Outcome based pricing models
There is a growing mismatch between expectations of today’s business organizations and what their outsourcing partners are currently delivering. Gone are the days when the clients were satisfied with one time cost arbitrage and in time project completion. The business leaders now expect suppliers to deliver value added innovations along-with ongoing price reductions. Such demands are forcing increased adoption to new business models based on ‘software-as-a-service’ and ‘transaction based pricing’ contracts. In short, a clear shift from input based cost mechanisms to output based pricing models is emerging.
However, there is a distinct view that quantum of output alone is not an adequate measure of the success. The clear expectation is that the output must meet a minimum success criterion and the price of outcome be lesser than the value addition perceived.
The dilemma that we face is how to clearly define a successful transaction and related value enhancements. The move from existing effort based pricing methodologies to successful outcome based partnership contracts throws a couple of challenges for both suppliers as well as client organizations. Some of the key issues that need to be addressed are:
1. Defining a transaction from beginning to end
2. Making sure that there is a clear agreement on what determines a successful outcome. How such an outcome is different from merely processing a transaction?
3. Emphasizing that this is a partnership model and collaboration is the key
4. Formulating Risk-Reward strategies and quantifying the same in a contractual manner
5. Arriving at a common basis for future value creation
Many industry experts believe that success of outsourcers will depend on, not just the ability to meet the demand, but the sustainable value that they will create. Do you believe that adopting to new pricing mechanisms is worth the pain and clients will really be keen on value innovations than immediate cost arbitrage? Please do share your thoughts.
Tags: integrated technology and operations, iTOPS, Off shoring, outcome pricing, Outsourcing, outsourcing strategy, process outsourcing
Outsourcing | Anil Bajpai, SVP & Head - iTOPS Delivery, iGATE | 
October 5, 2008 6:39 pm
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