Pricing models in IT managed services

IT managed services have two main points of concern for you’re as a customer, a reliable vendor to find and a pricing model to apply. While we have explored the vendor-finding theme in one of our previous posts, now it is high time to speak about pricing models that exist in software development outsourcing

Fixed-price model

When you have a detailed software requirement specification and clearly a defined result to get, a fixed-price model is what you need. As it comes out of its name, a software outsourcing company estimate and fix the cost they are going to charge for the negotiated project scope.

Advantages

The main advantage of this model is a vendor can’t change the price for the defined scope during the project execution. Thus, you stay secured form unexpected additional expenses regarding the defined project scope. To clarify, even if your vendor underestimates the project difficulty, labor required to build the software and, hence, underestimates the project costs, he can’t charge you with more than it was agreed initially.

Insight features

The model does not guarantee your staying on budget with your project. To clarify, it guarantees only staying on budget with the initially defined scope of work in a tight correlation with results these works must provide. However, if you make changes in your requirements (for example, add new features), you will have to pay for them.

Also, your outsourced software developers may find and suggest another solution that will greatly benefit the software performance, scalability, or security. If implementing this new solution requires additional labors, it is only fair you need to pay for this as well. After all, you always have an alternative to stay firm on your initial solution but compromise on the software quality.

Besides, a fixed-price contract implies your lack of control. To clarify, the model resembles a black box where you input your spec and money and output web or mobile application, CRM, or another software. You can verify its quality and its meeting requirements you provide in your spec. However, you can’t enjoy control over the workflow.

Time and material model

When you have a large project, it is very difficult to draw a detailed spec and clearly identify the outcome. First, because the requirement may alter as you dig deeper into your business environment. Second, because market fluctuation produces additional challenges you need to overcome. Thus, a time and material model is your better option than a fixed-price one. As it comes out of its name, here, a vendor estimates the project price but the final settlement depends on how much hours its developers spend on the project.

Advantages

The main advantage of this model is it enables you to follow a really value-driven approach instead of a cost-focused one. Alterations, new features — all this is easy to implement with this model. That is why such a contract is often associated with an agile software development approach.

Here, it is easy to estimate your expense in every given period of time. Just multiply the hourly rate of your vendor’s developers and amount of time they reported they spend per week or another agreed milestone (for example, per a sprint).

Insight features

The model is difficult to accept for inexperienced customers. For example, they may feel great uncertainty in terms of how much time developers, assigned for their outsourced IT project, will spend on solving a particular task. Definitely, this is a very important aspect. After all, you need to plan your budget and, of course, don’t want to overpay for the time of low efficiency.

Fortunately, this problem has a good solution. Yes, we are talking about challenges and other trials to test developers of an IT outsourcing company you are going to handle over the project. To clarify, the way they work when solving a challenge you give them will tell you all about their proficiency and efficiency. Thus, you can understand how much they can do per hour and how many hours they need to accomplish certain tasks. In case you are not great in programming and don’t have your in-house experts, it is a good idea to turn to IT consultancy.

Besides, as a time and material pricing model goes in line with agile software development, the whole project pipeline is divided on a large number of iterations, sprints. Therefore, you can control the outcome of every iteration and, hence, have greater control over your project.

Dedicated development team model

When you need to establish an efficient collaboration for a large project or a series of projects, you need more flexible an advanced option than aforementioned models. A dedicated team is what benefits you the most. Here, you engage developers on a full-time basis while still not having them as your employed personal. In other words, you reach a software development company for IT managed services provided on a long-term basis.

Advantages

One of the main model advantages of the ease of calculating your monthly expenses on the project. All you need to do is just sum up your assigned developers’ monthly salaries and your vendor’s management fees. So, it becomes very easy to plan your project expenses.

Other advantages of this model are:

• Agile and value-driven approach to software development;
• Outsourced developers share your corporate values and are really committed to your goals;
• Your great flexibility regarding scaling up (or down) the team.

Insight features

The model gives you full control. These developers are alike your in-house ones and you pay for their full-time programming and testing activities. So, you can train and control them the way you do with your employed team.

Perhaps, this is the only model in software development outsourcing that provides deep integration of your outsourced developers into your corporate environment. This not only simplifies the knowledge transfer but guarantees the greatest results and the fastest delivery for the targeted solutions.

To sum up, while a fixed-price model benefits you with its cost-focused approach and a time and material contract provides you with greater control, a dedicated development team model is where the real partnership and efficient collaboration lie.