Pricing models of outsourcing operations

There are several models companies follow to organize their outsourcing or near-shoring IT operations. They choose a model depending on several aspects: whether outsourced processes are strategic or not, the control level they want to have, or time and scope of outsourced operations. The below table summarizes 3 commonly used pricing models.

cooperation models

Fixed price

Fixed price cooperation model gives a company a control over price, scope, and time of outsourced projects. It’s suitable for short term operations, with clearly defined problem and solutions domains. It’s typically used in implementation projects where the supplier delivers a product or service as well as the relevant know-how and support often in form of specific SLAs. It doesn’t give a company insights into supplier’s internal processes and doesn’t allow control over supplier teams.

Time and material

Companies choose time and material model for their outsourced IT operations mainly when they want to have control over people involved in those operations and outcomes of their efforts. For example when they want to have connection with their remote team members, be able to discuss their goals, agree on responsibility areas, or even assign tasks. Such model is suitable for longer term projects with known problem domains but uncertain solutions. In such cases supplier and provider agree on a methodology or practices which they want to follow. Agile methodology is often chosen because it is characterized by collaborative approach and frequent contact with the remote team where the best solutions can be worked out using short feedback loops. Such pricing model is used in supporting several collaboration models such as body leasing, team leasing, or try and hire model where companies use trial periods to decide whether a contracted team or person should be hired directly to the company or not.

Equity investment

For long term, strategic operations, companies usually choose equity investment in subsidiaries that they want to have greater control of. In such cases being a shareholder gives certain rights and obligations that are governed by Code of Commercial Companies. For example, shareholders have right to supervise company activities, vote in general meeting of shareholders, or participate in company profits. This gives shareholders possibility to have control over strategic decisions and internal processes. Each shareholder may sell its stake or its parts.

The above mentioned three pricing models are suitable for different types of outsourcing activities. Each is characterized by different control measures, require different levels of involvement, and can be subject for different KPIs. Before getting involved in the outsourcing or near-shoring activities companies should decide how long they will be involved in the outsourced activities, what types of activities they are, how much control they want to have, and how much effort and money they want to spend on such activities.

 

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