Are Fixed-Cost Projects the Best Choice for Outsourcing IT Services?

Outsourcing IT services is one of the best decisions organizations can make regardless of their size. Not only does it boost productivity and efficiency, but it also amounts to massive cost savings.

However, if you’re thinking about outsourcing software development at fixed cost, you may encounter some unique challenges.

A Closer Look at Fixed-Cost Development

Fixed-cost pricing is a project engagement model that sets a flat fee and firm deadline for a product or service. All details, from scope to quote, are defined in the contract from the outset.

The project is then executed according to the agreed-upon software requirement specification (SRS).

The costs are typically laid out in payment milestones, with each stage marked by project deliverables. This keeps you just involved enough to monitor progress and ensure you’re getting what you paid for.

The Pros of Outsourcing IT Services at a Fixed Cost

For many businesses and project types, fixed-cost development is the go-to strategy. And here’s why –

• Simplicity – Straightforward and accessible, the fixed-cost model is perfect when outsourcing IT services for low maintenance, low management projects. Generating small or uncomplicated products in bulk is where this model really shines.
• Transparency – As a customer, you can trust that you’ll be charged exactly what it says on the price tag. No hidden fees apply.
• Stability – The predictability of the cost and deliverables makes this engagement model a dream for businesses on a budget. You can plan your investments with no uncertainty factor clouding your judgment.
• Automation – For businesses that sell recurring services, fixed costs and fixed specifications streamline the process. You can scale up your sales and make more deliveries while keeping the development phase efficient.

The Cons of Fixed Costs in IT Projects

Despite their perks, fixed-cost projects have a few disadvantages you should factor in before making your choice –

• Limited Price Negotiation – Outsourcing IT services often leaves you some wiggle room for price negotiation. This is typically not the case with fixed-cost services. And without knowing what the quality of the finished product will be, you may be taking a risk.
• Low Flexibility – The fixed nature of the model makes it time-consuming to request changes in scope and deliverables. That can impact your project if the market takes an unpredictable turn before it’s ready.
• Detailed Specifications – To ensure your product comes out exactly the way you want, your outsourcing provider needs to know every detail. But drawing up a detailed enough SRS requires your own team to have highly specialized knowledge.

The Challenges of Fixed-Cost Projects for Outsourcing IT Services

Each engagement model for outsourcing IT services has its own set of challenges. In the case of the fixed-cost engagement model, you should be prepared to face these four.

1) Long Time to Plan = Long Time to Market

Because the plan will remain the same from beginning to end, your outsourced team needs an airtight briefing. You’ll need plenty of time to create and deliver the SRS. But the team will also need to understand the vision: who your users are and why they want your product.

This lengthy planning phase pushes back the time to market.

2) Limited Involvement and Iteration

If you wish to be fully involved in the development process, this model may not be suitable for you. With fixed-cost development, you need to fully trust the external team with your product.

Similarly, iteration is off the table. This means there are fewer opportunities for you to make adjustments if something’s not working.

3) Getting Stuck with the Finished Product

You can’t do much if you’re not satisfied with the finished product. And you may end up spending more time and money finding a new contractor to fix it.

The onboarding process will go quicker with a product to fix rather than just the blueprints. Still, your new team will require thorough instruction on your product and precisely what went wrong. Otherwise, they may end up making mistakes of their own.

4) Post-Development Maintenance

Fixed-cost projects don’t account for technological advances over the course of the development. This means your product will likely be out of date by the time it’s released.

Almost as soon as it’s out of the development cycle, you’ll find yourself investing in updates and maintenance.

How Fixed-Cost Development Impacts Innovation 

Innovation is one of the biggest challenges of fixed-cost projects. Especially since this engagement model follows linear systems and barely involves clients.

To be more precise, your project may end up caught in these three innovation-killing traps –

1) Committed to Lackluster Specs

A detailed SRS is essential for determining resources, specifying deliverables, and setting a schedule. But sometimes it’s just too early to tell if those specs are going to produce an inspiring product.

Fixed-cost development is comfortable. It’s predictable. As a result, your outsourced team won’t take any risks or commit to innovation – even if the product turns out lackluster.

2) Fixated on the Deadline

In software development, there is such a thing as being too committed to the deadline. In fact, Agile approaches rely on flexible deadlines for the sake of customer-led iteration.

Fixed-cost projects leave no space to experiment, get feedback, or redesign features. Even if the team notices that the final product isn’t cohesive, they may not do anything about it. After all, it was made to specifications, and time is up.

3) Refusal to Look Beyond Scope

Your outsourced team is being paid only for exactly what’s written in the contract. So, anything beyond the scope is out of the question unless the contract is updated.

Avoiding scope creep is a necessary business move. But you lose value from a team unwilling to step back and spot opportunities for more or better features.

How to Choose the Right Engagement Model for Your Project

Considering how an engagement model can impact your project’s success, you need to select the right one. Here’s how you can make this choice effectively.

Select According to the Type of Project

Consider the complexity and expected timeframe of your project. For instance, if your next project is simple and won’t require much time, you can opt for fixed cost. If the reverse is true, you can consider other models such as resource augmentation instead. 

Factor In Flexibility

Make sure to include flexibility of scope, price, and timeframe in your decision. Fixed cost is for predefined plans you’re confident about. Meanwhile, other models can offer more flexibility in comparison.

Plan Around Your Budget

If you have a tight budget, the fixed-cost model may be the best option for you. However, while this aspect isn’t fixed in other models, you do get many benefits such as higher client involvement and full control. So, keep value for money in mind when making your choice.

Go for a Proof of Concept

Before you commit to a full-scale investment, consider conducting a proof of concept (PoC).

This tool, usually a rudimentary version of your product, can be used to gauge user interest prior to development. It’s a cost-efficient way to see if your idea will achieve the results you expect.

The insights from a PoC will allow you to –

• Assess whether there’s a market for your product
• Be first to market, giving you a competitive edge
• Spot potential issues in the design early on
• Reassure investors that your idea holds weight

Ready for Your Next Project?

Outsourcing IT services, especially for the first time, can be a complicated process. If you’re not sure what engagement model would best suit your project, DPL is here to help.

Our team of experts has decades of experience with project-based development as well as outsourced IT support services. And we’ve worked with both startups and multinational enterprises, so rest assured your project is in the best of hands.

So, let us know how we can help using the form below and let’s get started!