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5 Pricing Models For IT Services

Jul 30, 2013 6:00:00 AM

by Charles Bystock

pricing models for IT complexityOne of the primary tenets of outsourcing has always been that you can save money, because services are scalable and you only pay for what you get. Pricing models for IT services used to reflect that same thinking. But the world of IT is rapidly changing and increasingly complex, so a single pricing model is no longer realistic.

Now there are several different pricing models for IT services. You can pick and choose among them to craft a scenario that meets your organization’s specific budget and cash flow requirements as well as your performance goals. You can still save money, if that’s your primary concern. But the biggest benefit of varied pricing models for IT services is that you can realize benefits beyond cost reductions.

Consider these possible models:

Consumption-based.

Pricing based on actual usage still might be your best bet if your demand fluctuates or you’re concerned about service provider productivity. This is a good model for cloud-based solutions. It’s easy to analyze cost-effectiveness, but tough to predict long-term costs. This model can also become a disincentive for adding needed services, because of the resulting cost increases.

Gain-sharing.

This results-based model is akin to employee profit-sharing. You can achieve significant improvements, because you’re benefiting from your provider’s creativity as well as their expertise, but you must assign a value to your provider’s performance contributions since that’s the basis for your payment. This model can require greater initial investment, and because it’s designed to produce big gains, it’s not for the budget-conscious.

Incentive-based.

Just as the name implies, this model rewards your provider for performing above agreed SLA levels. You’ll need to identify what “extras” you’ll reward and how you’ll compensate them, based on your overall goals. Be sure you aren’t incentivizing work that should be done anyway, and note that you do not have to automatically provide incentives if you create penalties for sub-standard performance.

Shared risk-reward.

This entrepreneurial approach allows you and your provider to collectively fund new development work for products, services, solutions, etc. Sharing the financial rewards as well as the risks with your provider requires a high level of trust and strong governance, so clearly delineated roles, responsibilities and measurements are critical for this pricing model to work.

Status quo.

You always have the option of doing nothing other than what you’re doing now. However, given the volatile nature of technology changes and the global marketplace, this is perhaps the worst among pricing models for IT services. You can’t expect to meet the challenges of the future by relying on the past.

Hybridization is the essence of flexibility.

The bottom line – for both function and finances – is that your enterprise is unique. There may be far more pricing models for IT services available now than a few years ago, but they’re still just models. Ultimately, it the combination of service delivery options, service provider choice, specific contractual details plus pricing elements that will determine your outsourcing success.

It’s your money, and your results are on the line. So bear in mind: 

  • You’re the customer, so you get to define the services you receive.
  • Well-targeted metrics are essential to know if you’re benefiting as expected.
  • It takes clear expectations to properly target pricing. Discussing your needs openly with your provider will help them understand the big picture, to develop the right service-and-pricing package.
  • Decide up front how you’ll implement changes and work together in the future, so things go smoothly and you don’t wind up paying for something you aren’t getting. Or not getting something you need.

Recognize that it’s a relationship-building process. Regardless of what pricing models for IT services you choose, your outsourcing experience won’t be perfect. But if you and your provider are committed to working out problems – and you’ve established in advance a governance and leadership plan – you’re far more likely to produce the best outcomes for everyone. 

Photo credit:  gurdonark via Flickr

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