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You get what you pay for

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Outsourcing relationships structured around pricing base models can be very complicated, so typically it only happens among highly experienced clients and outsourcers who have built mature relationships. According to research from Datamark there’s a growing trend and shift towards this sort of pricing model.

Outcome-based pricing is an operational model where the service provider charges the buyer based on specific business outcomes

Outcome-based pricing is an operational model where the service provider charges the buyer based on specific business outcomes and not on labour. The provider does not get paid for the effort it puts in. Instead, the service provider gets paid when it meets a specific business outcome.

Partners who have developed a good sense of trust and fairness for both parties will develop contracts that have a sliding scale of rewards for approaching desired outcomes they won’t lock providers into an adverse all or nothing scenario.[1]

Contracts can also be designed with incremental steps. For example, promising a certain amount of savings in year one, then a higher amount of savings in year two, will allow the provider time to build up, adjust and weave innovations into the business process. Another solution to test the waters of outcome based pricing is a hybrid approach: price some business functions based on FTEs, others based on outcomes or gain sharing, and in the case of services delivered through cloud computing, usage based payment models

What are the advantages?

Outcome-based pricing helps with customer satisfaction and driving innovation which adds value to the processes being outsourced. Outcome-based pricing works best when the service provider controls the process end-to-end. Outcome-based pricing will not work better than FTE or transaction-based pricing if the client does not understand the drivers and put the right incentives in place.

When buyers ask for too much, sometimes suppliers promise to provide it in their eagerness to close a deal. Both sides are better served by establishing realistic objectives from the outset. Buyers should understand that general economic factors and conditions can impact a service provider’s ability to deliver the desired outcomes.

Large vendors employ estimating models to determine how many hours they believe will be required to deliver services included in a fixed-fee bid. Such estimates tend to be higher than if clients competitively bid out the requirements. Clients need to have someone that can go toe to toe with a supplier and take apart the estimating model. This will generally reduce the cost of a fixed-fee bid.

Schedule monthly or quarterly reviews with providers to see if they are on target to meet the objectives. These kinds of reviews can help both providers and customers by offering early visibility into potential problems

[1] http://www.datamark.net/uploads/files/2014_bpo_trends_wp.pdf
July 1, 2014
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