Fee for Service. The traditional structure of a classic outsourcing consists of an agreement for the service provider to provide services (based on an agreed scope and an agreed level of services) in return for an agreed pricing structure. The service provider controls the provisioning of the services, but the enterprise customer has certain rights relating to relationship governance, contingency procedures (force majeure, disaster recovery, business continuity, etc.), selection of the vendor’s key personnel and change management (sometimes referred to as “change control”).
Control by Contractual Governance. Under the classic outsourcing structure, the enterprise customer controls the operations by monitoring performance for compliance with the agreed quality and volumes of the work. In exchange, the enterprise customer gives up control of how the work is done. As part of this transfer of control, the customer receives the benefits of the service provider’s technology, expertise, knowledge base and, if agreed, some capital.
Process Improvements. This classic structure has some incentives for the service provider to improve the quality of services over time through improvement of the operations and through the pricing structure.
Exit Strategy. Upon termination or expiration of every outsourcing contract, the parties jointly face the task of restoring to the enterprise customer (or its new service provider) control over the services. Generally, this process can be facilitated by anticipation in the original contract.
Further reading:
- Domestic vs. International Deals
- Variations: Enterprise Resource Software
- Variations: Divestiture of Facilities and Personnel
Return to Sourcing Models