Outsourcing remains an excellent way of implementing projects in companies across the planet. Cost-savings, a better competitive advantage, increased productivity, and reduced time of project implementation are some of the benefits that make this approach ideal for businesses.
That said, when it comes to outsourcing, the success a company achieves on a project depends on the choice of engagement model to implement. In this article, we will tell you about two engagement models in outsourcing, staff augmentation (aka out-staffing), and turnkey projects (aka managed projects or time and materials (T&M) and fixed-price projects). We will explain each model in-depth to help you understand the differences, and, thus, help you choose the one that’s suitable for your situation.
Staff Augmentation (aka Outstaffing)
Staff augmentation is an outsourcing approach that is used to staff a venture and address company goals. It involves the use of necessary technical resources, typically offshore, recruited as overseas development extensions of in-house teams on fixed or flexible terms.
In this approach, the hiring company (staff augmentation provider) takes care of screening, vetting, hiring, and retaining specialists added to a client-tailored team. Then, if any skills gaps are identified at a specific phase of the project, qualified personnel are recruited on a short- or long-term basis as ad-hoc talent.
Types of Projects It’s Best Suited For
Staff augmentation is suitable for these types of projects:
- Short-term: Businesses usually turn to this solution during their peak seasons, when a project phase comes with many tasks, and the in-house team cannot cope effectively. It is also an option when an in-house professional is sick or on a break.
- Long-term: If a company has a lengthier and more complicated project and does not have an expert with a specific skill internally, software team augmentation can come in handy.
Where Does Project Management Reside?
With staff augmentation, project management resides at the client’s end. More specifically, the company seeking staff augmentation will retain control of the project from start to completion. It means the client has 100% control of all essential functions such as project management and technical leadership and has a direct influence on tech hiring. That said, from time to time, the business would have to assess its employees and find any necessary supporting skills to help specific initiatives.
By implementing staff augmentation, a business will enjoy a more effective budgeting process. It is because all the costs of recruitment are factored in when it comes to the total cost of the outsourcing engagement. Most of the time, companies outsource their projects to lower-cost locations to benefit from labor cost arbitrage. As such, for companies based out of the US, UK, or other developed countries, Eastern European countries, such as Ukraine, make an excellent outsourcing destination due to their considerably low rates and Europe’s largest tech talent pool currently estimated at more than 185,000 specialists. Of them, up to 40% are employed by outsourcing providers.
Average Time to Hire/Onboard the Team
Unlike in Western countries, the recruitment cycles in outsourcing locations are much shorter. Why so? Such destinations have a large pool of readily available IT experts, cutting back on time needed to find them. In Ukraine, for instance, the average hiring cycle is 25-30 days, while in the United States, the average time to hire tech talent exceeds 52 days.
Pros and Cons of Staff Augmentation
The benefits of staff augmentation are:
- Sustained control over the team: If you need to manage your staff carefully during a project, this is the strategy to implement.
- Maximum use of existing resources: With staff augmentation, companies take full advantage of both internal and external resources.
- It avails specialist expertise: Staff replenishment helps companies to fill gaps in specialist skills.
- It helps cut the costs of acquiring skills/building tech solutions in-house: This approach helps businesses avoid investing in internal skill development.
When it comes to disadvantages, perhaps the most renowned one is low budget control. For this reason, if you get an unreliable vendor and they inflate their price, you will end up spending more.
Turnkey or Managed Projects
One method of outsourcing is to hire a contractor to design, manufacture, and build a product for you. This type of engagement model is referred to as a turnkey contract. In this case, you give the contractor the requirements for the software product you want to have built. Then the contractor procures all the materials needed, builds or assembles the product, and transfers its ownership to you once done.
Unlike staff augmentation where control of the outsourced team resides on the client’s site, turnkey contracts typically include a dedicated project manager who controls the development process and manages the outsourced project team. Thus, turnkey projects are also called managed projects. As with any other type of contract, a service-level agreement specifying the expected quality of the product and the responsibility for you, and the service provider should be drawn up.
Projects Best-Suited for This Model
The turnkey engagement model is best suited for small projects that typically have short development times and tight budgets. In this case, you deal with one offshore contractor for everything, and your product is delivered to you at a fixed date and rate. It is also a good option if you or members of your team lack the technical expertise to manage/control the project. In this case, the contractor handles everything for you and is fully accountable for the delivery, quality, and timeliness.
Project Management in This Type of Engagement
What makes turnkey projects unique is how they are managed. Rather than having an internal project supervisor to manage and oversee the team, turnkey projects come with an assigned PM. The outsourced team, therefore, includes a project manager who controls the software development process and ensures delivery within the agreed-upon period. The vendor takes care of everything from designing, procurement of necessary materials, development, and commissioning. Ownership is then transferred to the client once the product is ready to hit the market.
Pricing For Turnkey Project Development
A turnkey engagement model can assume either of these two pricing structures:
- Fixed-price (FP)
Fixed-price refers to a type of contract where the service provider completes the project within an agreed-upon budget. This pricing model works well for projects with highly predictable requirements and rates and, as a result, the cost is relatively constant. As the client, you give your product vision while the contractor makes sure the desired results are achieved. The full value of the contract is specified at the time it is awarding to the service provider.
- Time and materials (T&M)
This contract bills the client based on the cost of materials used to develop the software and the number of hours spent on the development process. Payment for labor is based on the going hourly rate. This model is highly flexible and allows for product scope modification during development. The contract’s full value is unknown at the time it is awarding. T&M can, therefore, grow in value within the contract’s operation.
Hiring a permanent software development team can take up to a couple of months. However, outsourcing reduces the time and cost to hire. In the turnkey engagement model, the client is not directly involved in the selection and hiring of individual team members. The vendor provides a team and project manager. Your job is to share your requirements, expectations, and goals, and in turn, the contractor gives you a proposal. Once you approve it, the job begins. This process can take about 1-2 weeks.
Pros & Cons of Turnkey Engagement Model
So, what are the benefits and disadvantages of this type of outsourcing?
- Full responsibility for the project and risks lies with the vendor
- It involves less management work
- It ensures error-free commissioning
- Payments are based on results
- Lower cost overruns (fixed-price model)
- Limited client involvement and control of the project
- Costs may exceed the client’s budget (T&M model)
- Integration of the project with internal processes may be problematic
In recent years, outsourcing has expanded to include multiple options. Now, you can choose an engagement model based on the type of project you are looking to develop, your budget, timeline, etc. Whether you go for staff augmentation or turnkey contracts, remember to hire a reputable service provider that will guide you along your outsourcing journey and become an integral part of your overall business success.