Different types of software development outsourcing

As the industry is changing rapidly, a lot of enterprises and startups are finding ways to gain niche competitiveness by minimizing cost while maximizing performance …


As the industry is changing rapidly, a lot of enterprises and startups are finding ways to gain niche competitiveness by minimizing cost while maximizing performance and enhancing customer services. Software Development Outsourcing becomes an ideal solution for all of these goals. Correctly taking advantage of outsourcing could turn it into a secret weapon for your business growth.

Firstly, we must understand software development outsourcing definition. Outsourcing (from outsources, i.e., external sources) is a management approach that allows delegating to an external agent operational responsibility for processes or services previously delivered by an enterprise. It can be defined as “the purchase of a good or a service that was previously provided internally”. Software Development Outsourcing is an arrangement where a company contracts a software-developing service provider to develop software for them. The leading drivers for outsourcing are cost efficiency and production reorganization. By outsourcing, companies can focus their efforts on core business and long-term targets and diversification opportunities.

Next, let’s define the typical aspects when talking about different software development outsourcing types. It is normally defined by how they align across these attributes: 

  • By location
  • By partnership
  • By contract

In this article, we will discover all of these above selections and find out what are the pros and cons of each type.

Software development outsourcing: By Location

When it comes to outsourcing, the geographical factor is the top consideration for decision-makers. It is one of the most important criteria to classify outsourcing types when the location is taken into account. Normally, we have three main types of outsourcing based on this factor:

  • Offshore Outsourcing – cooperation with a provider located in a distant country.
  • Nearshore Outsourcing – cooperation with a contractor in neighboring countries or near abroad.
  • Onshore Outsourcing – cooperation with a provider within your country.

Let’s go deeper into these terms:

Offshore Outsourcing

Having a team in a distant country may cause complexity in terms of project management, in return, you will get dozens of choices from low-cost countries sourcing. Asia is the perfect destination for global enterprises or startups looking for a trusted and low-cost IT service provider. The software outsourcing rates in Asia are considerably lower than their peers in other countries in the region due to its low living cost and a massive pool of IT talent. Together with these perks are challenges in time zone, language, and cultural differences.

A.T. Kearney Outsourcing Location Report

According to The 2019 A.T. Kearney Outsourcing Location Report, countries like China, India, and Vietnam are among the top destinations to invest in. With dramatic economic growth over the last century skilled and well-educated workforce, Vietnam is becoming a rising star among the leading outsourcing nations, with nearly 100,000 developers, 40,000 IT graduates each year, and 75,000 specialists in this field.

Read about: Top outsourcing countries for software development

Nearshore Outsourcing

This term refers to cooperation with a foreign development service provider located in your neighboring area. This is a wise choice for businesses that want to save costs and avoid geographical obstacles and time-zone differences at the same time. However, when taking nearshoring into account, everything should be considered very carefully since even neighboring countries have certain conflicts in cultural and legal aspects. And normally, countries in the same region have no huge differences in the cost and quality of services. Now it is necessary to consider the economic term, is the hiring developer cost low enough to compensate for the other costs?

Onshore Outsourcing

Obviously, this model brings about visible advantages. Working with a team located in the same location, there are almost zero obstacles in communication, geographic barriers, and legal aspects. However, as a coin always has two sides, working with a team inside your country might lead to several disadvantages related to the cost of services or even the quality required. Especially for startups and small businesses, this issue might be seriously taken into consideration.

Software development outsourcing: By Partnership

Software development outsourcing by Partnership

This outsourcing model describes the ownership and responsibility between customers and the service provider. There are different outsourcing models available in software project management. However, in this article, we only mention 2 typical models that are used the most: 

  • Project-based Model – you delegate the entire project completion to a third party.
  • Dedicated Team Model (offshore development center) – you hire remote full-time developers reporting directly to you but will remain in the dedicated team provider’s office.

Project-based Model

With a project-based IT outsourcing model, you delegate the entire project completion to a third party. In this collaboration, clients should first explain the full requirements of the project to members of the outsourcing vendor, such as project managers and business analysts, and they will then be in charge of forming the development team and seeing the project through to its completion.

Pros: Project-based model takes a large bulk of the work office on your hands, as the outsourcing company will be largely responsible for the development of the entire project from start to finish. This provider is also responsible for forming the team, carrying out project management,t and controlling the quality of results.

Cons: This model gives you limited control over your project and developers. It can cost you a lot from extra services such as project management, business analysis, and quality assurance. You are also required to define the full specifications of your project at the beginning, which may be very hard. Furthermore, gaps in understanding of project requirements can result in significant mistakes that delay project completion.

Dedicated Team Model

With this model, you hire full-time remote developers who directly report to you but will remain in the dedicated team provider’s office. They may be in the form of your entire development team or collaborate with your in-house developers.

Pros: Hiring dedicated developers gives you full control over the project. It is more flexible when it comes to expenses since you can easily add or remove developers as your requirements change. Moreover, it does not require you to define the full set of project requirements at the very first steps. You can immediately detect and correct mistakes as they appear.

Cons: It requires constant communication and collaboration with your remote dedicated developers, thus, when hiring from a distant country, time zone differences and language barriers may pose challenges.

Software development outsourcing: By Contract

Software development outsourcing By Contract
Image of business partners handshaking over business objects on workplace

After going through all these stages above, you must sign off an agreement or a contract to officially kick off your project. Typically businesses use two types of contracts including:

  • Fixed-price contract – the service to be provided at a flat rate, regardless of how much time and cost you pay.
  • time-and-materials contract –  the provider bills the client an agreed-upon rate for the hours and resources spent on the project as well as the cost you pay.

Fixed-price contract

This type of contract is a flat-rate contract where the provider is responsible for completing the project. It can be an effective choice when requirements and specifications are very clear and predictable. Nowadays, fixed-price contracts are not as widely used as time-and-materials models due to their lack of flexibility.

Pros: Predictability is one of the key advantages when using this type of contract. You can be given clear deadlines and figures to be transferred within your budget. Besides, fixed-price contract payments are normally based on the percentage of work performance. It will make everything much easier after closing the project and going to the acceptance stages.

Cons: As mentioned above, a lack of flexibility is a significant drawback when using a fixed-price contract. Having emergent changes is inevitable, and this type of contract will prevent you from adjusting your own project.

Time-and-materials contract

In this contract, customers are charged for the number of hours and resources spent on specific projects. This model is more flexible than the fixed-price contract, and it offers chances to adjust the requirements compared with the initial requests.

Pros: Obviously, flexibility is the strongest advantage of a T&M contract when you are allowed to adjust to the scope of work while implementing the project. This is most suited for startups and small-medium enterprises when they tend to prefer agile delivery methodology.

Cons: Low budgeting control is the main drawback of this type. The total expense can go far beyond the expected estimations.


In recent years, software development outsourcing has grown up sharply as a rising trend in the global ICT industry. This is considered a perfect idea to optimize business costs and maximize productivity. All these factors mentioned above give you an overview of which types of outsourcing are best suited for you. It is essential to weigh all the strengths and weaknesses of each contract type and how they can fit into your project.

With over 27 years of experience in the market working with many international clients, CMC Global has extensive insights to give you practical consultation. We make it easier for you to choose from those complicated ways of software outsourcing. 

Talk to our experts today to get free consultancies!