What is better for you? Outsourcing or Staff Augmentation?

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What is Outsourcing?

Outsourcing or Managed Services is the practice of contracting projects or parts of a project to an outside supplier, instead of completing them in-house. Outsourced projects are typically long term and are viewed as a way to reduce costs while increasing capability, thus providing the company with a competitive edge in the market.

What is Staff Augmentation?

Staff Augmentation is typically used as an alternative to permanent hiring and is seen as a means for increased agility. Resources are hired short term or intermittently to augment the strength or capabilities, or both, of an existing team. They work under the supervision of the company’s management. They only distinguish from full-time staff in that they are not on the payroll and ending their involvement in the company requires no long-drawn process on the company’s part.

Internal Capability

Outsourcing: When there is no internal capability for developing a product, outsourcing is the given solution for one-time or intermittent requirements. If, however, the company does have the internal capability to get the task done, outsourcing may still have operational and strategic benefits. It may not be viable to re-allocate the resources because of increased risks to the projects they are currently committed to. Outsourcing can be a good choice in that it frees up company’s resources and enables better focus on the core functionality. Also, experienced contractors may be able to manage the same work with better efficiency, giving the company a competitive edge.

Staff Augmentation: Staff augmentation provides tactical support by supplementing a team’s capabilities. Staff comes in at various stages of development to lend missing skills and expertise to advance the project. This model is great for meeting aggressive timeline challenges because of its ability to leverage existing resources by supplementing them with lacking expertise.

Cost

Outsourcing: Transferring portions of work to external contractors shifts the fixed costs of employees to the supplier. This proves cost effective for the company as their costing is based on the level of project activity, rather than staff engagement. Outsourcing also eliminates many other hidden costs in an organization, such as those associated with replacing obsolete technology or adopting new best practices.

Outsourcing can help meet business and organizational goals, increase overall productivity, and improve the company’s image. On the other hand, if the service levels are not defined clearly, the company could end up expending extra time and effort managing the project, which can have long term impact on the company’s overall profitability. It is essential to understand the total cost of outsourcing, including the hidden costs, to ensure it doesn’t outweigh the benefits received from it.

Staff Augmentation: Staff augmentation avoids immediate costs of developing skills internally. If requirement for a skill is not contiguous, it puts pressure on management to make the maximum use of a full-time resource. Augmented resources are employed by the contracting firm, which enables companies to ramp staff up and down without worrying about either the cost or liabilities that engaging full-time staff entails. On the other hand, cost of managing the augmented staff needs to be taken into account as well.

Responsibility for Risks and Results

Outsourcing: In the outsourcing model, the company buys results within the committed scope and term, as agreed upon in the contract. Responsibility for these results lies with the outsourcer. It costs more long term to internally allocate resources from one project to another. Transferring all risks regarding the day-to-day management of the team and the project, thus making it cost efficient in the long run.

The supplier should be capable of delivering the service levels desired by your company. It is vital to ensure that they are able to take responsibility of the entire project, including but not limited to internal reviews and management. This could prove to be a challenging task, especially when the scope of the project falls outside the company’s core competency. Project consulting services with specific expertise and experience in the field could assist with that.

Staff Augmentation: Hiring the right expertise and skillset can help in speedier project deliveries. However, the costing for staff augmentation is tied to the number of hours and not the results. As such, the responsibility for outcomes remains completely within the company. The company also shoulders other responsibilities and costs associated with the project such as managing resources, tasks, deliverables, technology, etc. There could be other increased risks involved, such as impact to organizational goals due to reassignment of resources and costs associated with delays on other projects.

Control

Outsourcing: While outsourcing helps avoid the necessity and expense of allocating and managing resources, it also means that the company has little control over processes or practices which are adopted by the contractor. Even though these risks can be mitigated to an extent through a carefully worded contract, the fact remains that no direct supervision is possible.

While working with domain knowledge that lends the company significant competitive advantage, it is more crucial than ever to pick the right vendor partner. It is vital to negotiate a sound contract with clear measures for protecting proprietary information. Since contractually all documentation belongs to the company, there is a much lower risk of knowledge loss as compared to the staff augmentation model.

Staff Augmentation: Hiring expertise on an as-needed basis allows you to closely manage the project and influence the processes involved in it. It also enables you to manage resources in the most cost effective way.

On the other hand, knowledge is vested with the individual resources with no contracted commitment to document or transfer it. This can lead to a loss of knowledge and increased risks for the company.

Flexibility and Scalability

Outsourcing: Costing is based on work volume, instead of resources. As the work volume shifts, it is the supplier’s responsibility to reassign or recruit more resources for the project.

Outsourcing can also be a means to accessing latest technology instantly. Quicker and better output can be expected with experienced suppliers, leading to faster product launches.

Outsourced firms are bound by contract to meet service levels. These service levels can only be defined effectively when the scope of work is clear to begin with. Projects with unclear requirements may not produce expected results through outsourcing.

Staff augmentation: Staff can be easily scaled up or down based on the requirements of the project. When transitioning to new processes or technologies, augmented staff can serve as ‘placeholders’ till permanent resources are engaged or trained. If a particular process needs to be rolled back, the augmented staff can be scaled be back with no liabilities on part of the company.

With decentralized and remote working, resources can collaborate with the team from virtually any place in the word. Augmented staff also doesn’t have to be limited to specific tasks and can be reassigned as needed.

Training

Outsourcing: The supplier is responsible for training and day-to-day management of the team as well as recruitment/deployment of resources required for completing the tasks specified in their contract. You can make it a point to ensure that the outsourcer follows industry best practices, the adoption and maintenance of which will be their responsibility.

If however, the project requires considerable domain expertise that the outsourced team will need to be trained on with considerable expense on the part of the company, it may be best to reevaluate outsourcing as an option.

Staff Augmentation: Resources are hired for their skillsets, so skill training is not required. Resources also bring their overall experience of working with different companies to the project. However, even with experienced staff, there is cost involved in bringing the resources up to speed on domain, tools, internal processes, as well as orienting them to the company culture.

Internal acceptance

Outsourcing: There may be internal resistance to outsourcing, especially if it is perceived by the employees as a threat to jobs within the organization. One way to overcome this is to share information freely so that everyone is on the same page.

Outsourced teams focus firmly on the outcome of the project regardless of the office culture, relationships, team dynamics, etc. making project advancement their main goal. Outsourcing is best put into practice when a project needs to move forward quickly.

Staff augmentation: There is less resistance from existing staff to a few resources hired on a temporary basis, as the employees feel less threatened in comparison to outsourcing.

Integration with Internal Processes

Outsourcing: The advantage of working with an experienced supplier is that they bring to the project best practices learnt over multiple clients and industries. The outsourced team is also unaffected by the company’s internal process flaws.

On the other hand, integration with the company’s internal processes might prove challenging, especially in instances where the outsourcer has no domain experience or has a markedly different corporate culture. Unless properly addressed in the early stages, this could increase demand on the company’s resources by requiring intensive management and communication at all stages of the process. It is important to take onus of communicating expectations precisely, clearly, and in detail to avoid incurring unplanned costs associated with poor expectation management. It is also essential to ensure that you have enough capacity internally of managing the outsourcer without significant impact to other projects/processes within the organization.

Staff augmentation: Augmented staff easily integrates with internal processes, so has minimal impact on the internal workings of the company. However, if the company’s internal processes have flaws, the resource’s dependence on them can negatively impact the outcome. Another drawback of this service model is that the company does not get the benefit of industry best practices.

If the company is in the process of shifting to a different platform that impacts projects which are likely to be outsourced, staff augmentation can be a good way to keep those projects going internally till the transition is made.

Staff augmentation is an easier model to adopt as compared to outsourcing as it is only slightly different from the familiar practice of employing new resources.

Economy of Scale

Outsourcing: Outsourcing can reduce stress on internal staff especially during periods of transition/upscaling within the company, enabling full-time staff to focus on adapting to the new changes.

Larger projects enable suppliers to leverage their internal economies of scale, thereby making it cost effective for the company to outsource the entire project. While negotiating for smaller projects, the reverse may be true. An experienced outsourcer may be reluctant to accept small projects, and the cost to the company could be disproportionately high.

Staff Augmentation: For exponential scaling, large projects, or long term projects with contiguous requirements, the cost for staff augmentation usually fails to match up to the benefits. Rates are negotiated on a per resource basis, resulting in an incremental increase in cost for the company. Other costs such as management overheads for supervising the augmented resources also go up. Costing in the staff augmentation model is tied to hours worked and not outcomes, which can increase the risks while scaling up substantially.

Comparison

outsourcing vs staff augmentation
In a Nutshell

Outsourcing is great for:

  • Overcoming lack of internal capabilities

  • Staying focused on core competencies

  • Shifting the risks and responsibilities of project management outside the company

  • Staying competitive, with access to latest technology and industry best practices

  • Where the work is clearly defined

  • Large scale projects

Staff Augmentation is great for:

  • Maintaining control

  • Integration with internal processes

  • Leveraging existing capabilities through addition of new skills

  • To immediately acquire lacking expertise without the cost of training/hiring

  • Increasing team strength to meet project timelines

  • To meet short-term or intermittent staffing needs

The Hybrid Approach

Where these requirements overlap, the hybrid model works best. It involves outsourcing certain parts of a project and completing others within the company, while supplementing the latter with augmented staff. This enables the project to be completed on time while leveraging both internal and external expertise, allowing flexible costing, and enabling the company to choose the level of control it exercises over the different aspects of a project.

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