Introduction

Outsourcing relationships are complex, and the success of the outsourcing deal is driven by the alignment of interests between the buyer and the supplier. The engagement model is one of the main factors that define this alignment. This report analyzes trends in pricing model and relationship approach adoption across various segments of the ITO market. It also argues the case for the choice of engagement model being a driver of client wallet-share. Buyers will appreciate that depending on their business context, the nature of the project and size, different engagement models may apply. Suppliers will find it critical to understand how flexibility with regard to the engagement model can drive increases in the share of the buyer’s wallet.

Scope

• Definition and understanding of the existing pricing models and relationship approaches
• Analysis of the likely evolution of the engagement models in various types of IT outsourcing
• Analysis of suppliers’ strategies in expanding the buyer’s wallet share through flexibility in pricing and relationship approaches

Contents

This report examines the complexity in outsourcing relationships along two dimensions: pricing model and relationship approach. It focuses on segmental variations in pricing model preferences and characteristics of relationship approach in an outsourcing engagement. Case studies are used to further illustrate various dimensions of the analysis and provide real-world context to concepts discussed. The report also identifies the implications of the research findings for key stakeholders.

Each section of the report describes the implications of 4-6 key trends, which are discussed in detail (and illustrated with supporting data and analysis) to provide the reader information in easy-to-apply, bite-size pieces. For example, the ‘Pricing model overview’ section elaborates on the following key insights:

• The pricing model defines the alignment of the incentives and transparency of the relationship
• Most pricing models fall under three categories: input-based; output-based and value-sharing. Determining what model is used is not a straightforward exercise and often requires in-depth understanding of the outsourcing arrangement
• Various segments of IT outsourcing often exhibit different preferences with regard to the pricing model. While Infrastructure Outsourcing (IO) deals are primarily based on output pricing, Remote Infrastructure Management Outsourcing (RIMO) deals and Application Development and Maintenance (ADM) deals are mostly input-based
• Each pricing model has its own sweet spot in outsourcing, While the input-based model provides maximum accountability and transparency of the effort, output-based pricing is easier to govern, and the value-sharing model enables true risk-sharing