The four popular outsourcing pricing models that businesses need to know
As the bursting of software outsourcing development trends, both IT service providers and IT service vendors have recognized the mutual values that outsourcing software development brings to them. This drags to several pricing models that have been applied most of the outsourcing contract between businesses. Here are the four pricing models which are believed to optimize productivity so as to balance risks and rewards for both parties, and ensure the most value for outsourced projects.
Shared risk-reward pricing model
This model is considered to allow service providers and clients to jointly fund the development of new products, solutions, and services. This means your partner has responsibility for potential and existing risks during the project because of its mutual impact. However, they have the right to receive a sharing in rewards for a defined period of time.
The shared risk-reward pricing model requires both parties to participate in brainstorming and contributing ideas to projects. In other words, it is not only the clients, but the service providers also take part in strategizing goals and objectives and planning for risks minimum. Due to its mutual value, this model is also suitable for business with the level of governance.
In contrast, drawbacks come hand in hand with benefits. The more ideas your partners come up with, the more argument both parties have to overcome. To clarify, your business goals and your partner’s ones may be different and that can cause controversy during the collaboration process. Thus, the business should well prepare for any changes or arguments while cooperating with your partners. At the same time, vision, goals, and objectives of products or services should be transparent and clarified before reaching the final decision for outsourced projects.
Incentive-based Pricing Model
This model allows your outsourcing company to gain more payment or rewards based on the performance. In particular, if the performance of the product or service positively exceeds goals and objectives which have been composed in the contract agreement. Apparently, the outsourcing companies receive a fixed price, but they also gain a bonus. This will be an incentive to boost their productivity.
On the other hand, there is no 100% guarantee for the best performance, whilst it drags to the complexity in the contract agreement. In fact, the bonus payment is just a factor to manipulate your outsourcing company’s motivation and responsibilities, but the success is reliant on other factors. Therefore, businesses need to concern the solution for that case in order to make your partner drive benefit for your businesses. In addition, some believe the model is appropriated to both parties when they have first-time cooperation and they would like to build the relationship.
Fixed Cost Pricing Model
If your business wants to run a long term project with a specific timeline, or you want to have a fixed budget for the project, the fixed cost pricing model is an ideal option. The fixed price model is defined as the solution for businesses to mitigate the risks of variable cost. Instead, this model facilitates business to focus on the long run of projects regardless of time and expense, while your partner is able to consult and offer the best fixed end-to-end service and exact budget in turn.
However, the fixed price model has some specific requirements for both parties. Particularly, details of requirements and the business scope need to be clearly defined to make your partner understand what to do for business goals and objectives. Besides, wireframes and timelines should be clarified so that the development and consultant team can figure out the best-fixed solution, time range, and budget before reaching out to the contract agreement. Hence, both sides need to discuss and negotiate before the contract so as to estimate everything in need.
Simultaneously, businesses should not be too rigid on the contract, because issues and other relevant things, which cause variable cost, cannot be completely eliminated. In consequence, businesses need to be flexible to open mind and ready to discuss any extra work with your outsourcing company before making a decision for it.
Time & Materials Pricing Model
The time & materials pricing model is considered as the method that businesses have to pay regularly for work completed. This model appropriate for clients who do not have long-term requirements or scope of work. Even though it fits a long term project, the clients, who need agile project execution and be adaptable to change procedures, can choose this to make their product or service catch up with the market trend. For the time & materials pricing model, the businesses have a significant role in their success of software development due to the flexibility. In other words, businesses can change their requirements, and partners can complete tasks based on those requests. This allows clients to keep track of the progress and product quality of each stage of requirements completed.
In contrast, there is no certain budget or timeline for the project owing to the changes in many factors (including the cost of technologies implement, rework problems, postpone tasks, and so on). At the same time, the product owner needs to clearly understand many steps and stages of the project to well manage and ensure the best performance. The change in the market has both positive and negative impacts on how to make a decision and estimate productivity. Thus, businesses should follow and keep track of work and market to contribute to the success of the projects. Not only do developers participate in the project, but the vision and decision of them are also an essential part of development.
The right Outsourcing Pricing Model
These models above have their own pros and cons. However, businesses can minimize the drawbacks by planning and preparing the solution for any potential issue before the contract agreement. Additionally, businesses need to understand your situation and depth of scope to decide which the most suitable models. In a nutshell, no matter which models your businesses choose, goals, objectives, timeframe, quality, and price should be smartly prioritized and balanced.
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