As competitive forces impinge on business entities, managers are increasingly re-structuring their organizations with an eye on achieving or maintaining competitive advantage. Despite the variety of benefits outsourcing bestows upon an organizational entity, pricing plays a predominant role and is often central to a strategic outsourcing decision – the primary objective of most outsourcing engagements is the achievement of some degree of cost savings. Although many articles have appeared on outsourcing, few have extended the discussion beyond simple cost benefit analysis and actually addressed costs and possible contract structures that accompany an outsourcing engagement. Hence, contracts are designed around pricing models, which shall be explored in detail.
Outsourcing contract models
Contract forms are usually equated to cost models in normal outsourcing practice. The different cost models currently employed are:
1. Staffing model
2. Fixed price (FP) model
3. Fixed-Price Contract With Economic Price Adjustment (FP EPA) model
4. Fixed price plus incentive (FPI) model
5. FPI Successive Target (FPI ST) model
6. Cost Reimbursable model
7. Cost plus Fixed Fee (CPFF) model
8. Cost plus Incentive (CPI) model
9. Time and Materials (T&M) model
10. Time and Materials (T&M) model with a cap
11. Consumption-based pricing model
12. Profit sharing model
13. Incentive-based pricing model
14. Shared risk-reward pricing model
The staffing model refers to the process of staffing or contracting of resources by the outsourcing organization from the service provider. The driver for such a model is the lack of sufficient resources or skills in-house that are required for a successful project completion. In this model, the outsourcing organization leases or contracts a specific number of resources for a specific period of time from a supplier i.e. the service provider. The service provider supplies the required resources based on an agreed upon rate for the duration of the project or on an as-needed basis. In this model, the contracted resources are usually located at the client site. Therefore, this model assumes that the client provides the necessary infrastructure for the resources to work on site.
The advantage with this model is that the project control always rests with the client. The contracted resources work under direct supervision of the client, hence closer monitoring and productivity depend largely on the client. This model allows for higher agility as the clients could progressively add or reduce resources, thereby maintaining absolute cost control. Even though this model has several tactical advantages, it has strategic limitations – the contract resources belong to the service provider, hence it is impossible for the client to build long-term competencies and capabilities with external resources.
> Read in the second part on Friday (08.02.) about Fixed Price Models
About the author: Mithun Sridharan is a General Manager at BlueOS LLC, an advisory based in Germany, where he is res pons ible for driving the s trategic s ales initiatives and managing cus tomer engagements in Digital transformation & Analytics. Prior to BlueOS, he was an Account Manager with Oracle Corporation, where he drove strategic partnerships with key enterprise accounts and major Independent Software Vendors in Europe and the USA. He brings with him over a decade of International experience in Management Consulting, Business development, Strategic Marketing & Product Management. He holds an MBA from ESMT Berlin and a Master of Science (MSc) from Christian Albrechts University of Kiel. He is a Harvard Manage Mentor Leadership Plus graduate, an SAP certified Business Intelligence Professional, a Project Management Professional (PMP) and a Certifed Information Systems Auditor (CISA). He also served as the Communication Chair for the German Outsourcing Association in 2013 and is based in Heidelberg, Germany.
Contact: Mobile: +49 176 9792 4897 eMail: firstname.lastname@example.org
LinkedIn: http://de.linkedin.com/in/mithun Twitter: http://twitter.com/jixtacom