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Open-Minded Outsourcing: Which Type of Outsourcing Relationship is Best for Your Company?

Based on the work scope and possible project risks, customer and vendor may use four outsourcing relationship types. Learn which approach will help you meet all the project needs.

August 27, 2014

Based upon the scope of work to be outsourced and the project risks to be shared, a customer and a vendor may use four outsourcing relationship types. Learn which approach will help you meet all of the project needs.

Many organizations that choose to work with an outsourcing vendor face two challenges:

  • What scope of work to give to the vendor?
  • How to define the vendor’s competence?

If this information is not well defined, selecting a vendor is usually governed by a company’s previous outsourcing experience or recommendations and references from colleagues or companies they trust. However, having this information does not guarantee an effective collaboration, and a trial and error approach during the project implementation may be used to achieve a productive relationship but is that the best solution?

Depending on how organizations address the gaps identified in an outsourcing relationship, a customer and a vendor form one of four types of outsourcing partnerships. They differ based upon the scope of work to be outsourced and the extent to which the project risks are shared between the companies.

Type 1: Outstaffing

Outstaffing or Outsourcing involves hiring 3rd party contract employees with the required level of qualifications to perform specified tasks. In this relationship, the customer is responsible for direction and determining all the issues related to workflow, management and control. As a rule, the contracted employees work at the customers’ location using their infrastructure.

Type 2: Dedicated Team

A dedicated team is a group of individuals that are provided with a task or goal based on predetermined criteria including volume, duration and quality. As an example, a dedicated team may implement a part of a product’s functionality or the quality assurance of a product in a full context. In this collaboration, team management activities as well as resourcing and risks management are delegated to the vendor and the development can be done at the vendor’s location using their own infrastructure.

Type 3: Product Development

The third type of an outsourcing relationship is full-fledged product development by a service provider/vendor. As opposed to the previous two types, the vendor is fully responsible for delivery of the final product under predetermined conditions and terms, which may include:

  • Project management
  • Collection and processing of the requirements
  • Maintaining working infrastructure
  • Security
  • Testing and maintenance

Type 4: Product Management

Customers and vendors that have collaboration experience and sufficient expertise tend to establish a "Product Management" type of outsourcing relationship. In this case, the vendor bears the full responsibility for the product’s success or failure. The entire spectrum of activities, ranging from definition of product development strategy to its implementation, is conducted by the vendor. Frequently, product owners establish local departments in countries with a favorable outsourcing climate.

Selecting an Approach

Before selecting the best relationship to meet all of the project needs, customers usually follow one of two approaches:

  1. Reactive approach is applied by customers that have had a negative experience or no outsourcing experience. Trying to mitigate the risks and maintain decisive influence on a project, customers usually stick to the first type of outsourcing relationships since it provides the maximum control over the workflow. The main challenge is that clients need a clear understanding of which type of an outsourcing relationship they are entering and the benefits as well as limitations of the different models. It`s not uncommon for a company to demand full control over a project (suggesting that Outstaffing or Dedicated Team would work best here), while at the same time expecting all the benefits that Product Development or Product Management delivers. If this type of misunderstanding occurs, it might lead to confusion, exaggerated expectations and a lack of clear division of responsibilities.
  2. Preventive approach is based on a real understanding of both parties’ capabilities and needs. In order to maintain collaboration at the highest level, vendors try to create conditions to facilitate a successful project launch and effective project implementation.

For effective outsourcing relationships, both parties need to validate the entire scope of the work to be completed and come to an agreement with regards to the solution roadmap. That’s why SoftServe has created SmartStart, an outsourcing process analysis framework. SmartStart ensures that the project scope, system architecture, development process and outsourcing governance are comprehensively analyzed and validated during the Discovery phase of a project. As a result, all the necessary adjustments can be made before the actual development starts, so the project is completed in the minimum amount of time, with the minimum number of resources.

According to our estimates, companies that apply a preventive approach experience a 5%-25% increase in productivity in comparison to a reactive approach and our client’s satisfaction ratio also increases by 25%. This approach allows customers and vendors to obtain comprehensive insights into outsourcing, build realistic expectations and facilitate optimal involvement of other valuable resources. As a result, each party receives the expected benefits and experience such as accelerators, knowledge in a particular subject area, partnerships with suppliers of products, etc.

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