in the long run
  • No additional or hidden costs
  • Helps you stay within the budget

When you should consider it:

The fixed price outsourcing model is suitable for small companies, usually start ups with limited budget and short-term projects. Although the quality of work is compromised a bit but at least you do not have to bear the burden of cost management in the long run. Also, this model can become expensive for long term projects.

• Time and Material Model:

In the time and Material outsourcing model, the client only pays for the time spent on the project and the number of developers/resources deployed on it. It supports agile methodology where changes or iterations are performed as per the client’s demand.

Why you should consider it:

The time and material model provides maximum control over the project with transparency of payment.

When you should consider it:

If you are a business:

  • Working on a project with changing requirements
  • Want to align the development process with agile and iterative methodologies
  • Requiring external expertise for small scale projects

• Build Operate Transfer (BOT)

A build operate transfer is a type of agreement between the client(recipient) and the outsourcing company(builder) in which the latter builds and operates an IT or businesses process for the client and after some time handover the ownership.

Why you should consider it:

The BOT model helps businesses with low upfront investments for big projects. The builder is responsible for kickstarting the project on behalf of the client. Also, the client gets an advantage of risk sharing with the service provider.

When is the right time to consider it:

The BOT model of IT outsourcing should be considered:

  • For projects requiring long term commitment and investment
  • For creating new IT infrastructure and systems
  • For building data and offshore development centers
  • To provide support and maintenance for current systems

Benefits of Software Development Outsourcing:

1-Get your hands on top talent:

There are a million software development companies around the world. But why have only a few hundred made their mark? The answer is they are working with top software developers and qualified specialists. Therefore, outsourcing is always the best option to work with top talent and stand out in the crowd.

2-Cut cost and development time:

Hiring and training software developers can be expensive, and you need proper infrastructure in place. Also, hiring in-house is time consuming since you will be looking for ideal candidates while managing other tasks. Software development outsourcing companies save you from the hassle by providing pre-vetted teams to start working right away.

3-High-quality Software:

One of the major benefits of software development is that you get high-quality software. How so? You certainly have service level agreement (SLA), metrics and other performance indicators in place, right? This way you regularly monitor the performance and make sure the service provider understands the level of quality you want to attain.

4-Access to diverse skillset:

Niche experts help companies understand technical perspectives better. So, by hiring software developers from outside having diverse skillset helps you explore your project from another perspective.

5- No HR costs:

The third-party vendor takes care of all the expenses related to HR operations. You just get a tailored and readymade team as per your convenience.

6-Flexibility and scalability:

 Need ‘on-demand’ service? Outsource your software development project using any of the IT outsourcing models. This is the only way to enjoy the freedom of choosing the resources and the number of resources and scale the teams up and down according to the project requirements.

7-Focus on business ROI:

The stress related to the development process can impact on your other business processes if you are handling it on your own. The software development outsourcing companies liberate you from such worries and help you focus on core business operations and generate the desired return on investment.

Factors To Consider When Outsourcing Software Development

Now that you know about different types of IT outsourcing models, there are some protocols to follow and mistakes to avoid while software development outsourcing. Here you go:

1. Do thorough research and avoid rushing the process:

This is the first step of hiring an outsourcing partner and most of the businesses do it wrong. Doing thorough research about the outsourcing company can save you from troubles like:

  • Poor quality of work, project delay and rework
  • Collaboration issues
  • Cost overruns
  • Security issues
  • Reputational harm

So, to avoid these issues at the later stage of the project. It is important to make sure the outsourcing company has a good brand image, a clear and trackable history, positive customer reviews and a strong portfolio.

2. Focus on quality over quantity and cost:

Cost shouldn’t be the main driver when hiring a software development outsourcing company. Cheaper is not always better. If you must compromise on the quality of your software just to save some bucks.

Then it’s better to avoid opting for software development outsourcing in the first place. Make sure the company is best at what it does and then negotiate the price, not the other way around.

3. Know your project requirements well:

Another mistake to avoid while choosing the right types of software outsourcing development model is rushing the project requirement discovery phase. If the project scope and requirements are not identified in detail, then how would you communicate it to the outsourcing company? Here are some steps that can help you with the discovery phase:

  • Identify the project objectives and what you want to achieve through outsourcing
  • Understand the needs and expectations of the stakeholders
  • Make a list of technical requirements and prioritize them
  • Define non-technical or non-functional requirements related to your project
  • Learn about industry best practices
  • Draft the finalized requirements in a document

4. Have a backup plan in place:

Outsourcing your software development project doesn’t mean you must blindly trust someone. Sometimes things do not go as planned.

This can result in undesirable outcomes that can be a blow to your reputation. So, it is always a good idea to have a plan B at hand.

5. Efficiently onboard the team and know them better:

The onboarding step is crucial to the success of the project. If you have a solid onboarding process in place, it will be easier for the outsourced team to grasp the requirements and successfully drive the project to completion. No matter what type of outsourcing model you opt for onboarding step remains the same. So, for successful onboarding, you must:

  • Share the internal knowledge base
  • Provide the team with authentic credentials after the security check step
  • Give access to all the necessary tools required for the project
  • Brief them about your work culture and ethics so that they can fit in your company
  • Set real expectations and let them know they are as important as the in-house team
  • Avoid micromanaging

6. Have a solid contract from the start:

Having a poor contract can lead to frequent changes within the project. It can also waste time since the resources are moved back and forth or changed sometimes. It can result in delays and an extended project timeline. To avoid such inconvenience, have a solid contract from day 1 and regular updates and audits.

7. Not having tested coding standards:

Maintaining control over the quality of the code is important for a successful IT project. How can you achieve this control? The answer is simple. You must have well-defined coding standards and a long-term performance vision. This is what differentiates a high-quality code from a low-quality code.

How To Choose The Right Type of Outsourcing Model?

Before choosing the right type of outsourcing model, there are a number of factors to consider. For instance, what rare skillset is your team lacking? Or how much flexibility is required? Here are some questions to ask before you opt any of the above-mentioned outsourcing models:

  1. What are my main business goals and objectives?
  2. What is my budget, timeline and scope of the project?
  3. Does the whole project need to be outsourced or some parts of it?
  4. Which area of the project needs developers with rare skillset?
  5. How much flexibility do we need?
  6. Is my in-house team capable enough to handle the project with an augmented team?
  7. How much time can I spare to carry this outsourcing relationship?
  8. What is the level of control I want to retain?
  9. Is the priority level of the project high or low?

When you answer these questions, you ultimately get a tailored outsourcing solution that fits your business needs.

How to Find the Right Software Outsourcing Company?

Once you choose the right type of IT outsourcing model for your business, the next step is finding the right outsourcing partner as per the model. Here is the process of finding the right software outsourcing company:

1-List down potential vendors

You can find them at many freelancing sites and portals such as Good Firms, Clutch, Upwork, etc. And jot down the ones you think are offering value to your business goals.

2-Send RFP (Request for Proposal)

By sending RFP, you can better know the selected vendors that can fulfill the project requirements and expectations. Also, ask around your business circle for recommendations.

3-Company’s reference portfolio/past clients

Get in touch with the clients mentioned in the company’s or vendor’s reference portfolio to get unfiltered review of the company.

4-Cheaper doesn’t mean better

Never opt for companies that offer rock-bottom cheap rates for their software development services. Never sacrifice quality for cheap rates. Although, you may get good service at reasonable rates from some regions of the world.

5-Security and privacy policy

A vendor offering software development services should have secure servers for the protection of sensitive information. Look for strict security policies if they are mentioned on their official web pages.


Verifying company certifications and accreditations is vital while vetting for the vendors since it’s another area where you can find red flags.

7-Technology stack

Don’t forget to investigate the technology stack of the vendor sometimes, they are not good in the technological area which you wish for your product development.

IT Services That Can Be Outsourced:

The IT outsourcing models can be used for outsourcing a number of IT services. Here is a list of these IT outsourcing services:

• Custom Software Development:

Custom software development has a defined set of requirements. It involves the process of designing, creating, deploying and maintaining software for a specific set of users.

• Cloud Computing:

Cloud computing and services include hosting applications, storing data and managing resources. Usually companies outsource services like Paas, SaaS and IaaS.

• Mobile and Web Development:

These services include designing, developing and maintaining these applications.

• Infrastructure maintenance and support:

Companies hire outsourcing companies to maintain their servers, networks, databases and storage systems. The outsourcing company takes care of the maintenance and security and recovers the data if it’s lost.

• Project Management:

To ensure that the IT projects are delivered on time and on budget, project managers are outsourced to monitor and execute these projects.

• QA and Testing:

These services are outsourced to make sure the software application is reliable. Testing may include functional testing, performance testing and security testing.

• IT Strategy and Architecture Consulting

If a company needs expert advice in areas like technology strategies, digital initiatives and system design, IT strategy and architecture consulting services company is hired.

Software Development Outsourcing Models Provide By CodeNinja

Codeninja is a leading software development outsourcing company dedicated to delivering top-notch outsourcing services in Pakistan and around the globe. We provide you with the flexibility and expertise to unlock the full potential of software development outsourcing. To take your business initiatives to new heights, explore the IT outsourcing models offered by CodeNinja:


Software development outsourcing enables businesses to take advantage of benefits related to it like reduced cost, external expertise and increased efficiency. The above-mentioned different types of outsourcing models help businesses choose the right software outsourcing model and strategy as per their objective and needs. No matter what option you choose, always assess your requirements, risks and challenges and select your outsourcing partner wisely.

Related Article: How To Manage Offshore Software Development Teams?

Aymen Mehreen

Content Writer

Aymen is a Technical Content Writer at CodeNinja – scaling businesses in the SaaS, Quick Commerce, Food-tech, Data Analytics, Healthcare, Ed-Tech sectors through SEO & Content Marketing. For the last 5+ years, she’s been working with both local and international marketing agencies.

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