New Pricing Models for Radically More Complex IT Outsourcing Engagements

Part 1

This is the first of a multi-part series on how the increasing complexity of IT outsourcing engagements is creating the need for IT leaders and sourcing professionals to understand and work with a new generation of pricing models. Visit The Journal to stay up to date with strategic sourcing and IT leadership topics.

As IT services evolve and the wealth of service offerings increases, IT outsourcing agreements are becoming increasingly complex and difficult to manage for many companies. This can often lead to organizations paying too much for their IT services or not getting the service they need. Having an effective pricing strategy to manage outsourcing agreements is a critical component of IT success. In this post, we’ll discuss the trend of increasingly complex agreements and what it means for your business.

IT outsourcing agreements are growing in complexity

Today’s outsourcing agreements are very different from those of the previous generation. As dedicated infrastructures make way for complicated multi-tenant environments, many organizations are struggling to effectively manage their IT contracts and pricing strategies. It is not uncommon for a current generation contract to include 50 to 100 — or more — individual price points. New pricing structures can take into account various tiers of service for each scope element, aggregate price points, organization financial structure, and the degree of technology standardization. Relating this complex array of factors to their potential impact on financial performance and forming an effective cost/benefit analysis can be challenging.

This trend is further driven by the increased use of multi-sourcing strategies to leverage best-in-class providers for different elements. Organizations must now manage an increasing number of contracts, with varying pricing structures that can conflict with overall IT planning targets and business requirements. This adds additional layers of technology complexity and new requirements for outsourcing pricing strategies and requires a greater management focus.

IT outsourcing pricing constructs are an integral part of IT strategy

Although price should not be the primary driver of IT strategy, it is a fundamental component of it. The IT department strives to deliver the most effective applications and services to the end user at the best possible cost. Understanding outsourcing agreements and pricing best practices is a critical part of overall IT strategy. Building key metrics into SLAs, regularly evaluating performance, and having a clear comprehension of every service being delivered are all key factors in the process. This allows business to better understand the dynamics of price and how pricing can impact financial and operational performance. It also allows executives to align IT objectives with business goals and achieve a more harmonious balance between transparency and complexity. Organizations must strive to gain perspective on the changing pricing structures and use that understanding to deliver services and value to the end user more cost effectively.

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