As the bursting of software outsourcing development trends, both IT service providers and IT service vendors have recognized the mutual values that outsourcing software development brings to them. Here are the four pricing models which are believed to optimize productivity so as to balance risks and rewards for both parties, and ensure the most value for outsourced projects.
Losing Potential Value with Cost-Based Pricing
With cost-based pricing, there's no incentive to maximize the value you create for the client since you cannot capture any of it with price. Sometimes, the client loses if the work done isn't bringing any value at all!
IT Outsourcing Pricing Models Gain Popularity
Shared risk-reward pricing model
This model is considered to allow service providers and clients to jointly fund the development of new products, solutions, and services. Essentially, the two team up for a relatively equal distribution of work and benefits. This means your partner has responsibility for potential and existing risks during the project because of its mutual impact. However, they have the right to receive a sharing in rewards for a defined period of time.
Best For: Customers seeking dramatic business improvements who want to create a true alliance with IT suppliers. Cost-focused buyers need not apply.
- This business process outsourcing model motivates service providers to innovate and enhance the client’s business through a sense of shared risk.
- Those risks can be reduced by getting more people involved in the decision-making process.
- It can be hard to measure just how much the service provider is contributing. This makes it even harder to implement rewards.
- The client needs to hand over a lot of the management to the service provider. This creates more of a “Partner” relationship than a client/provider relationship. Therefore, they should have a strong management team
- The client's business goals and partner’s ones may be different and that can cause controversy during the collaboration process
Incentive-Based Pricing Model
Incentive-based pricing model offers bonus payments to the outsourcing partner as a reward for meeting certain established goals. These extra payments are added on top of what is established in the original contract. Many experienced businesses embrace this model for its ability to motivate teams to meet (and exceed) directives.
Best For: The incentive-based outsourcing model is best for companies that want to motivate their vendors to perform beyond expectations.
- The attached incentives can help compensate for the limits of fixed-price and T&M models.
- All in all, this is a great way to make sure that the team’s goals align with the client’s.
- Clients don’t have to pay for shortfalls. If the team doesn’t perform, they aren’t out the extra cost.
- Adding different milestones and bonuses does make the engagement model much more complex.
- Measuring bonus-worthy performance can be difficult and costly. The ‘incentive’ should be that they get to keep providing the service.
Performance-Based Pricing Model
Similar to other incentive-based models, a Performance-Based Pricing Model rewards the service provider for producing satisfactory results, reaching milestones, or hitting certain metrics. It usually involves a lot of negotiation in order to set terms and benchmarks that both parties find suitable.
Best For: Larger or more established companies that don’t need to build partnerships with their service providers frequently employ this model.
- This is the most intense of all incentive models, as it provides a reward for superior performance and threatens punishment for underperformance.
- You can almost always expect quality work from your vendor, as delivering good work is the only way they can assure payment.
- It requires a lot of oversight and interaction on the part of the client to make sure performance metrics are being hit.
- “Docking” the pay of your IT team is not a great way to build trust. In fact, it often creates tension and even animosity between parties.
Pay-Per-Unit Pricing Model
In a Pay-Per-Unit Pricing Model, vendors will offer a unit-based set rate. The amount the client pays ultimately depends on how much of the service they use over a period of time.
Best For: The PPU Pricing Model is one of the best reserved models for companies that have more sporadic service needs.
- Companies can save a lot of money by minimizing their usage of a particular service. They also get the option to invest with more than one service provider at a time.
- Companies with minimal requirements can end up saving a lot of money by only paying for (and using) the bare minimum.
- Using this model requires a somewhat detailed prediction of demand. Otherwise, service providers might not be able to properly allocate their team or resources.
- Demands will change over time, which can make it hard for the client to budget for their needs.
- The service provider may not be available when needed, as there is no long-term contract in place to “lock in” their services.
Cost-plus model by TIGOSOFT
The Cost-plus model is offered by TigoSoft as a unique and innovative service for businesses requiring IT outsourcing. In this model, a business solution consultant will evaluate what level of service you require based on your unique business plan.
Businesses seeking the affordable cost while wanting the continous software delivery (ie. every 2-weeks sprint) are encouraged to take advantage of the Cost-plus model, as it is highly beneficial for a long-term software development project and for the relationship.
The model offers businesses stability and predictability in an often-turbulent business environment. Clients looking to scale up and expand their remit would benefit from everything the Cost plus model offers, including:
- Customized, detailed analysis to clarify needs and tailor offerings. We will research your company and learn about your business needs and requirements.
Two rounds of preliminary screening so that we can find the perfect developer for your needs.
Internal technical interviews for quality assurance.
Candidate interviews alongside the business.
A free trial period so that you can assess whether or not the collaboration is working.
Management process setup. We will liaise between you and the chosen developer to ensure that everything runs smoothly and that you’re communicating effectively.
Partnership monitoring. We will help you undertake performance and project reviews. This will allow us to deal with any issues before they become problems.
Long-term strategy evaluation. Our delivery managers will help you identify any future needs and prepare for them.
The business landscape is undergoing a massive change. The onset of globalization means businesses must be flexible and meet the requirements of a dynamic environment. Of course, the demand for IT services will continue to grow exponentially, despite a lack of highly-skilled developers.
Fortunately, we offer you the opportunity to access highly-skilled, resourceful professionals from our country. This allows you to focus on increasing your operational efficiencies and building your core business.
In the end, the Cost-plus model provides you with increased flexibility. It is a leaner and more cost-effective option, especially when compared to Fixed-Price or T&M models. All in all, it’s a collaborative and innovative outsourcing option that delivers skilled developers directly to businesses that need them.
The right Outsourcing Pricing Model
These models above have their own pros and cons. However, businesses can minimize the drawbacks by planning and preparing the solution for any potential issue before the contract agreement. Additionally, businesses need to understand your situation and depth of scope to decide which the most suitable models. In a nutshell, no matter which models your businesses choose, goals, objectives, timeframe, quality, and price should be smartly prioritized and balanced.