There are several outsourcing models that can be applied to both core and non-core businesses alike when facing challenges in defining the most suitable strategy for going forward. In general, these models are clustered in areas such as:
· Pricing
· Engagement
· Topology
· Delivery
· Transformation
We’ve talked about the strengths of Outsourcing, and its impact on the way businesses can control their costs (primary goal), scale their processes, generate savings, access talent pools, gain services tailored to their specific needs, provide a better experience to their customers, expand progressively and of course, to establish a sustainable competitive edge.
We’ve also talked about how digitalization has made Outsourcing evolve into mainstream, and how today it can be applied to both large and small businesses, even startups.
Sources say that global Outsourcing is set to be valued at over 400$ billion by the end of 2021, and is expected to grow in years to come.
Having that said, the pricing structure and models of Outsourcing naturally change and adapt.
What’s a pricing model?
Basically, it is a service payment/provision in which the end customer pays for the product/service their organization requires. Based on the level of service needed, each pricing model is different. By choosing the appropriate model that fits best to their needs, each business can be one step closer to reaching the advantage without having to hire new in-house employees.
How to choose the right pricing model?
The most important is to determine your organization’s actual needs, timing, and budget. The research comes next, which means choosing the right collaboration partner, such as Titan SIM, the one that is experienced enough to understand your requirements, but also capable to communicate accordingly and able to develop and test the product or service just in time.
What impacts pricing models over time?
Pricing models can be impacted by numerous factors. The most notable ones are:
Inflation
Increases in inflation can force companies to raise prices, but also to correct underpriced products and services. Hence, it should be ensured that certain contractual assurance terms like caps or changes are linked to local consumer price indices in place.
Staff promotions
A pricing model that is gradually impacted by the staff regulation promotions, which include appointing staff members to positions carrying a higher grade. It should be ensured that the supplier is responsible for a certain regular exchange of employees, without adding extra costs. Supplier is responsible for managing its staff without negative pricing impacts for you as a client (even when a named resource gets promoted on the supplier side).
Non-delivered pricing gains (estimates versus promises)
Both internally and externally related, associated with failures such as unplanned delays, bugs, rework, redesign, retesting, misunderstandings, or shortage of specifications in requirements. It’s important that related commercial consequences are covered in every contract and that the supplier is responsible for absorbing related commercial risks (regarding his promises).
Supplier spend volume changes (i.e. in-/decreases)
Suppliers spend volume can vary over time, i.e. for evergreen or long-term contractual relationships. Therefore, it’s important that certain volume discounts for each particular deal are implemented, so when the spend volume in the deal or a company group changes in your favor.
Currency exchange (who takes benefits?)
Price adjustment of products and services based on the currency exchange (both directions) also needs to be considered. It can impact merchandise trade, economic growth, capital flows, inflation, and interest rates. It should be ensured that negative impacts are covered (hedged) from the supplier and positive impacts are passed on to your company.
Special events (e.g. Covid-19)
Pricing challenges created by unforeseen events, such as Covid-19, could impact your business and your cost dramatically. It is highly recommended that certain insurances contractually are in place, the ones that will protect your company against these kinds of events. For example, a lot of firms have no protection for the personnel restaurants in place and have often to renegotiate their engagement or pay additional fees to hold the business on-site alive.
Contract expiry/ending (e.g. handover, decommissioning)
A contract end is defined as a regular end (when it expires) or when it gets terminated for convenience or based on a material breach (e.g. bankruptcy, voluntary termination, deficiency in the provision, etc.). In most cases, handover or decommissioning assistance is required. Hence, it’s important that certain contractual regulations are in place, so that related costs can be covered in your favor.
Delivery performance (e.g. non- or low performance who covers the costs e.g. for additional FTE?)
Delivery performance represents measuring of agreed benefits, gains, and unexpected losses. Usually, it relies on key performance or output indicators. Outsourcing deals are highly supplier-staff driven, which means that the supplier has to be commercially responsible for his delivery and, in cases of non- or low performance of the staff or certain handover times, they should cover the related costs. Hence, it’s important to include certain terms in your contract, so you do not have to cover the related commercial consequences.
Most common Pricing Models?
A. Classic models
– Fixed price model (FP): The only model that allows precise planning, as it guarantees a fixed budget for the entire project, regardless of the actual time and expenses.
– Time & Materials model (T&M): Represents a flexible engagement model, highly supported in agile development, where clients pay only for time and resources spent on their project.
B. Special workforce-related models
– Cost reimbursable model (aka Cost Plus Contract): Valid option that represents a model where the contractor has reimbursed the actual cost they experience in carrying out the task, plus an additional fee.
– Flexible Specialist Staffing model (aka Expert Bench Contract): It is a service where businesses are provided with highly skilled staff (e.g. IT developers or Data scientists) by a service provider so that these staff members can be directly involved in managing their specific requirements. It is one of the best outsourcing models for acquiring specialized expertise whenever you need it.
C. Special customer-centric models (abstract)
– Consumption-based model: This model represents a provision/payment for the customer, based on the resources that are being used during the process. It can be flat rate or at different rates.
– Pay per Unit model: The actual price based on the quantity of a service/product purchased by the customer.
– Performance-based model: Provider of the product/service is paid based on the actual performance of its goods.
– Variable Rate model based on use cases: The end price of a product/service is impacted by the total variable cost of production, such as expenses that are subject to changes within the process.
D. Special joint cooperation models (in addition to A-C)
– Profit-sharing model: The actual reward is based on the outcome of potential outsourcing of product/service, after the overall value of the organization is increased beyond the initial agreement.
– Incentive-based model: When bonus payments are given to the provider of a product/service for achieving performance levels above the contract agreements. This includes the bonus-malus system as well.
– Shared risk-reward model: Overall cost of a product/service is impacted with different approaches that can improve overall business performance, but also involve certain risks. Usually, it includes the implementation of new technologies or processes.
Conclusion
Choosing the right pricing model can be tough, whether you’re a business beginner or a pro. Like pretty much everything in business, such an immense decision requires research, planning, testing, and feedback prior to implementation. Fortunately, there’s plenty of tried and tested methodology.
Which Pricing Model should be the best one for your upcoming deal?
I would be happy to discuss these topics further. Just contact me.
