Output based pricing has increased in popularity in infrastructure services and transactional business process outsourcing deals. More recently, enterprises have warmed up to the idea of using this pricing model for application services.
This should come as no surprise, given the benefits.
Our output based pricing research offers market best practices data on business criticality, support coverage, ticket volumes, ticket type, usage, change frequency, underlying technology, and others.
Overall, output based pricing brings a lot of transparency into the pricing equation and makes underlying delivery nuances clear. Enterprises’ procurement teams also find this pricing model attractive, as they can expect greater delivery certainty, better transparency, and more flexibility from the suppliers, leading to higher-value relationships.
Output based pricing works best in scenarios where transaction volumes are known, repetitive, and predictable. Enterprises with clearly defined parameters such as industrialized estimation models to measure resource productivity can derive optimum results from this model.
However, the model may pose limitations in situations wherein the organization’s processes are not standardized. Engagements involving activities with a higher degree of subjectivity should not go for this pricing construct. And because procurement and delivery teams need a certain level of maturity to leverage the model effectively, it shouldn’t be used when the enterprise is new to outsourcing.
To succeed with output based pricing, the client and the provider must collaborate, and both parties must remove as many constraints as possible to allow the provider to go about the best ways to achieve optimal results.
The onus is on the enterprise to provide access to historical data, information around regulatory requirements, business fluctuations, and identify clear risk areas. The service provider is responsible for being transparent on its assumptions, inclusions, exclusions, and risk premium.
Careful contract management right from the pre-contract phase is a prerequisite to make this pricing model work. Unambiguous definitions of performance measurements will help deliver the most favorable outcomes. Finally, there must be an open and trusting relationship between the two parties. Relationships that are based on up-ending each other will likely result in failure.