Outsourcing allows businesses to focus on their core functions while doing away with time consuming tasks. When done right, it can save you a lot of money in operational costs. In fact, cost reduction was the top reason companies decided to outsource. Meanwhile, outsourcing can help reduce labor costs by 70%. Outsourcing will allow you to scale your business without the associated costs like employee wages, rentals, utilities, taxes, and others.
When outsourcing, your prospective partner will provide you with the details of what you can expect from them, the scope of the project, rates, and other important details. For your part, you want to make sure that everything will be in black and white for your security and protection. Outsourcing contracts will do just that. Before entering into an agreement, you need to have an eagle-eye and be attentive to the terms and conditions of the contract. In this article, we take a look at the different types of outsourcing contracts.
Components of Outsourcing Contracts
- Detailed Project Scope
- Service Level Agreements
- Transfer of Assets
- Warranty of Product
- Ownership of Product
- IP Protection
- Cost & Payment Structure
- Duration of Completion
Types of Outsourcing Contracts
- Time and Material
- Pros of Time and Material Contract
- Cons of Time and Material Contract
- When Should You Form a Time & Material Contract?
- Fixed Price
- Pros of Fixed Price Contrac
- Cons of Fixed Price Contract
- When Should You Form Fixed Price Contract
- Flexible Scope
- Pros of Flexible Scope
- Cons of Flexible Scope
- When Should You Form Flexible Scope
- Dedicated Team
- Pros of Dedicated Team
- Cons of Dedicated Team
- When Should You Form Dedicated Team
Components of Outsourcing Contracts
Before proceeding to the different types of outsourcing contracts, we need to understand the different components of an outsourcing contract. The following terms and conditions need to be mentioned in the outsourcing contract.
1. Detailed Project Scope
A detailed project scope is one of the first things your outsourcing contract should have. It details the service requirements on your end. This section includes the RFP as well as the response of the outsourcing provider during the bidding process. Make sure to clearly mention the final scope of the project and services for the offshore team to understand. The project scope includes the main deliverable your prospective partner will offer.
2. Service Level Agreement (SLA)
The Service Level Agreement or SLA is used for obtaining a service guarantee from the outsourcing company. The SLA is responsible for setting the benchmarks for the quality of benchmarks the provider would be offering.
3. Transfer of Assets
The outsourcing contract should also indicate how assets like telecommunication equipment, computer hardware, leases on equipment, software license, and others will be transferred. For things like software licenses, it might include additional costs or licensing fees which should also be indicated in the contract. Take note that the outsourcing contract should comprehensively detail these costs.
4. Product/Project Warranty
Outsourcing is associated with various uncertainties and risks. Any breach of contract may expose you to litigation that could not only drain your coffers but also waste your time and effort. For this reason, the outsourcing contract should clearly explain how to mitigate losses.
5. Ownership or Governance of Product
Surely you want to retain ownership of your intellectual property and the final product. But there are cases when the ownership will be shared by you and your partner. This should be clearly indicated in the outsourcing contract as well.
6. IP Protection Clause
One of the biggest stumbling blocks of customers when outsourcing is the fear that their intellectual property might be stolen. According to the Commission on the Theft of American Intellectual Property, IP theft costs the US from $180 billion to $540 billion annually. In line with this, the outsourcing contract should include a Non-Disclosure or Non-Compete Agreement to be signed by all parties involved.
7. Cost & Payment Structure
The outsourcing contract should clearly indicate the mode of payment and structure. In addition, the amount to be paid with breakdown should also be clearly mentioned. It should also answer the when, how, and whom of pricing. It should include all the services available and both parties agree to the pricing.
8. Duration For Completion
Mentioning the duration of the project is very important in an outsourcing contract. The duration of the contract matters a lot in the success or failure of your outsourcing venture. It is never advisable to enter into a long-term contract instead sign a smaller contract and extend it as time passes.
Types of Outsourcing Contracts
All outsourcing contracts are similar by nature and only vary in their details depending on your requirements and goals. Let’s take a look at the different types of outsourcing contracts.
1. Time and Material Contracts
A time and material contract is one of the most popular and oldest types of contract. This is used for long-term projects that require an assessment of time or expenses that cannot be prepared in advance. It is based on the IT services or products requested and the time it takes to accomplish them.
A time and material contract is used if the time for which the project is to be conveyed might not be evaluated. Here you will pay the outsourcing provider for their work time and materials. Thus, it is important to learn about the total cost of ownership and possible flexibility in the matter.
Pros of Time and Material Contract
Here are the advantages of time and material contracts:
- It ensures that a contractor will earn a profit
- It offers a great level of flexibility and focuses on agility
- You can easily adjust to changes
- You can easily add or remove resources when need changes
Cons of Time & Material Contract
Despite its advantages, time & material contract also has its disadvantages:
- Client could run out of money before the project is complete
- Without a not-to-exceed clause, workers have no incentive to work efficiently
- Rising labor prices could eat into your profit
- Tracing costs require extra work
When Should You Use Time and Materials Contract?
So when do you use a time and materials contract?
- When flexibility is the core requirement of your project
- When defining the scope of the project is not possible due to its complex & raw concept
- When emerging technologies are required for the completion of a project
- When the idea is too innovative to make advanced estimations
- When you still want to have control over the project while an external team works on it
2. Fixed Price Contract
In a fixed price contract, the client pays a one-time fee for the whole project to be handled by the outsourcing company. The client makes a Request for Proposal or RFP and the provider places a bid on the project. This type of contract works like a managed project and the requirements are clearly mentioned beforehand in the RFP together with the estimated costs. The fixed cost you will pay will minimize the flexibility of your involvement in the project scope.
In a fixed-price contract, the outsourcing company will assign a project manager to handle the project and ensure the delivery of the project within the committed time and the cost agreed upon. The fixed price contract is often used for projects that could be precisely assessed.
Pros of Fixed Price Contracts
The main benefits of fixed price contracts are:
- The product specification is delivered by the client or prepared together with IT partner before the work starts
- There is a predetermined time and budget
- There is a certainty of costs
- It allows both the seller and buyer to adapt to market change
Cons of Fixed Price Contracts
Here are the cons of fixed-price contracts
- Comes at a higher price
- Planning takes a long time
- Rigid process
- Not suitable for large-scale projects
- There is a chance of miscommunication
When Should You Form A Fixed Price Contract?
- When you know exactly what you require and are able to describe it with the provider as well
- When the project requires a smaller time frame to complete
- When you know the project is simple, and not many changes would be needed once completed
- When you are not worried about handing control over to the company with a managed project approach
3. Flexible Scope Contract
A flexible scope contract is a stand-alone, full lifecycle project management and delivery method. The aim is to deliver results to customers quickly and effectively. The collaboration between teams and individuals is based on the main principle and values of the companies. The success of the project lies in it being aligned with the company’s business goals.
However, it requires a cultural shift in terms of the development team’s thinking. The framework may be costly to implement as it requires developer and user training. In flexible scope, the client and your team define milestones iteratively. At the end of each milestone, the client approves the deliverables and makes the relevant payment only after that.
Pros of Flexible Scope Contracts
Here are the advantages of flexible scope contracts:
- Control over the scope and progress
- Results-based payments
- No risk of the wrong estimation
Cons of Flexible Contracts
- Unfixed budget and deadlines
- Risk of disputes
4. Dedicated Team Contracts`
From the name itself, this type of contract is used for outsourcing a dedicated team. It will work as an extension of your in-house team and can be asked to handle any project. With this type of outsourcing contract, you do not need an exit strategy as the collaboration with your remote team may not end anytime soon.
A dedicated team is one of the most popular collaboration models. This type of contract is suitable for complex long-term projects, which can expand in the future. If you are a start-up business with vague project requirements, hiring a dedicated team is the way to go. A dedicated team provides your team with the time and resources you need to focus on the discovery stage without worrying about overspending.
Pros of Dedicated Team Contracts
- Better talent
- Reduction of costs
- Increase in speed
Cons of Dedicated Team Contracts
- Estimate ambiguity
- Communication Problems
- Organizational Difficulties
When Should You Create Dedicated Team Contracts
Here are the reasons why you should consider using a dedicated team for your business:
- You have a complicated project that needs frequent iterations and changes
- You are looking to build a long-term partnership with the outsourcing team
- You need to keep tabs on offshore workers and the projects they are working on
- You are ready to expand and require a dedicated team of developers to work on projects
Outsourcing allows you to handle more projects without worrying about job burnout for your employees. However, you want to ensure the safety and security of your organization. This is where outsourcing contracts come in. It will secure every aspect of your project from start to finish.
Why Should You Consider Outsourcing with airisX?
By outsourcing to a leader like airisX, you will be able to scale up quickly by getting the right resources, processes and technological infrastructure. No matter what your scaling requirements are, airisX will give you the best optimised solution and you will be able to focus on making your customers happy. Your back office operations will be simplified, giving your users a high-quality experience.
The most important advantage of working with airisX is that we enable you to stand out from your competition by providing you with a sharply differentiating customer experience and best practices, which is the result of working with some of the world’s biggest and disruptive companies. Contact us today at firstname.lastname@example.org to get started with getting a tailored solution for your business needs.