An outsourcing engagement model is the fundamental-defining form of the client vs. outsourcing vendor relation. Each of the two parties, i.e., the client and the outsourced vendor, must communicate clearly under the software development model of engagement. The outsourcing engagement models are classified into the three types depending on the financial aspects and other conditions:

Fixed Price Model

The fixed-price engagement model establishes a professional partnership with a pre-determined budget. Despite the time and money spent, the model indicates a single-rated bill. To set the budget at the start of a collaboration, the team must be fully aware of your requirements, business demands, and budgetary constraints.

Pros of using a Fixed Price Model

• Overall Transparency
  This strategy is based on plans, timelines, and regularly updated milestones reached during the software development process.
• Quicker Business Results
  The FP model pre-plans each stage, and enterprises adhere to the schedule. As a result, each phase aligns, and every business outcome is more predictable.
• Easily Manageable Business Processes
  With minimum supervision needed by clients on their ongoing software product. The management of the client's company has finished liberty to focus on other important activities rather than monitoring and giving feedback on developed software.
• Straightforward payments
  Fixed-price contracts let you perform your financial planning easily since prices can rise only through contract variation or changes.
• Minimized risks
  In most cases, the fixed-price contract requires a prepayment. The client makes all further payments only after the software development company fulfills the requirements specified in the contract.‍

Cons of using a Fixed Price Model

• Long preparation
  The pre-co-operation stage and planning can take more time and effort since the dev team needs to make sure every feature and logic is clear before the development starts.
• Does not Allow Adjustments
  The FP model ensures everything is set initially and works as per the plan. However, if anything goes wrong with the plan, this model has to quit the current plan and focus on the emergency demands, spoiling upcoming deadlines and deliveries.
• Extra Work Costs an Extra Penny
  With the entrance of newer technologies, if the businesses have some additional demands to be added to the list, they have to pay extra for all the extra work not included in the model.
• Overpaying
  The final cost is often higher than in other pricing models since a service provider often charges on top to cover possible risks associated with budget overruns.
• Delayed Launch time
  If something goes wrong, firms must change their schedules for other jobs, which may cause most of their normal plans to be late, ultimately delaying the entire launch time.‍

Dedicated Team Model

The dedicated team engagement model focuses on long-term collaborations in product development from scratch. First, you recruit an outsourcing vendor's team (developers, QA engineers, Project Managers, and others) for a monthly salary specified by a contract. In addition, the monthly fee depends on the staff's qualifications, the team's size, and the hourly rate set by the software development company.

Pros of using a Dedicated Team Model

• Employed to Align with Business Objective
  This form of cooperation is typically utilized to get work done quickly by screening the correct group of resources for the job.
• Relevant Expertise and Experience
  The recruiting of these expert development teams usually done with great scrutiny. Hence the experience and expertise of team members are never queried.
• Result-driven Approach
  The only aim of hiring a dedicated team for software outsourcing projects and services is to achieve targeted goals. This result-driven approach provides complete visibility of regular task updates, which permit a business to make the right decision and avoid conflicts.
• Easy scaling
  You can flexibly scale your dedicated team up or down over time.

Cons of using a Dedicated Team Model

• High Cost
  If you have recruited a dedicated development team for smaller projects, it can be a costly expense as the efforts will be higher. However, this engagement model suits larger projects and enterprise businesses more.
• Barriers to Communication
  Communication might be a major issue if the organization does not work with the correct developers from a software outsourcing company.

Time & Material Model

The T&M models of engagement are based on an agreed-upon billing rate and consider actual project time and materials consumed. As a result, you can completely engage in the process and adjust the necessary criteria. Moreover, the price approach is solely based on the development team's real-time spent executing your product.

Pros of using a T&M Model

• Rapid Adaptability
  Because of the rapid-paced nature of business, every company must be adaptable and adopt changes quickly. This "Time and Material approach" enables firms to adopt changes fast with the next project cycle's closest iteration.
• Staying up-to-date with Technology
  When you execute the T&M model, all the alterations are periodically addressed, which means there is a higher possibility of withstanding technology changes easily and effectively.
• Improved time-to-market
  The "T&M" model employs a continuous change approach in which defects are identified early on, and costs are meticulously calculated to meet the end goal. In addition, because the T&M technique reduced time-to-market, numerous goods are halfway ready for launch.
• Agile development process
  The T&M pricing model is an excellent fit for using agile methodologies like Scrum or Kanban which let you make frequent reassessments, and adaptation of plans.‍

Cons of using a T&M Model

• Time and budget restrictions are both uncertain
  The Time & Material model focuses more on time, so your development needs get deviated. The overall cost might not fit in your budget. So businesses choose this model so that they can halt the services whenever they feel content with the achievement.
• Contract Extensions are less likely
  This strategy is typically adopted on an hourly, weekly, or monthly basis, and no firm will adhere to the same method for an extended period once the goal has been attained.
• Deep involvement
  You, as a product owner, need to keep tabs on the development process, set priorities, and act quickly to respond to ever-changing market demands.

Milestone-driven Development

Milestone based outsourced software development billing model is used when the contractor needs to be paid pre-defined milestone for a scope of work which was performed over a certain period of time. The amount of the payment is defined by the spent time and achieved progress. The customer pays for actual functionality which was delivered and approved by him.

This model is applied to large long-lasting projects that are managed remotely therefore allowing the clients to test or get involved during development stages/ phases. With this form of engagement payments are predefined and milestones measured against the estimated efforts. Payment schedules are pre-defined therefore reduces risks due to visibility of the development.

Milestone based outsourced software development model supposes the customer and development team to set benchmarks or milestones together before the start of the development. Then a customer pays after the team achieves the predefined milestone. Like in the time and material model, the payment is based on the time spent on development and an hourly rate for the specific task (e.g., UI/UX design, QA, development, etc.)

Pros of using a Milestone-driven Development Model

• Payment for achieved results
  The client has the privilege to pay only after they agree upon the completion of a particular milestone. No prepayments.
• Satisfying results
  A team needs to reach the next milestone with flying colors to receive a new payment.
• Take advantage of the existing business relationships
  The milestone development model is best when you have established business relationships between your company and the development agency.

Cons of using a Milestone-driven Development Model

• Ufixed prices
  Can cost you a different of time and amount of payment.
• Long disputes
  Arguing on the quality of the delivered value can take a decent amount of time.
• Unpredicted budget
  The budget highly depends on how much time the team will spend developing certain features and changes they need to fulfill.
• Undefined timeline
  ike the budget, the final timeline is also quite rough, which may delay the project.
• Risks
  The milestone pricing model implies medium risks for customers and software vendors. Extra development hours, especially those spent on edits, may arise disputes, apart from risks of underpaying and underdelivering.

Conclusion

Defining the most suitable engagement model for your business

To define the most suitable model for offshore development, you must clearly understand the requirements of your project. You should make your final decision depending on how much flexibility and the quality of the relationships with the contractor are needed for your project. We believe that theese two key appointments will help you to sort everything out and make a final decision on choosing the right engagement model for outsourced software development.