The Outsourcing Contract: New Pricing Models

On April 18, 2012, in Outsourcing, by Business Development Group
... clients today are expecting more value from their outsourcing service providers, significantly opting to establish win-win relationships with their partners instead of the traditional service-for-fee arrangements.

... clients today are expecting more value from their outsourcing service providers, significantly opting to establish win-win relationships with their partners instead of the traditional service-for-fee arrangements.

In traditional outsourcing deals, the outsourcing service vendor provides business process or Information Technology (IT) services and the client pays for them, following any of the three basic pricing models typical in traditional outsourcing contracts: fixed-price, time-and-material, or cost-plus pricing.

However, clients today are expecting more value from their outsourcing service providers, significantly opting to establish win-win relationships with their partners instead of the traditional service-for-fee arrangements. This resulted to the emergence of pricing model combinations/hybrids as well as new pricing models being used today more than any pure/basic form of the traditional ones.

Related Article: New IT Outsourcing Pricing Models Gain Popularity

Consumption-Based Pricing

A consumption-based pricing model, in comparison to the traditional time-and-materials pricing model, is a pricing arrangement whereby the outsourcing service provider charges the client based on the amount of the service the client consumes, rather than a time-based fee.

Read related article: Wells Fargo says BPO operations Vote of Confidence in Philippines

Incentive-Based Pricing

In incentive-based pricing, payments are connected to the achievements of certain service levels or other specific aspects of delivery or performance above the contract’s service level agreements.  This pricing model is often used in conjunction with a traditional pricing method, such as Fixed Price or Time-and-Materials pricing model.

Related Article: New IT Outsourcing Pricing Models Gain Popularity

Shared-risk or Shared-Reward Pricing

This pricing model is considered the “compromise” between two extreme traditional pricing models: the time-and-materials pricing model, where the client takes most of the risks and receives most of the benefits in a successful project; and the fixed price model, where outsourcing service provider takes most of the risk. In a shared-risk or shared-reward pricing model, both the client and the vendor identify risks and benefits of a project, and agree to share either the loss or the benefits of the project.

Read related article: How to Successfully Transition to Outsourcing

Gain-Sharing Pricing

In this pricing model, both the client and the outsourcing service provider establish measures on transparency and accountability between themselves towards the ultimate goal of achieving maximum efficiency and effectiveness. Both parties can work towards common business goals, investigating efficiency and effectiveness schemes, quantifying potential impacts, and sharing the benefits of a successful project.

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