SOURCINGINTERESTSGROUPRESEARCHREPORTOUTSOURCINGPRICING:NEWAPPROACHES©1996,1997,1999SourcingInterestsGroup30HackamoreLane,Suite20BellCanyon,California91307Phone:(818)884-6080Fax:(818)884-4875web:sourcinginterests.orgTABLEOFCONTENTSIntroduction...........................................................................................................i1.TypesofPricingArrangements...................................................................1-12.WhentoConsiderDifferentPricingArrangements..................................2-13.PricingMetrics...............................................................................................3-14.LessonsLearned............................................................................................4-1©THESOURCINGINTERESTSGROUPINTRODUCTIONAstheoutsourcingfieldmatures,newerformsofpricingareappearingtosupportthespectrumofrelationships,fromthetradi-tionalvendor/customerarrangementthrough“partnering”toco-ownership.Muchrecentdiscussionhasfocusedonrisksandrewardssharedbythecontractingparties.ThisResearchReportdelvesintovariouskindsofpricingarrangementsanddescribesthelessonslearnedtodate.Wetalkedwith13peopleinoutsourcingclient,advisory,andprovidercompanieswithexperienceinbothITandgeneralser-vicesoutsourcing.Theyarelistedbelow.Inourinterviews,wediscovereddiscrepanciesbetweenopinions,definitions,viabilityofrisk/rewardarrangements,andtheamountofrisk/rewardpricingactuallyincludedintoday’scontracts.Risk/rewardpricingisnotcut-and-dried;itisfairlycontroversial.•J.RodFranklin,NationalDirector,Services,EntexInformationServices.•HarryGlasspiegel,Partner,Shaw,Pittman,Potts&andTrowbridge.•SteveHuhn,VicePresident,GlobalBusinessDevelopment,ISSC.•KeplerKnott,PracticeLeader,OutsourcingGroup,G2Re-search.•TerrenceMcGowan,President,TechnologySourcing,formerlyCIOofHiltonHotels.•ThomMead,SeniorRelationshipManager,CorporateMarket-ing,EDS.•ChristianMeyers,SeniorAnalyst,OutsourcingGroup,G2Re-search.•JohnPearsall,VicePresidentofOperations,UtilitiesDivision,EnergyIndustryGroup,EDS.i©THESOURCINGINTERESTSGROUP•DeanSchmelzer,ExecutiveVicePresident,SalesandMarket-ing,Fiserv.•MikeShaheen,SeniorManager,Outsourcing,AT&TSolutions,leadsthePricingCenterofExcellencewherepricingmethodolo-giesarecreatedtoincentdesiredbehaviorandaligntechnologywithmarketdrivers.•RitaTerdiman,VicePresidentandResearchDirector,GartnerGroupcoversITmanagementissues,includingoutsourcing,businessprocessreengineering,andorganizationalstructures.•PeteTierneyisinIBM’sWorldwideCorporateContractsDe-partment,whichispartofIntegratedProcurementSolutions.•JeffWacker,VicePresident,EnergyIndustryGroup,EDS.•BarryWiegler,President,KeyConsultingGroupandManagingDirector,SourcingInterestsGroup.ResearchedandWrittenbyBarbaraC.McNurlinii©THESOURCINGINTERESTSGROUPTypesofincentives.Therearenumeroustypesofincentivepricingplans,saysMeadofEDS:•Incentivepricingbasedonmilestones.Thesearegenerallyone-of-a-kind.•Self-contained,one-of-a-kindincentives.Inthesearrangements,theconsultingarmofanoutsourcingprovidermight,forexample,contractwithanoutsourcingcustomertoachievesavingsinonearea,suchasimprovingtheeffectivenessofthesalesforce.Thedealcouldbe:“Wewillinvest50%,youinvest50%,andwe’llsharethesavingsoverthreeyears.”•Sharedpricing.Inthesedeals,theprovider’sremunerationissplit(shared)betweenafixed-pric...
