Outstaffing vs. Outsourcing vs. Managed Services: Differences and Benefits

Terminology is a tricky thing. In various organizations, outsourcing and outstaffing can mean very different things. In Ukraine, the majority of small and mid-size IT companies call themselves IT Outsourcing. 

On the other hand, large and public companies tend to position themselves as in IT outsourcing, but only in the Product Development Services and Managed services areas. As time goes on even small companies reject "outsourcing" positioning using "custom software development" instead.

So let's look under the covers of outsourcing and product development services based on what we know about the IT sphere and IT market. We'll also go over the outstaffing practice further in the article.

Outsourcing vs. Outstaffing: What Is The Difference And What To Choose?

I enjoyed working in several companies, including startups, small private IT development Shops, and large enterprises with tens of thousands of people on board.

Playing different roles on a different level, I have had multiple challenges regarding the differences between outstaffing vs outsourcing, as well as what differentiates Managed Services. In the end, each business practice has its advantages and disadvantages, so there's no universal answer to the "outsourcing or outstaffing" question.

Let's take a look at the following summary table, and then go one by one starting with outstaffing and building our way up.

Outstaffing

Outsourcing

Product Development Services

Purpose

Team Extension

Business Function

Technological Partner

Managements

Client

Client/Vendor

Vendor

Quality Ownership

Client

Client/Vendor

Vendor

Revenue

Low

Low-Medium

Medium-High

Source of revenue

Workforce

Operational Excellence

Intellectual Product

Outstaffing services

Software outsourcing and outstaffing are sometimes used interchangeably. However, those two practices are completely different. Basically, outstaffing is the most straightforward model to understand. Many companies are shorthanded and need a development team to help their house developers. Outstaffing comes in handy when the client's needs mean increasing the software development team's capacity and jumpstarting the development process. In the case of outstaffing, offshore employees for remote software development are officially employed by another client to speed up the development process.

Management 

With the outstaffing approach, the client has full control over management. The outstaffing software development team inherits the existing methodology, processes, tracking tools, and communication approaches. The repository, environments, and automation tools are usually on the client-side or administered by the client. This factor is often considered among the main outstaffing pros.

Quality ownership

The outstaffing projects are also frequently called Staff Augmentation.

  • The outstaffing company augments their remote employees with the client's existing house team. 
  • The manager is responsible for the terms, product, and budget. 
  • The outstaffing manager is an employee of the client's company.

Revenue

The outstaffing model is a time for money trade. So, there are no cons of outstaffing from this perspective. You can imagine it in the form of the hourly rates or cost+ model. Clients buy an hour of work; the vendor gets their profit from hours sold.

Consider that the required organizational complexity here is low. There are many competitors, and competition is based on the price. Many vendors are competing around small-sized clients, so the market's invisible hand keeps the costs low.

One of the primary sources of revenue is the workforce. The key to making more revenue in the outstaffing area is to sell more hours. The more people - the more money. That's what the outstaffing model is about.

Development outsourcing

Within the outsourcing vs outstaffing paradigm, software outsourcing means when companies delegate one of the business needs to a third-party service provider. Apart from software development, a company can turn to outsource to help with their manufacturing, accounting, software development, testing, support or call center, and other digital activities.

Speaking about the tech area, a development team can be employed by another company to perform testing, product management, maintenance, and support, along with software development outsourcing. The outsourcing model also applies to different technologies, and an integrated software development function. Let's continue with the outsourcing vs outstaffing comparison related to three core points.

Management

Outsourcing project management may have a complex structure. Usually, management is done on the client-side (Product management, Program management), and the outsourcing provider is responsible for proxy management (Project Manager, Team Leader, proxy product ownership).

Quality ownership

Depending on the management structure, the outsourcing vendor commits to the quality of the outsourcing function. Quality standards and formal development methodologies are applied to measure quality and results. Having managerial positions allows contractor companies to use standards and measurements and perform control over them. Furthermore, it brings an obligation to comply with standards and achieve the KPIs.

Revenue

Processes, web development guidelines, prebuilt solutions and pipelines, and much more – are the solution accelerators. By keeping standard things standard, the company can avoid reinventing similar wheels for multiple projects. Lower costs with improving operational excellence give extra margin. Therefore, revenue is among the major outsourcing pros.

In other words: with the right attitude for the client, it won't matter if developer John switched the whole project and QA Pete automated his tests. As long as the dedicated software development team produces the results they are committed to, no one cares whether it's software outsourcing or any other hiring practice.

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Product Development Services

Apart from outsourcing - outstaffing models, there exists product development services. When I got to know the PDS term for the first time, I worked in a 10+ tech outsourcing company. The company initiated a series of events to educate its personnel about the PDS Delivery model. One example for developers was, "you stop thinking that the business wants this button painted in red: You start thinking, how would the end-user like to see this button."

The main difference between the approaches mentioned above and PDS is that the latter means, first of all, a shift in mindset. Mature companies realize that, besides technical assignments, the company can provide their expertise and advice. The evolution from doers to thinkers to become a technological partner with the client's business. Commit to the product and give the product more than just the hours spent. 

Management

To provide the Service of Product Development, the provider company shall acquire the competencies of Business Analysis, Project Management, Product management, and domain knowledge of the industries their clients are working at. 

The PDS project is usually expected to have a Project Manager, Product Owner, Stream, and group leaders among the team members. In some cases, those roles can interface or mirror the respective roles on the client's side. In other cases, they can be positioned as provider-side roles only. Additionally, the company establishes competency centers and practices - the non-production people responsible for acquiring and growing the competency and domain knowledge.   

This gives the vendor much more autonomy and freedom. Dedicated software development teams can arrange convenient processes and adapt the methodology of choice. 

Quality ownership

Having Product and Project Management on the provider side also means having Ownership and Responsibly on software end product delivery so that the quality ownership is entirely on the vendor side. 

Revenue

On PDS projects the company still makes more money with more people. But that becomes a side-effect. The PDS source of revenue is an intellectual product that can take different forms. The form of higher hourly rates for engineers with higher qualifications, and additional knowledge of industry and business. The conditions of phases for generating intellectual outcomes: Solution Design, Technical/Process Audit, Marketing research, etc.

Generally, as the vendor takes more risks and responsibility, the more revenue it generates. 

Client view

As an IT company, we are a supplier for our clients; an IT Service Provider. There is a traditional categorization of suppliers.

Let's go through the classification:

a traditional categorization of suppliers

  • Commodity: for suppliers who provide low-value or easily available products or services, which could be alternatively sourced relatively easily. 
  • Operational: for suppliers of functional products and services. These relationships would usually be managed by junior operation management and would involve infrequent but regular contact and performance reviews. 
  • Tactical: for those relationships involving significant commercial activity and business interaction. These relationships would usually be managed by middle management and apply for regular contact and performance reviews, often including ongoing improvement programs.
  • Strategic: for significant 'partnering' relationships that involve senior managers sharing confidential strategic information to facilitate long-term plans. These relationships would usually be managed and owned at a senior management level.

Being in outstaffing, the vendor falls into the Commodity category. No significant risks are associated, and alternatives can be found and engaged fast enough.

Outsourcing can be either Operational or Tactical suppliers, depending on the importance and impact. Taking more ownership, and providing more value, is the key to progress toward strategic partnership.

By practicing the PDS approach, the vendor company can achieve a strategic partnership with a client.

Cost of moving ahead

Staying in 'commodity' keeps prices (and in turn salaries) limited by the market. Too many Outstaff service providers competing to maximize the revenue can exhaust the labor market and lower the entry criteria. That's pretty much what is happening in the Ukrainian IT labor market. And like anything else in this world, all approaches have their pros and cons. 

To bid for providing services as a strategic partner, the company must understand the client and contribute to the client's business success better than other competitors. That requires investments into:

  • Management – improve governance, consistency of deliverables, communication, and reporting
  • Practices and competencies – acquire unique selling points in the form of a group of people with "know-how"
  • Sales – change of focus from "selling standard services at a low price" to "provide complex technological consultation and analytics"
  • People – attraction and retention of talents. Utilization of bench programs, internal and external education, improved work conditions

Value of moving ahead

Better sales, dedicated remote team, more extensive projects, more considerable challenges and impact, higher salaries, and much more room for professional growth in almost any direction; All of these at the cost of ownership and responsibility. 

I hope you liked the article. It's challenging to cover outsourcing or outstaffing the development process and its pros and cons fully in one piece. Please share your experience, questions, and comments. It's always exciting and motivating to get feedback.

 
Dmytro Zota

Delivery Director at The APP Solutions https://www.linkedin.com/in/dmytro-zota-1693b14a/