Introduction

Pricing is an integral aspect of any outsourcing relationship. Buyers typically face different kinds of operational issues in their outsourcing relationship, many of which can be resolved through appropriate pricing strategies. This report describes how common issues in IT outsourcing can be resolved by making appropriate changes in the pricing mechanism of the contract. It demonstrates the application of these pricing strategies through four in-depth client examples and illustrations of issues faced by buyers in their outsourcing relationship. The study is supported by a discussion of the objectives of ITO pricing and key components of a pricing model. Companies will benefit by understanding the linkages between pricing, buyer and supplier behavior, desired business outcomes and how to align incentives for buyers and suppliers through pricing strategies.

Scope

• Understanding of key supplier/ buyer motivations that can be impacted by pricing
• Definition of existing pricing models and approaches
• Analysis of the operational issues in IT outsourcing contracts today that can be addressed through innovative pricing strategies

Contents

This report describes how common issues in IT outsourcing can be resolved by making appropriate changes in the pricing mechanism of the contract. The key insights are presented in three sections: objectives of ITO pricing, key components of the pricing model in IT Outsourcing and key issues in ITO pricing. For instance, the third section discusses four examples of pricing solutions to operational issues in IT outsourcing. These examples cover the following scenarios:

• Cost of service, e.g. misalignment of negotiated rates with existing market rates
• Control/ flexibility, e.g. business-driven changes  in IT service lead to increase in “un-contracted services” billing
• Quality of service, e.g. supplier deploys inappropriately-skilled personnel or reduces staffing levels
• Innovation, e.g. supplier does not proactively bring the benefits of innovation to the buyer’s IT organization