How Much Will Your Next Outsourcing Deal Cost? Understand These Seven Factors That Impact Pricing for Services | Blog
With outsourcing activity again picking up after slowing when the pandemic hit, now is a good time to gain a better understanding of how providers price IT services. To help ensure your enterprise gets the right value out of your next outsourcing deal, read on for expert pricing tips based on Everest Group’s experiences.
Below are seven common trends we see that can impact the pricing of outsourcing services:
- Of course, it’s 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 can throw away all previous estimates on the futures of 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
- RFP versus 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. By introducing competitive tension into the overall bidding process, an RFP can often be more effective in getting the best pricing. However, due to excessive price undercutting, the quality during delivery may not be what was promised during the talks or negotiations
- Cross subsidization of accounts: Often, vendors 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
- 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
- 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 seen at least the last two recessions will bring a different experience into negotiations than purchasing resources 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
- Transformation versus 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
- 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 all the holdback 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
After advising on countless engagements, we’ve seen many other checkpoints that impact deal pricing. By starting with understanding the factors above, you’ll begin thinking about pricing from a more holistic viewpoint and be more educated at the negotiation table.
If you would like to talk more about pricing, please reach out to Achint Arora at [email protected].