Are IT Outsourcing Pricing models biased towards service providers?

Contemporary literature for pricing Outsourcing services addresses mostly the perspective of the provider 

Unfortunately contemporary literature on pricing of IT Outsourcing Application Management contracts largely deals with Application Pricing models from the perspective of a service provider:

  • Either they compare and contrast the the advantages and disadvantages of fixed price versus Time and Material models of pricing.
  • Or they advise on how to price to win – this takes the form of penetrative and skimming strategies. large_3881693277

Labor-based Pricing is unfortunately the norm Most commonly used pricing models (fixed price, time and material, volume based pricing) find their root in the labor costs of the provider. This is an input based pricing as each of these models are linked directly to effort drivers. These are the factors that go into the delivery of the services.

Environment-based Pricing is actually what you need

What CIOs actually need is a pricing that is based on the factors of their environment – and the ebb and tide in their environments. They need a way to transparently show the result of each change to the environment, and not each change to the input that the provider adds into the service.

This is the subtle difference – this is the difference between basing the price on the complexity of an application and its interfaces instead of only on the number of tickets that the provider has to solve.

So start encouraging the right behavior with your IT Outsourcing Provider The pricing model should encourage the right behavior. Creating a pricing model that is purely based on the effort drivers of a provider either unevenly balances the risk on each side, or removes the risk completely from the provider. The result: a service provider service provider has to take care of the inputs of the service instead of proactively trying to better the environment of the application.

As an example, ticket based pricing might appear attractive at first because of the variability of the price – but it might not encourage the right behavior in a provider who is paid based on the number of tickets they solve.  One would want to avoid a constantly increasing number of tickets – the first sign of a dissatisfied customer.

Is your IT Outsourcing Application Management Costing based on your environment and needs, or on the effort drivers of your provider?

See also:

The hidden inflexibility in IT Outsourcing contracts

Do standard application pricing models really cover today’s needs

photo credit: RHiNO NEAL via photopincc

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