New Pricing Models for More Complex Outsourcing Engagements – Part 2

These days, IT service contracts are more difficult to understand and outsourcing costs are a critical part of today’s IT strategy. In this post, we’ll take a deeper look at why contracts have become more complicated and what that increased complexity means for your organization.

What’s driving increased contract complexity?

Today, unit price points can range from fifty to well over a hundred individual items and contracts are often extremely difficult to understand. This can make deciphering contracts and evaluating their potential impact on performance and business challenging, but what has caused contracts to become more complex?

Multi-tenant environments make pricing less clear

One of the major shifts driving the change is the popularity of multi-tenant environments. This trend has many technical and operational benefits for IT departments, and can even lead to better pricing terms, but it also often makes the IT price comparison and variable management more complicated. As IT services shift from dedicated infrastructure, computing, and storage to shared resources, pricing models have drastically changed.

Generation one contracts primarily dealt with dedicated infrastructure, which provided straightforward price points. Now for example, cabinets and top-of-rack costs are apportioned to multiple VMs and images, spreading out the cost and making them harder to understand. Tape operations are rapidly being replaced by VTLs, with infrastructure costs often shared across organizations or between departments.

In first generation IT service contracts, clients could much more easily understand the effects that changes in a technical environment would have on costs. With resources shared between many organizations, this becomes much more difficult to predict. It also makes finding the optimal price to performance ratio for your organization challenging. Pricing models have been adapted to reflect changing service models, and companies must stay proactive to understand how this change will affect them.

Today, to reflect the implications of multi-tenant environments and the commoditization of IT services, pricing is affected by a range of variables, including:

• Fixed Cost Elements
• Variable Cost Elements
• Tiers of Service per Element
• Organization Structure
• Degree of Standardization

Service delivery partners aggregate prices

Price aggregation might seem like it would make IT outsourcing agreements simpler, but it actually has the opposite effect. Because pricing has become more complex thanks to multi-tenant environments and other variables, aggregation simply serves to confuse the issue even further. Hiding several variables behind a single price point makes benchmarking and market price analysis much more difficult. Clients simply have to work harder to find out what they are actually getting. Motives for doing this are also usually self-serving for service partners, as price aggregation reduces areas of contention with a client when prices increase.

In today’s IT services market, companies must have the right knowledge and guidance to understand how their outsourcing agreements will impact their business. In the final post of this series we will further explore IT outsourcing agreements and pricing by taking a closer look at how companies can manage the increased complexity of IT service contracts and develop strategies to ensure that they reach an agreement that meets their business needs.

Wavestone US’ consultants have decades of experience navigating the most complex outsourcing agreements. To learn more about Wavestone US’ sourcing advisory services and how we can help you turn IT outsourcing into a strategic business enabler, visit https://www.wavestone.us/capabilities/.