As with any economic ecosystem, pricing methodologies allocate goods and services according to the rewards received. In outsourcing, pricing methodologies therefore play an important role in defining what services are provided, how the services are automated for process efficiency and how human-processed services are streamlined, measured and paid for.
True Outsourcing: ARC’s and RRC’s
Traditional pricing methodologies for outsourcing involve a fixed fee for a fixed volume of services, with variations on fees for volumes above or below target thresholds. Charges for additional resources (“ARC’s”) above the threshold are priced at rates to reflect the marginal cost of the additional production plus a reasonable profit. Credits (“RRC’s”) granted for reduction in resources consumed or provided offer the enterprise customer some comfort, but the savings on credits tend not to be equivalent to the increased costs when paying for incremental resources in excess of the threshold. Price credits may be imposed when service levels fall below contracted quality benchmarks.
Gain Sharing
When outsourcing creates permanent cost savings, the service provider might obtain a share in the savings. “Gain sharing” poses a number of special issues relating to process improvement, incentives and competitiveness that need discussion in the early stages of contract development.
Staff Augmentation: Hourly Rates
Some outsourcing transactions apply a fee matrix depending on the hourly rates of the provider’s employees, according to their different skill sets and roles in service delivery. This model is sometimes referred to as the “staff augmentation” model when the parties agree to manage the input levels (number of hours and skill sets) rather than the output levels (service level agreements). Staff augmentation agreements therefore present a different risk profile than classic outsourcing.
