Pricing Outsourcing

On July 19, 2011, in Outsourcing, by Business Development Group

In determining the costs or pricing of outsourcing, it is best to establish future delivery costs, baseline costs and how the impact of both benefits is shared.

Yes,  Outsourcing is itOutsourcing increases business flexibility,  provides technologies and processes previously unavailable to your business.

In determining the costs or pricing of outsourcing, it is best to establish the existing baseline costs of the business process you intent to outsource. From this point you can determine on what the price of the outsourcing projects should be. 

As cited in a research by International Association of Outsourcing Professionals (IAOP), pricing specifies how the fees for the services provided are calculated. It is important that a pricing structure for an outsourcing contract takes into consideration the risks and rewards are allocated between the business owner and the outsourcing service provider or provider.

The most common pricing models are, as follows:  

Costs Plus

The outsourcing service provider is paid for the actual costs with a fixed amount or percentage. This enables the business to fix the profit for the provider and gives visibility of underlying cost factors.

Unit Pricing

Charges is based on the amount of service or the service units rendered.

Fixed Price

The outsourcing service provider’s fee is the same regardless of the volume of service that is provided.

Incentive-based

The business owner uses payment incentives to encourage the outsourcing service provider to deliver services in a particular way or on a specific level of performance.

Gain-sharing

Provider receives a portion of any additional benefits like savings generated for its customers. Favorable to the business owner as splits range either 50-50 or 25-75, the savings may come from lowered cost on raw materials or acquired technologies.

Achievement Bonuses

A commendation-in-cash or one-time payment for an achievement or reaching a specific milestone.

Risk/Reward Sharing

Both the business owner and the outsourcing service provider have money at risk, as each stand to gain a percentage of the additional value created by their combined efforts.

Read related article: Outsourcing Services Made Our Client Earn 15M

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