©SOURCINGINTERESTSGROUPOUTSOURCINGPRICINGSOURCINGINTERESTSGROUPRESEARCHREPORT©2001SourcingInterestsGroup30HackamoreLane,Suite12BellCanyon,California91307Phone:(818)884-6080Fax:(818)884-4875Web:sourcinginterests.orgAllrightsreserved.©SOURCINGINTERESTSGROUPTABLEOFCONTENTS1.INTRODUCTION1-1WhatClientsNeedtoKnowAboutPricingPricingGuidelines2.TYPESOFPRICINGARRANGEMENTS2-1TypesofIncentivePricingIncentivePricingGainsharingandRisk/RewardValuePricingCosourcingandAlliances3.WHENTOCONSIDERDIFFERENTPRICINGARRANGEMENTS3-1IncentivePricingGainsharingandRisk/RewardValuePricingCosourcing4.SERVICELEVELAGREEMENTS4-1DefiningServiceLevelsChangeofCharacterClauses5.METRICS5-1EstablishingBaselinesProblemAreastoMeasureIncentivePricingGainsharingandRisk/RewardValuePricingCosourcing6.LESSONSLEARNED6-1IncentivePricingGainsharingandRisk/RewardValuePricingAlliances©SOURCINGINTERESTSGROUP1.INTRODUCTIONMAJORPOINTSINTHISSECTION•Thepricingalgorithmiscrucialbecauseitdeterminesbothpre-dictabilityandflexibility,whicharethetwocharacteristicscus-tomerswantinanoutsourcingcontract.•Spendenoughtimeconsideringtheeffectsofpricingalterna-tives.•Morecustomersareinsistingonfixed-feearrangements.•Themore“pricingreopeners”(triggerstorestatepricing),thelesspredictablethecontract.•Manydealsincludemuchmore“financialengineering”thanyouwouldthink.Financingisbigpartofdeals,especiallylargedeals.•Thebiggestmistakeclientsmakeisnotinquiringaboutpricingtermstheydonotunderstand.•Executivesoftenunderestimatecomputinggrowth.•Bewaryofguaranteesbecauseitisverydifficulttocalculateactualsavingsbecausevolumesandenvironmentchange.•Alignpricingwithmanagement’sgoalsandtrytogetpricingbasedonbusinessunitsratherthantechnology-basedunits.•Negotiatethebasepricefirst,thentalkaboutfinancing.•Negotiatepricingthatcanaccommodatechange.•Structurethedealtomotivatepeopletodotherightthing.Astheoutsourcingfieldhasmatured,differentformsofpricinghaveappearedtosupportthespectrumofrelationships–fromthetraditionalprovider/customerarrangementthrough“partnering”toco-ownership.Ofparticularinteresttocontractingcompaniesisrisk/rewardpricing.ThisResearchReportdelvesintooutsourcingpricingandexploresthevariouskindsofpricingarrangements.1-1INDEX:WHATCLIENTSNEEDTOKNOWABOUTPRICINGPRICINGGUIDELINES©SOURCINGINTERESTSGROUPWHATCLIENTSNEEDTOKNOWABOUTPRICINGPricingisanart.Itrequireschargingtheworthofaservice,notthecosttoperformit.Thetworeallyarenotrelated.Manycontractsarebasedoncost-per-transaction.Value-basedpricingmightbebetter.Pricingisatwo-edgedsword.Ontheonehand,customerswantpre-dictablefixedprices.Ontheotherhand,theywantfutureflexibilitysothattheircostswillbebasedonvolumeandotherfactors.Customersmaysacrificeflexibilitywithfixedpricing;however,themore“pricingreopeners”inacontract–triggerstorestatepricing–thelesspredict-ablethecontract.Mostcustomersacceptpricingalgorithmstooquickly.Theydonotappreciatethesubtletiesofthealgorithms.“Youcandoyourselfadisservicebynotspendingconsiderabletimeconjecturingabouttheimplicationsofvariouspricingalternatives,”saysHarryGlasspiegel,outsourcinglegaladvisor.Tomakeinformedtrade-offs,peoplemustunderstandthecostmodelsaswellasthebenefits.Notallexpertswhounderstandcostmodelsreal-izethesignificanceofoutsourcingpricingalternatives.“Mybestadviceistoprotectyourselfbyextendingpricingdiscussionsratherthancut-tingthemsho...
