I need to know how outsourcing transactions are priced.

8. I need to know how outsourcing transactions are priced.

The structure of the pricing for the outsourcing contract can be one of the following:

(1) Cost Plus. This approach pays the supplier for its actual costs, plus a predetermined profit percentage. This plan allow little or no flexibility when business objectives and technology change during the life of the contract, nor does it give any incentive for the supplier to perform more effectively.

(2) Unit Pricing. This is a set rate determined by the supplier for a particular level of service, and the client pays based on its usage. Paying for desktop maintenance based on the number of users is an example of this approach.

(3) Fixed Price. Some buyers think this is the best approach, because they know exactly what the supplier's price will be, even in the future. But the problem with this approach is that if the buyer does not adequately define the scope of the process and design effective metrics before signing the contract, too often the result will be that the supplier claims a particular service or service level is beyond the scope of the contract and then charges a premium for it.

(4) Variable Pricing. This plan involves use of a fixed price at the low end of the supplier's service, with variances based on higher service levels. Its effectiveness, again, depends on adequately defining scope of process and metrics.

5) Incentive-based (or performance-based) pricing. Here, the buyer provides incentives to encourage the supplier to perform at peak level (or complete a one-time project ahead of time, for example) by offering a bonus reward if the supplier performs well. This same plan works in ensuring that the supplier must pay a penalty if it does not perform to at least the "satisfactory" service level designated in the agreement. This plan is the one to use to ensure the supplier's excellence in performance. (There is an article in one of our back issues that explains the current trend in call center pricing, based on this pricing model.)

(6) Risk/reward sharing. Here, the buyer and supplier each have an amount of money at risk and each stand to gain a percentage of the profits if the supplier's performance is optimum and achieves the buyer's objectives.

The buyer will select a supplier using a pricing model that best fits the business objectives the buyer is trying to accomplish by outsourcing.

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