Application outsourcing: the pros and cons of the different types of contracts
Nowadays, we count three main types of application outsourcing contracts. All of them offer different ways to manage project expenses and duration as well as the Customer/vendor relationship. They all have pros and cons, we will see which one is more beneficial.
The lump sum contract
With a lump sum contract, the supplier has the advantage of be able to control the cost and duration of the works. He takes on the risks of the estimate that was conducted before the project started. Nonetheless, the client will be charged for all the specification changes. Here is why, in most cases, the final cost of the project is much higher than the initial one.
The service provision contract
If the client calls on body shopping, it will not be as ease to arrange changes. Yet, the client takes on that risk since there is no visibility on the works progress, mostly regarding expenses and duration.
In that case, the supplier would benefit from a longer project in time, since he charges according to the duration of the works.
The Function Points are a standard (ISO 14143) enabling to objectively size the volume of software to develop. The client can compare the prices of the various suppliers (Price per delivered Function Point). The supplier, is not wronged in case of changes of specifications or of new orders since the price is based on Function Points.
By analogy, one may say that Function Points are to software engineering what miles are to transportation. For instance, when asking a taxi for a ride, you do not know the price of the ride before you reach your destination. A fixed price per mile would enable to know the price in advance. It is actually the best way to optimize the ride.
The models based on prices based in measurement units offer a flexible solution enabling to pay services according to what is delivered to you.
It seems that the third type of contracts, the one based on a price per Function Point, is more beneficial for both stakeholders. In order to optimize supplier management and cost and duration compliance, the Function-Point-based contract is more suitable.