IT Outsourcing Pricing Structures

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.

Performance-Based Pricing

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.

Fixed Pricing

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.

Variable Pricing

The client pays a fixed rate for the supplier’s low-end service. The price varies for the higher level of service.

Cost-plus Pricing

The supplier is paid for the actual cost plus a percentage. This pricing structure gives little incentive for IT outsourcing service provider.

Shared Reward/Risk

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.

Profit-sharing

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.

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