IT outsourcing is a popular strategy for businesses to reduce costs, access talent, and improve efficiency. But how do you choose the right pricing model for your IT outsourcing project? In this article, you will learn about some of the most innovative IT outsourcing pricing models that can offer you more flexibility, transparency, and value.
The fixed-price model is one of the most common and traditional IT outsourcing pricing models. It involves setting a fixed price for the entire project or a specific deliverable, based on the scope, timeline, and quality requirements. The fixed-price model is suitable for projects that have clear and stable specifications, low complexity, and minimal changes. The advantages of this model are that it provides certainty, accountability, and control over the budget. The disadvantages are that it can limit innovation, flexibility, and collaboration, and increase the risk of scope creep, delays, and disputes.
The most innovative IT outsourcing pricing models include: 1. Subscription-Based Pricing: This model charges customers a fixed fee for access to services over a pre-determined period of time. 2. Utility-Based Pricing: This model charges customers according to the actual usage of services. 3. Pay-Per-Use Pricing: This model charges customers a fee for each service usage. 4. Performance-Based Pricing: This model charges customers based on the performance of the service provided. 5. Hybrid Pricing: This model combines multiple pricing models to meet the customer’s specific needs.
The time and materials model is another widely used IT outsourcing pricing model. It involves paying the service provider based on the actual hours and resources spent on the project, plus a markup or profit margin. The time and materials model is suitable for projects that have unclear or changing specifications, high complexity, and frequent feedback. The advantages of this model are that it allows for innovation, flexibility, and collaboration, and adapts to the changing needs and expectations of the client. The disadvantages are that it can create uncertainty, inefficiency, and overspending, and reduce the accountability and control over the quality and timeline.
When it comes to IT outsourcing (ITO), both “fixed price” and “time and materials” pricing models represent very outdated methods of thinking about outsourcing. They are both largely labor arbitrage plays without long term benefits. While both may be useful for short term IT projects, they have proven unacceptable for medium to large scale ITO of the support and maintenance an organization’s technology estate.
The value-based model is one of the most innovative and emerging IT outsourcing pricing models. It involves paying the service provider based on the value or outcome delivered to the client, rather than the hours or resources spent. The value-based model is suitable for projects that have measurable and tangible goals, high impact, and strong alignment between the client and the service provider. The advantages of this model are that it incentivizes performance, quality, and results, and creates a win-win partnership based on mutual trust and benefit. The disadvantages are that it can be difficult to define, measure, and agree on the value or outcome, and require more risk-sharing and communication.
“Value based” models have seen some success in narrowly defined business process outsourcing (BPO), but I have not seen any sustainable models for ITO.
The hybrid model is another innovative and flexible IT outsourcing pricing model. It involves combining two or more pricing models to suit the different phases, components, or objectives of the project. For example, you can use a fixed-price model for the planning and design phase, a time and materials model for the development and testing phase, and a value-based model for the maintenance and support phase. The hybrid model is suitable for projects that have diverse and dynamic requirements, multiple stakeholders, and long-term collaboration. The advantages of this model are that it offers the best of both worlds, customizes to the specific needs and preferences of the client and the service provider, and balances the risks and rewards. The disadvantages are that it can be complex, confusing, and challenging to manage and monitor.
The retainer model is a simple and convenient IT outsourcing pricing model. It involves paying the service provider a fixed monthly fee for a certain amount of hours or services, regardless of the actual usage. The retainer model is suitable for projects that have ongoing and predictable needs, low to medium complexity, and long-term relationship. The advantages of this model are that it provides stability, simplicity, and efficiency, and ensures the availability and commitment of the service provider. The disadvantages are that it can be wasteful, inflexible, and uncompetitive, and create a complacent or dependent mindset.
The KPI (Key performance indicators) model, You can use them to measure essential activities of your business so that you can see how these activities influence business results. Define your own business suited small measurable indicators, for development (based on loc, analysis of issues hourly basis, fixing and unit testing etc). This will be out come and result oriented based.
The pricing model I prefer is “resource unit based”. Every asset (i.e., routers, switches, firewalls, database instances, servers, etc.) in the IT estate has an industry standard monthly cost to support and maintain. The variables in the model are volumes, service levels, and length of the contract. The cost model generally includes declining year over year resource unit (RU) pricing which drives innovation and optimization. That is an oversimplification of course, but hopefully useful.