Introduction

Procurement Outsourcing (PO) is different from other BPOs in that it addresses a large cost base in terms of non-core procurement spend as opposed to only the operational and functional spend that most BPOs target. While this creates a significant savings potential, it also renders the PO process complex and challenging. Consequently, the pricing strategy in PO becomes a critical component to ensure the right behavior from both buyer and supplier leading to win-win solution for all stakeholders.

The objective in this study was to uncover the latest trends in pricing structures prevalent in PO. In this research study, we focus on

• Pricing structures prevalent today
• Market trends in adoption of different pricing structures
• Factors impacting PO contract pricing
• Best practices and recommendations for buyers and suppliers

Scope

• Executive-level interviews with buyers and suppliers of PO services
• Proprietary Everest database of nearly 150+ PO contracts

Contents

This report examines the various pricing structures in PO and provided in-depth analysis of the various factors affecting pricing in PO contracts. The report provides the reader with an accurate overview and clear identification of trends observed. For example, throughout the report key findings are shared, including the following, among others:

• There is no "nirvana" to pricing strategy in PO, and every structure described has its own pros and cons in terms of how it impacts buyer behavior and supplier behavior
• The managed-service fee is the most prevalent pricing structure in PO. The market is now maturing towards a hybrid pricing model based on a managed-service fee with a component of gain-sharing
• Pure gain-sharing in PO contracts is rare. The rise of an FTE-based pricing structure is a recent phenomenon driven primarily by the FAO suppliers entering the PO market
• The key factors that drive pricing strategies are process type and focus, buyer preferences and supplier preferences
• In the PO market, there is a large variance in the pricing levels that is driven by various factors such as contractual elements (deal size and duration), process scope, buyer operations and delivery region