Outsourcing has become a crucial part of many businesses worldwide, and it is not hard to see why. The benefits of outsourcing are plenty as the practice helps businesses to reduce costs, increase efficiency, and focus on their core competencies. However, one of the most important considerations when outsourcing is pricing.
It makes sense for businesses to look for cost-effective ways when it comes to choosing their vendors and service providers. That’s because different outsourcing companies may offer different pricing models, each with different conditions set.
In this article, we will explore the common types of outsourcing pricing models to help prospective outsourcing clients choose the best option for their business.
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Common Types of Outsourcing Pricing Models, Explained
Overview of outsourcing pricing models
1. Staffing model
The staffing model in outsourcing involves hiring individual professionals or teams of professionals to work on specific tasks or projects for a defined period of time. In this model, the outsourcing provider takes care of finding, recruiting, and managing the staff, who are usually deployed on a time and materials basis, which is another pricing and staffing model that we will discuss later in the article.
Through this model, companies can quickly scale up or down their workforce as needed, which is particularly useful for short-term projects. The model also provides access to specialized expertise that may not be available in-house, which can help companies complete projects more efficiently and effectively. Additionally, the staffing model can be more cost-effective than hiring full-time employees, as companies only pay for the services they need for the duration of the project.
On the other hand, the staffing model has several disadvantages. Companies may have less control over the work of the outsourced staff, which can lead to issues with quality or communication. Likewise, integrating outsourced staff into existing teams or workflows can also be challenging.
2. Dedicated team model
The dedicated team model operates similarly to the staffing model in that it also involves working with an external team of experts for a project. Similarly, the service provider assembles a team with the necessary skills and experience to work exclusively on the client’s project, paid under a fixed monthly fee. As such, each team member must be assigned to the right roles to ensure a smooth working process.
Its difference lies in the longevity of the team’s commitment to the project, as well as in the management of the project and personnel. While the two models’ sourcing methods are the same — the outsourcing provider finds people to build the team — here, the resulting team is usually managed by the client who has direct control over their activities and processes. Also, the dedicated team model is often preferred for longer-term projects that require a higher degree of collaboration and customization. The staffing model, on the other hand, is more suitable for short-term projects.
The assembled team becomes fully integrated into the client’s project development team throughout the project’s duration. Constant communication and clearly defined goals between the assembled team and the client’s project managers will ensure the project’s success.
3. Time and material (T&M) pricing model
The time and material (T&M) pricing model, alternatively known as the cost and materials (C&M) model, is one of the most common types of outsourcing pricing models. This type involves a bidding process where an outsourcing service provider bids for a client’s projects by presenting a proposal, based on the client’s requirements.
Under this model, the client pays the service provider based on the actual time and effort expended on the project, along with the cost of materials used. This pricing model is suitable for long-term projects that are difficult to estimate in terms of the required time, resources, and materials.
A big feature of this model is its flexibility as it will allow clients to pay only for the services they need and provides them with the opportunity to make changes as the project progresses. In fact, the client and service provider may agree to set the payment rates on an hourly, daily, weekly, or monthly basis.
4. Fixed price model
The fixed price model is another popular outsourcing pricing model. As the name suggests, under this model, the service provider and the client agree on a fixed price for the project before it begins. The price is usually based on the estimated time and resources required to complete the project.
This pricing model is suitable for projects that are well-defined and have clear deliverables. Clients are provided with a predictable cost structure and assurance from the outsourcing service provider that the project is completed within budget. However, it also means that the service provider assumes all the risks and has little room for flexibility if the project requirements change. Should there be any changes in the scope, details, and requirements of the project, the client and service provider may need to revisit and revise the contract to accommodate these new developments. Needless to say, transparency is the key to success under this model.
This is the best model for small, short-term projects with a fixed budget in place. Those new to outsourcing and are exploring their vendor options may also suit this setup.
5. Cost-plus pricing model
The cost-plus pricing model involves paying a vendor the cost of the project plus a fixed percentage of the cost as profit. Furthermore, the vendor and their client can make fee adjustments based on agreed-upon conditions between the two parties:
- Cost plus fixed fee – The client pays the outsourcing service provider an additional fixed fee only upon the completion of the project.
- Cost plus incentive – The client pays the outsourcing service provider a bonus predetermined fee (the incentive) if they’re able to deliver exceptional performance for the project. For this setup to work, the client must set the metrics that the provider must exceed to earn the incentive.
- Cost plus award – The client pays the outsourcing service provider a bonus fee if they have met the expectations of the client. The difference here and the previous type is that no set metrics are included in the contract, the fee is not predetermined and is purely up to the subjective standards of the client.
6. Value-based pricing model
This model is based on the perceived value of the services provided, rather than the time or effort spent on the project. The pricing is usually tied to the business impact of the outsourcing services, such as increased revenue or reduced costs. Value-based pricing is best used for projects with high strategic value and a clear business case for outsourcing.
Outsourcing service providers with highly specialized or niche offerings and those with a good track record of generating huge value for their past clients can benefit immensely from this model.
7. Retainer-based pricing model
This model is based on a fixed monthly or yearly fee for a set of predefined services. The pricing is usually tied to a set of deliverables or services that the outsourcing provider is expected to provide on an ongoing basis. Retainer-based pricing is best used for services that require ongoing maintenance or support, such as website management or content creation.
It benefits the service provider with a guaranteed monthly and annual fee for their services, as long as their services are needed. Meanwhile, for the client side, the model provides a transparent way of paying for services which can help them with budgeting.
8. Shared risk-reward pricing model
This model is based on a shared risk and reward system between the client and outsourcing provider, where the pricing is tied to the achievement of specific business outcomes or results. The pricing is usually based on a combination of fixed fees and variable fees that depend on the success of the project.
This type of pricing model is best used for projects with high levels of risk or uncertainty, where both parties share the risks and rewards of the project. It likewise compels the outsourcing service provider to perform exceptionally on the basis of the shared risk-reward component of the agreement.
9. Performance-based pricing model
Performance-based pricing is a type of outsourcing pricing model that bases the cost of a project on the achievement of specific performance metrics or results. The primary objective of this model is to align the interests of the service provider with those of the client, ensuring that the provider is motivated to deliver the best results possible.
In this setup, the client and the service provider will first agree on the specific performance metrics that will be used to determine the success of the project. These metrics could include things like website traffic, lead generation, sales, or customer satisfaction rates. Once the metrics have been defined, the outsourcing company will develop a pricing structure that rewards them for meeting or exceeding the agreed-upon targets.
The primary benefit of performance-based pricing for the client is that they only pay for results. If the provider fails to achieve the agreed-upon metrics, the client is not responsible for paying the full price for the project.
The performance-based pricing model works best for projects where the desired outcome can be clearly defined and measured. This is typically the case for digital marketing campaigns, lead-generation efforts, and other projects that are focused on specific metrics.
10. Consumption-based pricing model
The consumption-based pricing model is a type of outsourcing pricing model in which clients pay for services based on their actual usage of the outsourcing company’s service. This model is becoming more popular as cloud computing, Software as a Service (SaaS), and other technologies enable service providers to offer scalable and flexible services.
In a consumption-based pricing model, the service prozavider charges the client based on the amount of resources they consumed, such as storage space, processing power, or network bandwidth.
The primary benefit of the consumption-based pricing model is that it offers clients flexibility and scalability. Clients can scale up or down their resource usage as needed, and only pay for what they consume. This makes it easier to manage costs and ensure that the client is only paying for what they need.
One potential drawback of the consumption-based pricing model is that it can be challenging to estimate the final cost of the project upfront. This can make it difficult for clients to budget for the project, especially if the amount of resources consumed or usage varies widely from month to month
How to choose the best outsourcing pricing model for your business
Clearly, there are many options to choose from when one is shopping for an outsourcing service provider. Understanding the basic information about each pricing model can bring a prospective client closer to vendors that best fit their business. However, reaching that stage requires a thorough review of the company’s needs.
First, consider the project’s scope and requirements. If the project has a clearly defined scope and deliverables, then a fixed price model may be the best option. On the other hand, if the project’s scope is more fluid and may change during the project’s lifecycle, a time and material or a dedicated team model may be a better fit.
Secondly, consider the company’s budget and financial goals. For those with fixed budgets for a project, the fixed price model may be the best option. However, for those willing to invest in the project and want to focus on receiving high-quality work, then a performance-based or a consumption-based pricing model may be a better fit.
Thirdly, consider the level of risk involved. For businesses that are willing to transfer most of the project’s risks to the service provider, then the fixed price model may be the best option. On the other hand, for companies who want to have more control over the project’s direction and outcomes, a time and material (T&M) or a dedicated team model may be a better fit.
Fourthly, consider the level of expertise and skills required for the project. If the project requires specialized skills or expertise, then a dedicated team or a T&M pricing model may be the best option. On the other hand, if the project requires less specialized skills or can be completed with off-the-shelf solutions, then the fixed price model may be a better fit.
Lastly, consider the service provider’s experience and reputation. Choose a service provider that has experience delivering projects similar to yours and has a good reputation in the market. Ask for references and case studies to ensure that they have the expertise and resources to deliver high-quality work.
In conclusion, choosing the best outsourcing pricing model for business requires careful consideration of the project’s scope, budget, level of risk, expertise requirements, and service provider’s experience and reputation. We advise potential clients to take the time to evaluate each option carefully and choose the model that aligns best with their business goals and project requirements.
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References
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Goroshkevych, Maksym. “10 Top Outsourcing Pricing Models to Consider in 2022 – InventorSoft.” Top Web Development Company | InventorSoft, https://inventorsoft.co/blog/the-best-outsourcing-pricing-models-for-your-business.
Shaptunova, Yuliya. “IT Outsourcing Models: Contract Types, Definition and Benefits | SaM Solutions.” SaM Solutions, https://www.facebook.com/SaMSolutionsCOM, https://www.sam-solutions.com/blog/it-outsourcing-models/.
Y, Manal. “6 Agency Pricing Models to Boost Profitability.” The Official Cloudways Blog, 13 May 2021, https://www.cloudways.com/blog/agency-pricing-models/.
