Types of Outsourcing Models

Quite often, project owners, to fill a lack of skill, may want to quickly find profiled specialists or build a project team without in-house or physical office resources. They may also want to delegate tasks or a whole project to an external team, for instance, one located in a more favorable tax environment.

So, today’s available outsourcing models are a true lifesaver for busy IT companies, swamped service providers, and ambitious entrepreneurs who simply cannot waste time on recruitment before a startup launch.

An outsourcing model is a specific form of professional engagement with an outsourced team or specialist that fits a company or project seeking technical or skill assistance with their professional qualification and readiness to start working immediately, on demand.

Different types of outsourcing exist to fit particular purposes, operational goals, project constraints, budgets, and technological capabilities. To define and categorize these approaches, we use well-established outsourcing business models, which we are examining today.

A company, entrepreneur, or business team might come across different pressing issues or needs. The scope of outsourcing requirements usually depends on the client’s location of operation, local specialist availability, budget, and vision. And picking the best-fitting approach from among all the available types of IT outsourcing is essential.

That is why we are making this overview and comparison of outsourcing models. Use it as a reference guide to make your life easier when making that final outsourcing decision. 

Thus, you may want to choose an outsourcing collaborative model based on several essential factors. Let’s examine each case and the respective types of outsourcing.

Firstly and most commonly, businesses and startups seek quick and cost-efficient project assistance elsewhere around the globe simply because they lack candidates in the local labor market. Or, local employment regulations are too strict, and in-house management expenses are too high — you name it. 

Offshore Outsourcing

Taking a look outside of one’s country of origin and/or operation allows one to tap into the global selection of talent that can make a much better fit.

Best for:

• Startups and small-to-medium-sized businesses looking to minimize operational costs
• Large-scale enterprises requiring access to global talent pools for specialized expertise (e.g., blockchain developers in Eastern Europe or customer support in the Philippines)

Opting for offshore outsourcing is a good idea when cost reduction is a top priority. Still, clear communication channels should be in place to manage time zone differences and cultural nuances. Use tools like Slack, Asana, or Zoom to simplify collaboration.

Onshore Outsourcing

A slightly less popular outsourcing model is nearshore, i.e., seeking specialists or professional resources not necessarily in one’s own city or region but within the bounds of the country (or, at least, its shores). It’s less popular, mostly because it is harder to scale while fitting local labor market constraints.

Best for:

• Businesses with strict regulatory compliance requirements (e.g., finance, healthcare) where local knowledge of laws and regulations is critical
• Companies that value face-to-face collaboration and cultural alignment, such as high-end design agencies or marketing firms

Onshore outsourcing works well for companies with a larger budget but who need close collaboration and minimal communication barriers.

Nearshore Outsourcing

Working with remote specialists from neighboring countries is a great middle-point alternative, where the outsourced staff isn’t local but is not too foreign either. This helps minimize time-zone and cultural differences by a bit.

Best for:

• Mid-sized businesses that require real-time collaboration for software development or IT support
• Enterprises looking to balance cost savings with ease of communication

Nearshore outsourcing is ideal for tasks requiring frequent updates or brainstorming sessions. Choose partners with cultural similarities to minimize miscommunication.

Some businesses and projects clearly know what they need from the get-go — what type of specialist, running on what budget, and under which workflow conditions. This is usually the case when the project already has a tangible structure or definite vision. In this case, one of the following IT outsourcing models would fit. 

Staff Augmentation

With the augmentation approach, existing staff can be scaled up and down based on dynamic project needs. The pre-screened outsourcing professionals are fully augmented into the running workflow, but only for the time being.

Best for:

• Companies facing a short-term skill shortage, such as needing a cybersecurity expert for a compliance audit
• Startups that need niche expertise without the cost of long-term commitments

Dedicated Team Model

A set of dedicated specialists is handpicked and assigned purely for one’s project’s needs under almost in-house conditions. This is still a type of outsourcing collaboration but with more long-term values, such as leading a project to its very launch (if required).

Best for:

• Enterprises running long-term projects, such as SaaS development, where consistency is critical
• Startups that require fast scaling without setting up in-house teams

A dedicated team model is ideal for businesses with large, complex projects that demand continuity and collaboration.

Project-Based Outsourcing

The ultimately custom and individual approach is when an outsourced team is gathered strictly based on existing or planned project nuances and scope, implementing it end-to-end. Sometimes, entrepreneurs need somebody to take full rein in the technical implementation or handling of some issues.

Best for:

• Small businesses with limited technical expertise, such as a retailer outsourcing its website redesign
• Companies in need of end-to-end delivery of short-term projects

Clearly define the project’s scope and deliverables upfront to avoid miscommunication or delays.

Budget is the definitive factor for project implementation for many companies and startups. These are also some of the mature, well-tried models that were used initially when the outsourcing arena was only gaining momentum.

Fixed-Price Model

Plain and simple — a predefined cost is agreed upon before the project begins, regardless of the time or resources required. All the workflow resources are planned out and distributed first.

Best for:

• Small businesses with tightly defined projects, such as developing a landing page
• Startups working with limited budgets

Time-And-Materials Model

The time-and-materials model is a direct alternative to the fixed-price one and a more flexible approach to cost-based project outsourcing planning. In this model, an outsourced team does their work first and gets compensated afterward based on the sum of the time and resources dedicated to the project.

Best for:

• Enterprises with evolving project requirements
• Businesses using agile development methods for flexibility

Opt for this model when flexibility is essential, but keep close track of hours to manage costs.

Outcome-Based Model

Now, the outcome-based approach doubles down on post-factum work estimation and compensation — outsourced specialists perform their work up to a particular project milestone and are compensated accordingly.

Best for:

• Companies that focus on results rather than processes
• Businesses outsourcing lead generation or sales funnel optimization

Clearly define KPIs and milestones to adjust expectations with the outsourcing provider.

Functionality is also an important factor.

IT Outsourcing

A company may want to outsource an entire IT workflow or a department, specifically to run IT tasks externally, to save in-house costs and spend resources on IT only when, and where needed. In this case, a company concludes service-level agreements, usually with larger-scale outsourcing agencies.

Best for:

• Companies undergoing digital transformation
• Businesses that need IT support for their operations

Business Process Outsourcing (BPO)

A narrowed-down take on IT outsourcing is when a company outsources only a specific process or two, like customer support, recruitment and HR, or payroll management.

Best for:

• Companies seeking to streamline non-core activities
• Large enterprises looking to reduce operational costs

Knowledge Process Outsourcing (KPO)

Companies or projects seeking very specific, niche expertise or advanced knowledge of external technologies may outsource narrowly specialized parties for tasks like legal consulting, in-depth data analysis, deep learning, R&D, etc.

Best for:

• Enterprises focusing on innovation or entering new markets

Apart from the direct requirements and needs, the final choice of outsourcing models for businesses is dictated by the client’s resources and capacities, like the following:

Project scope and complexity

The preferred application outsourcing model must match project needs — these needs must be defined clearly. For example, staff augmentation is a match for niche skills, while project-based outsourcing is for turnkey solutions.

Budget and cost flexibility

Selecting the most cost-effective models, all of the above approaches are tuned to save costs in fitting scenarios, but it all starts from the top — the tightest budgets are best matched with offshore or nearshore options.

Desired level of control

Balancing control with flexibility should be yet another priority when picking from the types of outsourcing models, with projects needing more hands-on oversight best serviced by dedicated teams and more augmented outsourcing types. 

Timeline and deadlines

Lastly, urgency impacts model selection, which dictates the choice in a big way — how quickly do you need an outsourced specialist to kick off or jump into the workflow, achieve milestones, and adapt? Pre-assembled teams are the best choice for the most urgent cases.

Outsourcing has evolved from a risky work delegation venture into a multi-faceted approach to driving internal business efficiency with the help of external powers. The resulting contribution is immense, with some of the discussed outsourcing models enabling businesses and startups that would have never existed otherwise in a world where only in-house resources could be used to achieve market goals.