Outsourcing Pricing Models: What’s the Best for Your Business?
It is an indisputable fact that outsourcing will allow you to cut overhead costs and get huge savings that can be used instead for business activities directly impacting growth. But without understanding current outsourcing pricing models, it may be impossible to get the most out of outsourcing.
Outsourcing, which is the process of delegating certain business functions to a third-party provider, has a long history of helping companies hit or even exceed growth targets. Since its rise in the 1980s, outsourcing has expanded from just providing contact centres to providing high-value skills.
There was even a time when outsourcing was only a viable business solution for large enterprises. But as time went by and new technologies emerged, it has become one of the most helpful strategies for small and medium-sized businesses.
The evolution of the industry also triggered the change in outsourcing pricing models. Each model has its own advantages and disadvantages, depending on the company’s size, nature of business, and needs and objectives.
Different types of outsourcing pricing models
Perhaps the most common outsourcing pricing model is the fixed price model, where the provider sets a standard rate that may be charged monthly or annually, depending on the agreement. The price will depend on the company’s requirements, and it will already include the tools and workspaces needed.
Despite its name, the fixed price model can still be a bit flexible. Rates may be adjusted midway if there are significant changes in the cost of labour, materials, office spaces, and other resources included in the client’s requirements.
Some providers offer an incentives-based fixed price model where the vendor gets a bonus for finishing early or exceeding any target profits. A subvariant of the fixed price plus incentives model even allows clients to change target profits for the entire project. The fixed price plus incentives model variant encourages the provider to exceed all set targets that result in better business for the client.
The fixed price model works best for projects with small to medium scope with a set of requirements that will not change throughout the course of the contract. The model requires tedious preparations to flesh out the details of the projects and make sure all the requirements needed are set before all the work commences.
Under the staffing model, a client contracts a vendor to provide the resources they need over an agreed duration. The vendor, usually located in another region, provides staffing services complete with fully functioning workspaces, tools, equipment, and support to the client.
Of all the pricing models, staffing appeals most because it allows clients to incorporate more skills into their existing workforce to finish a project or attain certain goals with lower overhead costs. Moreover, this is the pricing model that gives clients full control over the resources they outsourced.
The staffing model allows a company to feely select people based on their skills and the organization’s specific needs. It also allows companies to scale up or down on demand, which is very helpful for small and medium-sized businesses seeking flexibility for growth.
If you are looking for a pricing model that gives full control over resources and costs, the staffing model is the one for you.
Time and materials
Typically used in long-term projects, the time and materials pricing model is a contract that revolves around actual time spent on a project, combined with the efforts and materials used in the process. Providers are usually required to bid for projects under this model.
Because it only charges for the time and materials used, this pricing structure is perfect for projects that need maximum flexibility, projects that are still in the process of scope investigation, projects connected with untested business models, and projects with hard-to-find specialists.
A variation of this pricing structure involves the client putting a cap on certain projects to avoid excessive charges. Clients should maximize the control this model provides, especially in terms of time management, to avoid charges beyond their projected budget.
Cost-reimbursable contracts, also known as cost-plus contracts, the service provider gets compensated for the expenses incurred for the project, plus an additional fee, typically in small percentage, for profit. This differs from the fixed price model where the standard fee remains regardless of the nature of expenses incurred.
The cost-plus fixed fee is one of this model’s variants, where clients pay a standard fee upon project completion, while the consumable cost may vary throughout the project. Cost-plus incentives, meanwhile, add incentives when the provider surpasses the projected performance, based on metrics set by the client. Lastly, the cost-plus award variant charges clients based on the provider’s performance.
Cost-plus pricing is often used for research projects, construction, and other projects that require purchase of materials. It is also recommended for projects with great uncertainty or projects with high levels of risk.
Under this model, clients are charged only based on their usage of the resources provided by their partners. Many companies find consumption-pricing appealing because they only pay according to their usage. You can get the most out of this pricing model if you have an accurate prediction of demand in a given period.
For example, some contact centers apply consumer-based pricing by charging per-minute for clients when they expect a low volume of calls. Some cloud services also charge customers for the additional storage they use per month.
Performance-based pricing model
This pricing structure is an outcome-based model. It rewards the service provider for bringing additional value beyond what the contract demands. Performance-based pricing differs from the incentives-based model in that the former allows clients to allocate a percentage of their profit to the service provider.
This is one of the many good ways to encourage the provider to perform better and deliver added value. It also encourages close collaborations between client and provider, taking the usual transactional partnership to another level.
Incentive-based pricing model
Like the performance-based model, incentive-based pricing rewards providers that deliver additional value to the client’s business. In this model, however, the conditions for incentives are stipulated in the contract.
For example, a service provider gets a quarterly incentive if they exceed the target by 20%. The real challenge in this model is to create the best incentive structure that will encourage both service provider and client to meet their goals.
Shared risk-reward pricing model
This pricing model is usually built on top of the times and materials, fixed price, or profit-sharing model. The shared risk-reward model is a flat rate structure where added costs are based on hitting stipulated objectives. This way, the client shares both the rewards and risks of the project with its partner for an agreed duration.
What’s the best model for you?
At the end of it all, the best outsourcing pricing model will depend on what your business needs. Always check on your budget and your projected timeframe and look at the pricing structure that will work best with your plan.
It is also crucial to choose the right partner that can deliver all the requirements that you need according to the pricing model of your choice. A lot of outsourcing providers are now capable of offering customizable solutions, and you only need to ask the right questions.
When talking to potential partners, always be transparent with your need. You may think that one model works right for you, but providers might have something better under their sleeves. Communication and transparency are important to have a smooth outsourcing journey.
Lastly, when you begin your outsourcing journey, don’t hesitate to start small. This will allow you to test the process if it works with as little risk as possible. It is also the perfect time to learn the ropes before scaling up your outsourced resources.