Software Development Services: the Most Used Collaboration Models
What’s the best way to work with your custom software development provider?
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What’s the best way to work with your custom software development provider?
The global software products market is expected to reach $968.25 billion in 2021 at a compound annual growth rate (CAGR) of 4%. The market is projected to reach $1493.07 billion in 2025 at a CAGR of 11%.
In its turn, the global business software and services market was estimated at $389.86 billion in 2020. It is expected to grow from 2021 to 2028 at a CAGR of 11.3%.
Increases in enterprise data and growing business process automation in some end-use industries such as retail, manufacturing, healthcare and transportation will be driving demand for business software and services during the forecast period, as per Grand View Research.
Various organizations worldwide are scaling up their operations to serve a larger market, driving the need for internal business software and services. The growing use of cloud platforms has fueled demand for cloud-based software solutions and services among small and medium-sized enterprises through benefits such as flexibility, cost-effectiveness and mobility.
What’s more, deploying enterprise solutions results in significant reductions in raw material and inventory costs, helping organizations increase profitability. Many companies use these solutions to improve operational efficiency by integrating administrative systems into a single program. Business solution modules connect departmental data with real-time updates to provide better visibility into operations. Companies choose the ideal software and solutions based on their needs.
Businesses worldwide are turning to custom software and service providers to create a wide range of services and solutions, and this trend is likely to continue in the near future. Due to the economic uncertainty caused by COVID-19, numerous business software and service providers have started to emphasize customer service-focused strategies such as proactive assistance in customers’ digital journey.
Technology partnerships help organizations implement and optimize their software systems, processes, and outcomes. These partnerships are usually established between custom software development companies or tech consultancies and companies that use these systems in their day-to-day operations.
Tech partnerships not only help companies simplify implementation processes; they also provide platform integration support for companies that use IT systems from different providers and need to sync them.
If you do not have internal resources with experience in implementing technology systems, managing the creation or implementation of a solution poses risks to customer relationship and revenue.
Good partnerships are built on the two pillars.
Can the parties act on a reasonable assumption of trust that does not raise persistent suspicion? Partnership agreements must contain adequate contractual guarantees that allow individual partners to thrive and, at the same time, allow the partnership to achieve overall success.
Both parties must have identifiable needs that the other party can help meet to achieve the partnership’s goals. You need custom software – your tech partner needs new clients.
When it comes to software engineering projects, there’re typically several service delivery models you can use to get the most of your tech partnership.
Let’s review the most commonly used ones.
Fundamentally, team extension is the process of finding software developers with the right experience, skills, and culture for custom software development projects.
As a client, you are responsible for managing these team members, often with the help of your outsourcing partner.
When you hire talent using this model, you can be confident that your software development team will be well-suited to the task at hand and in line with your company’s culture.
Team extension emerged as a method of meeting the dynamic demands of today’s business world, whether we are talking about a small startup, SME, or enterprise. The idea is to equip these companies with dedicated developers who have a specific skill set and can support the company’s goals over long periods. These employees become part of the client’s organization and are often deeply integrated into the company’s internal structures, working closely within and between teams.
Team Extension based engagements typically have two submodes: a Dedicated Development Team and a Managed Team.
Now let’s delve into the details of each model.,
A dedicated team is a business model that refers to an agreement between a client and a service provider where the latter provides the client with software development specialists on a long-term basis. These specialists are selected according to the client’s requirements, based on their experience and skills. The client can choose to manage the team from their side or appoint a service provider’s project manager to coordinate the communication process. The team can work from the service provider’s office or on the client’s premises.
The dedicated team model has a very clear and transparent pricing structure: there’s a monthly check depending on the size of the team. Payment is made up of member salaries + service provider fee, which usually includes administrative overheads.
Dedicated developers are best suited when the project’s scope cannot be clearly defined, and requirements may change during the development process. This model’s main goal is to hire a team that will bridge the knowledge gap and will work as your own team.
In Dedicated Teams, clients are normally responsible for the entire project and team management and delivery, while the tech partner assists with recruitment process, infrastructure and tools deployment, team setup, timesheets and improval proposals.
To top it all, a dedicated team model is ideal for a dynamic project with changing requirements and objectives, but with a defined end goal.
A managed software development team model follows the team extension model. In this scenario, companies hire one or more developers to complete some of the required software development skills. These tech pros can be added to your in-house development team locally or remotely.
In managed teams, the service provider is responsible for recruitment process and team setup, onboarding and training, technical validation, internal processes’ organization, KPI management, delivery management, knowledge transfer, etc. The client is responsible for project specification, delivery structure, architecture, software licenses, software tool stack, etc.
Similar to the dedicated team model, you reap significant savings with a guided team approach. This is because you can expand your team with extra freelancers, eliminating the day-to-day costs associated with permanent hiring.
You can also hire developers in other countries (to work remotely) on a project basis.
Managed Team proves to be ideal for remote software development (especially if you have no experience/resources to manage remote talent).
In a solution delivery model, the client completely handles the technical work to the provider who is in charge of managing the project in every aspect: scope of work, sourcing, methodologies, software and hardware tools, technical validation etc.
This is an outcome-based collaboration model where the budget is often fixed.
When it comes to solutions development outsourcing, there’re two main pricing models: time and material and fixed-price. It may not be immediately obvious which one to choose, and many myths have arisen around both.
Simply put:
Fixed Price: As the name suggests, this is when you and your software development partner agree on a fixed amount for the entire project (or part of it).
Time and Materials (T&M): The price you pay reflects the actual time spent by the developers and other tech specialists working on the project. The payment is comprised of their hourly rate and the cost of resources used during the project.
Both are based on various assumptions and reflect a completely different perspective on software development projects (think waterfall or agility).
In the case of a fixed-price agreement, you basically buy the product at a single fixed price. But if you are not actually buying software off the shelf, you need to remember that this is a product made specifically for your business needs and according to your detailed scope of work. It is mostly used by waterfall model companies and is never a good idea if you are flexible. And it can work if you have a specific vision and a (very) detailed specification that will most likely not change.
On the other hand, a T&M contract takes into account the entire dynamics of software development, such as changing requirements, updates, and potential risks. This is why most software companies (including ours) today favor the time and material pricing model, although the fixed-price model is still commonly used.
The fixed-price collaboration model works as it’s called. You pay a lump sum of money to a software development company in exchange for achieving concrete results. This is one of the most popular software development service delivery models as a fixed-price contract makes companies feel secure. They have an established budget and are therefore guaranteed (seemingly) not to pay more than the fixed amount money.
If a company needs to plan its budget and expenses strictly, this model of cooperation, admittedly, sounds attractive.
Moreover, there is a “set in stone” deadline by which the customer is “guaranteed” to be delivered a finished product. And with a detailed plan including goals and milestones and an achievable roadmap, they can easily track project progress.
The customer also does not need to supervise the project, so everything sounds clear and predictable.
If your project is small, with well-defined features and a little risk of things changing, a fixed-price model might be exactly what you need.
However, fixed-price contracts also have some disadvantages.
In the course of the project, you find out that you do not need one of the specified functions in the contract, but you will need another. You will also need a new version of the API and system support.
For large changes, this is justified, but for small adjustments, the overhead blows up project development budget. This is because a task that only takes a few hours to complete must first be discussed with the management, including risks assessment, quality control, code review, deployment, etc.
This means that you will have additional documents and also require another meeting with the development team to discuss changes that could jeopardize the deadline (and your budget).
Before choosing a fixed-price contract, you need to first make an appointment with the development team to discuss all the project specifications. They should be extremely clear to both you and the developers, so you need to think through them to the smallest detail.
It would be best if you also discussed all the actions that the development team needs to take and possible risks and pitfalls, so keep in mind that you may need several meetings to get everything defined and accepted. Otherwise, it may turn out that the final product is not exactly what you expected.
There is another problem that can arise with the fixed-price model. The more complex the project, the higher the likelihood of problems. However, a professional software company must meet deadlines and the budget specified in the contract. In a rush to stick to the schedule, the development team could cut corners and create a product that would unlikely be used.
The Time and Material model works differently than the fixed-price model. Instead of paying a fixed amount at the beginning, you pay the software development team for the hours of work it takes to complete the project and for all the materials they use. This type of collaboration is useful when you cannot estimate exactly how much a project will cost or how long it will take to complete, so the team has no set price or hard timeline.
The most significant advantage of the T&M collaboration model over the fixed-price models is that you retain much more control over the project.
You can easily change your project elements if necessary. If you do not yet have a detailed vision of the product as a whole, the Time and Materials model is also an excellent choice.
This type of contract allows you to decide which direction the project will take with no strings attached.
If there is a sudden need to improve some parts of the project, just add new features to the project scope. If an unexpected issue arises, the T&M model allows you to adjust the schedule as needed. The development team can also get started right away, even if they (and perhaps you) don’t know all the project details yet. They can be discussed at later meetings.
The entire project is divided into smaller tasks, each requiring specific time, resources, and cost. When you agree on the price, the development team can get started immediately. There will be several team meetings during the project, during which you can add suggestions and ask for changes. Thus, you will receive a quality product that exactly matches your needs at the end of the project.
If you are still worried about running out of project budget, we can use a third collaboration model called Time and Materials with a Cap. This is the same as a regular T&M contract, but with one change – the contract specifies an upper limit on the value that you will not have to pay more . If the cost of the project exceeds the threshold, the developer will cover the additional costs. This way, you can get all the benefits of a contract on time and materials without the risk of the project cost being much higher than expected.
Fixed-budget / T&M with a Cap is a great fit for companies with dynamic priorities who still need control over their budget.
The key difference between regular T&M and T&M with a Cap is that the provider takes over budget control. It tracks costs, reports how far they have come, and identifies risks if the project scope is not on track.
The key difference from the fixed-price model is that it allows customers to adjust the work scope and recalculate the available budget accordingly.
If the budget needs to be changed, the provider communicates as soon as possible and responds promptly to the client’s decisions. This model proves to provide the best value to the customer.
As you have set the foundation of your relationship with a software provider and are considering the option of sharing more tasks and responsibilities, you will face the delicate transformation process from your CMO to FMO. Correct execution of this process is crucial to the long-term success of your software projects.
A quick set-up of the governance and transfer of tools and resources will guarantee the continuity of operations and, consequently, a great project kick-off.
The FMO is still a flexible structure, as the provider can make adjustments in the middle of the project in response to changes needed, size of the project and partnership development.
Wrapping up, when you consider outsourcing your software development project to an external provider who’ll act as your tech partner, you can choose between a managed solution delivery and team extension.
In the first case, you offload your entire project development to your custom software provider and hold them accountable for the final solution delivery, maintenance, support, and scale-up. As a client, you have a single point of contact with your provider – a team lead or a PM – who ensures all of your project needs are addressed properly with the right skills, expertise, and timelines.
In the latter case, you engage your tech partner to recruit dedicated talent to act either as an organic extension of your in-house team or as a standalone dev unit to address your needs for talent and resources.
When it comes to the dedicated team, the client is fully responsible for team management, milestone delivery and final product release. In the case of a managed software team, it’s the provider who takes care of your team management and project delivery.
That being said, the difference between these models is in the areas of responsibilities between the client and the provider.
