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By the end of 2023, the global IT outsourcing market is forecasted to be worth $1.3 trillion, as per Statista. Furthermore, IT services make up 72% of all global outsourcing contract values. Meanwhile, 92% of G2000 companies use IT outsourcing.
The overwhelming popularity of offshore software development is attributed to its numerous advantages, such as cost reduction, faster time to market, increased flexibility, accelerated digital transformation and more.
However, to maximize the benefits of IT outsourcing services, choosing the right offshore development model that aligns with your financial institution's project requirements is crucial. To streamline your decision-making process, this article will provide comprehensive information on all available types of engagement models. In addition to defining each model, we'll also explain when each model is most suitable and outline the pros and cons of each.
Offshore development model by levels
When selecting a partnership relationship model, one of the key considerations is the level of control the customer desires or can exert over the contractor's work. The degree of coordination determines the extent of involvement and responsibility of the offshore development team. There are typically three levels of offshore development models:
1. Low-level offshore development
This tier of engagement model provides competitive pricing but with minimal involvement from IT offshore vendors. They primarily execute specific tasks as directed by the customer team, such as software development and quality assurance. The in-house team retains a high level of control and decision-making authority, with the offshore team mainly acting as an extension of the internal team.
2. Mid-level offshore development
In this model, the offshore team is involved in more in-depth services and has a certain level of autonomy and decision-making authority. Both the offshore team and internal team work collaboratively, with the offshore team taking more responsibility and contributing to the overall project strategy.
3. High-level offshore development
With this model, the offshore team operates independently, taking on end-to-end responsibility for the development process. The onshore team involvement is limited to oversight and strategic direction, while the offshore team manages the entire development process, including planning, execution, and delivery.
Offshore development by business models
While offshore development by levels refers to the level of engagement between the client and IT vendor, offshore team by business models refers to the contractual arrangements between both parties.
The common business models for offshore software development in finance include:
1. Offshore development centre (ODC)
This outsourcing model entails setting up a dedicated development centre in a different country, typically in a location with lower labour costs, such as Vietnam. It is fully equipped with all the necessary infrastructure, equipment and support required to remotely manage and operate a software development team remotely.
This model benefits large enterprises with a long-term software development roadmap that requires significant work and can benefit from labour arbitrage.
Nevertheless, building an ODC requires significant time, resources and investment which may not be feasible for all companies. Effective management is also critical to ensure the offshore team delivers quality work and avoids cultural or language differences. Moreover, firms must comply with the legal and regulatory requirements of the offshore location, which can add complexity to the process.
2. Dedicated software team
This offshoring engagement model refers to a team of specialists who are exclusively assigned to work on a specific project for a client. Typically, these dedicated software teams are cross-functional. The model is ideal for long-term projects requiring high collaboration and communication between the financial service provider and offshore teams.
One of the main benefits of the dedicated software team is that it offers great control and flexibility to the client. They have direct control over the team and can manage the project as they see fit. The model also enables direct communication with the offshore team, allowing for clear instructions and feedback. With that being said, the financial organization can establish a long-term relationship with the offshore vendor, which can benefit future projects.
Lack of skilled IT talents, a Top 4 Australian bank has approached us for a dedicated software team to build a donation platform for its Community Giving Program. Over 8 years of cooperation, our team has scaled by 6 times to twenty members. The fundraising platform is a huge success as it has helped raised over $53 million in donations.
3. Staff Augmentation
Staff augmentation involves adding temporary high-skilled tech talent to your existing team to fill specific skill gaps without the time and administrative overhead of hiring a full-time employee.
Under this model, you only pay for the service fee, and the augmented staff are fully integrated into your team, working exclusively for you until the contract ends. Meanwhile, your IT provider is responsible for all other costs associated with compensation and benefits.
This model is helpful if banks require specific expertise that their existing team may not possess. Augmented staff can help fill an IT skill gap by introducing specialized technicians, such as DevOps professionals, data scientists, or automated testers.
The staff augmentation model is also ideal when a deadline is approaching. The traditional recruitment process for software development roles can take up to two months, from job advertisement to onboarding. By adopting this engagement model, financial institutions can quickly fulfil staffing needs by tapping into a vast pool of tech talents from anywhere in the world, providing them with the necessary skills to meet the project deadline.
With this approach, we have been able to help the Asia Commercial Bank (ACB) release an MVP banking app in just 4 months. We provided the company with an Agile team of high seniority, including 1 Scrum Master, 2 Front-end Developer, 2 Java Back-end Developer, 1 Back-office Developer, 3 Test Engineer, 1 DevOps Engineer and 1 Business Analyst. Together with their team of BA and UI/UX designers, we developed the MVP with innovative features like On-the-go signing, batch processing, RSA encryption, etc.
Offshore development by pricing models
The offshore development pricing model can vary depending on the project requirements, scope and complexity. Here are two common pricing models used in offshore financial development:
1. Fixed cost model
In this model, the bank and the offshore development team agree on a fixed price for a specific scope of work.
It's suitable for short-term projects whose requirements are well-defined, stable with a fixed timeline, and you don't foresee a change. With a clear project scope, budget and timeline, the model makes it easier to plan and budget.
However, it offers little to no flexibility. If the project scope changes, the development team will have to renegotiate the contract and adjust the price accordingly, which can be time-consuming and may cause delays. On the other hand, as the development team is tightened with a fixed deadline and budget, they may be tempted to cut corners when facing unexpected challenges to meet the requirements, potentially compromising the work quality.
2. Time & Material Model
With this type of contract, the financial service provider pays for the actual hours worked by the development team, along with the cost of materials and any other expenses incurred during the project.
The model is best suited for projects prone to specification and design changes. As the project progresses, the client can add or remove resources to meet evolving market demands, making it a better option for scalability and maintainability.
However, it's vital for the client to maintain control over the project and ensure that it doesn't exceed the budget.
Final Marks
Comes with different pricing models and engagement levels, selecting the appropriate offshore software development model can be challenging. Each model has its own advantages and disadvantages. However, the task can become less daunting with a reliable remote team. If you're unsure, you can always seek consulting from our team of experts with 14 years of experience. We can help you better understand how to establish an offshore team, maximize its potential and select the most suitable cooperation model.
