Information Technology Outsourcing (ITO) involves outsourcing the development, design, implementation, and management of processes and products to a third-party service supplier.
At first, outsourcing contracts are paid on fixed price basis or billed on a time and materials. But as time passed by, the pricing and contract arrangements have evolved. Here are the structures of common IT outsourcing agreements:
Time and Materials Pricing
Clients pay the IT service provider based on the materials and time used to finish the job. It is usually used for long-term contracts of application development and maintenance. It is also ideal where specification and scope are hard to estimate.
Unit or on-demand Pricing
The provider sets a rate for each level of service and the client pays for the usage of particular service he renders.
The client gives financial incentives based on the performance of the provider. This approach encourages the supplier to perform well. However, it also employs paying a penalty when the job is unsatisfactory.
It is a good option if there is a clear objective, scope, and requirements of the outsourced task. The deal price is determined before the contract is signed.
The client pays a fixed rate for the supplier’s low-end service. The price varies for the higher level of service.
The supplier is paid for the actual cost plus a percentage. This pricing structure gives little incentive for IT outsourcing service provider.
The client and the IT provider collaborate to finance a new product, service, or solution development. In this approach, they both agree that the supplier will have a reward for a definite period.
Pricing is determined by the supplier’s expertise and contribution. The ability of the supplier to produce the expected outcomes and meet the client’s objectives gives them both a share in the sales profit.
It is important to find the ideal IT outsourcing pricing method that gives mutual advantages to the client and the service provider.