The 4 most popular types of outsourcing contracts | Blog - Future Processing (2024)

Partnership with a right IT services outsourcing company can give great opportunities to your business. Today we live in a fast-moving and dynamic business environment and thanks to IT outsourcing services you gain the flexibility to adjust to market and clients’ needs. A well-prepared agreement covering issues such as intellectual property rights, business process, service levels, forms of outsourcing, clauses, third party involved, general obligations and rights of businesses engaged in the outsourcing services etc. form the base of business relationships.

Of course, the purpose of any contract is to facilitate establishing proper mechanisms and business processes suitable for both parties involved in close cooperation and toprotect the organisations from possible penalties and undesirableactions towards each other.  Forewarned is forearmed.

You can also find an outsourcing contract example and more information on what to include in an IT partnership contract in ourfreechecklist.

There are some golden tips to follow when selecting a contract type that suits your needs best:

• discuss all the conditions and the elements of the project before launching it,
• be clear on pricing and payment terms,
• make sure all the details are in writing,
• choose a contract that will be a good fit for your chosen work methodology.

We have prepared a summary of  the 4 most popular types of outsourcing agreements.

TIME & MATERIALS CONTRACT

This is a kind of contract where the customer pays the supplier for work time  (according to the prearranged hourly rate of each member ofthe dedicatedteam) and materials used by the outsourcing service provider (e.g.using the software license or other assets). Before the cooperation starts it is importanttolearn about thetotal cost of ownershipandpossible flexibility in this matter.

PROS AND CONS

The main advantages ofaTime & Material contract terms are:

• great level of flexibility in the development andfocus onAgility
• client decidingontheproject’s prioritiesandfunctionalitiestobedevelopedandimplemented
• general requirementsof the project, as well as all the details, arediscussedbeforeevery sprint
• service is billed in relation toactual days/ hours of work
• it is possible toadjustthe project tothe market’s changingrequirementseven if work on it has already begun

BUT: Theprojecthas tobeverywell managedand under control asthe main responsibility regarding its final price anddeadlineslies with the clientwhodelivers the idea and requirements. It is also possible toanalysethese issuestogether with the IT partner beforehand.

FIXED PRICE CONTRACT

In this type of outsourcing contract, the customer and the supplier agree on a steady ‘fixed price’ for the service (i.e.for delivering the solution). The price is estimated by a supplier based on well described scope of work to be done. The constant price means the constant scope and the deadline for the project.This kind of contract can also work very well in case of hybrid contracts like ‘fixed price per iteration’ when customer pays for each milestone separately.

We recommend defining project’s scope and estimating costs together with business and technical specialiststocrystalliseyour idea and collect all the requirements.

PROS AND CONS

The main advantages of a Fixed Price contract are:

• product specificationisdelivered by the client orprepared together with the ITpartnerbefore the work starts
• thetime and budget arepredetermined
• the customer hasthe least cost risk(assuming that the scope is well defined)

BUT: In this model, there islessflexibility,and even making changes is possible while the project is ongoing,itstrongly influences time and cost of deliveryand mayalsoresult incontract modification. As this model requires a specification there isa great degree of worknecessary before embarking on theproject.

If the costs are more than theagreed-upon amount,the service providerbearsadditionalcosts.

FLEXIBLESCOPE (DSDM)

This outsourcing agreement framework is astand-alone, full lifecycle Agile project management and delivery methodand itaims at deliveringresults to the customer quickly and effectively.The collaboration between teams and individuals is based on main principles and values of Agile, and the key to the project’s success is its alignment to the company’s business goals.

The main advantages of contracts based on aFlexible Scope (DSDM) frameworkare:

• cleardefinition of roles andresponsibilitiesfor all involved
• effectiveprioritising(use of theMoSCoWmethod)
• consisting ofdetailed analysisand requirements gatheringeventhough the development itselftakes place in anAgile manner
• involving the collaboration ofproject’s decision-makers

BUT: This framework requiresa culturalshiftin terms of the development team’sthinking. What is more, itmay becostlyto implement as it requiresdeveloper and user training.

PAINSHARE/GAIN SHARE

The aim of this mechanismis to share the benefits or dis-benefits from projectoutcomes.This kind of outsourcing arrangement can be a base of an agreementsigned by the parties or the mechanism itself can beincluded in the TargetCostcontract.

The main advantages ofcontract based on aPain Share/Gain Sharemechanismare:

• risk and attitude to it is discussedby the partiesat the initial stage of businesscooperation
• the gain-share/pain-share mechanismis at the heart of targetcost arrangements
• contractorgains a bonusif theactual cost is below the targetcost butshares the costif goesabove it
• both parties areincentivisedtodeliver to baseline

BUT: This model requiresstrict changemanagement processes,so it is notappropriate unless/until the design isclear, andnot for small or open-endedworkassignments.

SUMMING UP

We strongly advice you to choose a contract type that will best match Although it is usually a choice between the typical ‘Time & Materials’, or ‘Fixed Price’ kinds of contracts,  software related services do not have to be limited to just these two options.

There are numerous software development outsourcing contract templates and modern outsourcing companies offer many indirect forms and innovative approaches to contracts to make the outsourcing service tailored to thecustomer’sneeds and expectations.

It is worth considering contracts that are based on more  partnership-like relations – especially if you’re looking for a long-term software partner and beneficial business relationship.

Today, companies from the outsourcing industry offer various pricing and outsourcing models and are open to adjusting them to chosen projects. Thanks to this the service will answer to your needs and outsourcing help your company develop. And that’s what every CIO, no matter from which industry, looks for.

You’ll find there the following materials:

• RFI template
• RFP template
• A tool for comparing potential IT partners
• Aspecificationtemplate

Choosing an outsourcing location is also not an easy part of starting an outsourcing process. One has to be sure the service is in the hands of the best outsourcing service provider. There are a lot of countries worth considering (India is not the only one). Look at the description and advantages of outsourcing to Poland (a very popular destination in case of IT outsourcing as well as the location of companies that a lot of global businesses sign BPO contracts with).