As IT leaders focus on cutting costs, they continue to put pricing pressure on offshore outsourcers. Since suppliers who respond with repeated price cuts could be slitting their own throats, some are offering up new pricing models to soothe the savage customer.
There are two well-established methods for pricing an outsourcing deal: time-and-materials (where the client pays for work on a cost-plus-margin basis) and fixed price, though variations on the two themes continue to emerge. An outsourcing customer will opt for a time-and-materials deal when overall requirements aren't clear or they want the transparency of the cost-plus model. The drawback of such deals is that they require more hands-on management by the provider and costs can spiral out of control.
Other customers like fixed-price deals because the cost of the deal is, theoretically, capped, and deliverables can be directly linked to service level agreements and associated penalties. The downside is that requirements need to be well-defined upfront, and there is limited visibility into underlying costs.
A new hybrid model seeks to incorporate both time-and-materials and fixed-price methods in one contract.
