Pricing Research

As outsourcing activity picks up after slowing during the beginning of pandemic, now is an excellent time to gain a better understanding of managed services pricing and how providers price IT services. To help ensure your company gets the right value out of your next outsourcing deal, read on for pricing research and outsourcing costs expertise based on Everest Group’s insights.

Seven common trends that can impact outsourcing costs:

1. The economy: Without a doubt, the economy plays a major role in the movement of deal pricing, especially when Black Swan events such as COVID-19 erase all previous pricing rate cards. The pandemic forced many enterprises to ask for short- to mid-term invoice discounts, while others used it as an opportunity to renegotiate their existing contracts. As markets rebound, talent scarcity and travel bans are resulting in upwards movement in pricing at high-cost locations, while pricing for digital talent at low-cost locations has reached an inflection point and is expected to turn around
2. RFP vs sole-sourced deals: First, there is nothing wrong with a sole-sourced deal. It can be more efficient, shorter in duration, and deliver greater value compared to an RFP-led scenario, given you have a trusted relationship with a vendor of choice. However, by introducing competitive tension into the overall bidding process, an RFP can often be more effective in getting the best pricing. But, as a result of excessive price undercutting, the quality during delivery may not be what was promised during initial negotiations
3. Cross subsidization of accounts: Often, providers subsidize their loss-making accounts through their profit-making ones. This is why it’s so important for enterprises to benchmark regularly to see how prices compare against market peers and the overall industry
4. Enterprise and sector financial performance: The performance of the industry or the sector as a whole can widely influence deal pricing. Sectors such as insurance or oil and gas that typically do not have very high margins usually have visibly low time and materials (T&M) costs or managed services pricing compared to enterprises in well-performing verticals such as life sciences, retail, investment management, or capital markets. While paying less in low or underperforming sectors is not guaranteed, clear trends point to this practice
5. Buyer persona: The sourcing team can impact the negotiations in ways enterprises often can’t fathom. For example, a senior purchasing manager who has worked across a range of sectors and lived through the last two recessions will bring a different experience into negotiations than those who are newer in their careers and have worked in the cash-rich internet, high-tech, or e-commerce sectors, which can impact the price and length of the deal-making
6. Transformation vs technical upgrade: If embarking on a complex transformation engagement that involves multiple elements such as change management, business consulting, architecture design, and a longer advisory/blueprinting cycle, it is highly likely you will engage a Tier 1 systems integrator or consulting heritage vendor (including the Big 4 firms) for the entire scope of work. Expect such engagements to cost as much as two and a half times more than a technical upgrade of a similar effort
7. Contract terms and conditions: Service levels, service credits, and penalties can have a major impact on pricing without enterprise procurement realizing it. In our experience, most holdbacks or fees at risk the enterprise asks the vendor to commit to are baked into the deal as contingencies. So, if you are planning to have the most stringent service levels and fees at risk for your next deal, think twice about whether you need it