Article: "What is the best engagement model: Fixed Price or Dedicated Team?"

sand Internetwebbureau is an international full service internetbureau and/or webbureau specialized in result driven, professional and affordable web design and web development of websites and web applications for clients across the globe. Internetwebbureau does provide web design and web development, including all associated services like marketing, optimizations, analytics, hosting, management with strong focus on results, at the highest quality, against the lowest costs, with the best service, at the shortest turn-around time, in the most flexible way, thanks to our global delivery model with a front-office (client contact) onshore in The Netherlands and a back-office (production work) via high quality partners offshore in India.
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Article: "What is the best engagement model: Fixed Price or Dedicated Team?"

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Internetwebbureau has experience with several engagement models in pricing for webdesign and webdevelopment of websites and web applications.
The two most common engagement models in pricing we use for our clients are Fixed Price and Dedicated Team.
Which of these two models deliver the highest value to our customers and makes outsourcing offshoring work most effectively?

Fixed prices have one crucial pre-condition: it needs to be clear what exactly has to be built, when it is not, the estimate of the workload will be completely wrong. And more often than, people are wrong about the workload. As with building houses, in most of the time a house is not being delivered in time and according to plan. Web suppliers protect their profit margins against wrong estimates by adding a big margin in the hours and in the hourly rate. The result is higher pricing and a lot of energy spent on the question ‘how much will the project cost’ and ‘what can be charged as extra work’.

Now the primary problem that companies are solving by outsourcing (part of) their IT services (like webdesign and/or webdevelopment) is capacity. They need people to run their IT operations (be it website or an web application). There are several options to do this:

Hire IT staff on your payroll.
Hire freelance IT persons.
Hire temporary IT people from an external employment agency.
Outsource (offshore) IT operations to an external company.

From the experience at Internetwebbureau, we believe the strongest model for running IT operations is having your own dedicated people, operating in a team where the team members know each other and have a strong team spirit. To build that team, hiring people on your payroll may seem cost-effective and easy. But apart from the fact that often it is not as cost-effective as it seems (overhead, illness, holidays, etc), your company becomes less flexible (hire/fire) and internalizes a skill that is often not the core competence.

Another option is hiring external experts. This ensures flexibility and ability to hire the right skills for the right job. But the costs are substantial if you hire these experts locally. Besides, it is usually not possible to hire local dedicated teams. The local outsourcing relationship is by default client-supplier, because hiring a full time dedicated team from a local supplier will incur high costs without any advantage over internal staff.

In an offshore outsource situation, companies are able to create a situation where they are able to hire dedicated teams while keeping costs below or at the same level as hiring staff internally. The outsourcer can select the team members, train them and build a strong team that can work for the company for the long term. The bottom line in this way of organizing is that the outsourcer is always flexible in his capacity and has no long term employment engagements.

Having a dedicated team has a few advantages over making fixed price arrangements:

The need for 100% clear requirement specifications disappears because the specifications can be developed partly onshore and offshore and projects can be organized using agile methodologies.
There are no disputes about the workload needed to complete a project.
The model is more cost-effective e.g. the translated hourly prices in a Dedicated Team model is lower than in a Fixed Price model, the supplier doesn’t need to add a ‘security’’ markup.
The outsourcer has full control over planning.
Strong relations are developed between the internal staff and the offshore team.
There are no communication layers, all communication is straight between the outsourcer and his team (in fixed arrangements, several layers of project management are often needed)
Knowledge can be kept with the outsourcer; his team will keep the knowledge, whereas in fixed arrangements, team members will often be replaced to other projects.

Internetwebbureau offer both a Fixed Price and a Dedicated Team model in the outsource offshore situation. Our experience is that for relatively small projects (less than 500 man hours), the Fixed Price model is commonly used. For large projects (larger then 500 man hours), the Dedicated Team model is the best choice.
Having said this, lately we do see as well that clients also want to hire dedicated people for any period from 1 week.

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