Pricing Outsourced Services

By Mark Burton
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The market for outsourced services – everything from short-term staffing to complete IT outsourcing programs – is in a state of upheaval. With strong, low-cost competitors and increasingly sophisticated customers who play off one vendor against another, there is enormous pressure on service providers to rethink every element of their cost positions and bid response processes. Knowing how best to respond starts with a clear understanding of what clients need in performance and relationships from their outsourcers.

To address the needs for differing client relationships, outsourcers should consider analyzing and correcting deficiencies in three key areas: offering definition, pricing, and sales approach.

In developing offerings many outsourcers still rely heavily on customizing most of their services. But this makes it difficult for customers to understand (and salespeople to explain) what they are getting. It also increases variation, and with it, the cost to deliver and the cost of quality.

On the pricing front, outsourcers have been slow to move away from traditional time and materials (T&M) pricing. T&M emphasizes cost to deliver (inputs) rather than the value of the results achieved (outputs). This invites constant client scrutiny on efficiency and work efforts – especially when low-cost competitors almost always look better on paper. It also puts the outsourcer and client at cross-purposes, undermining trust.

As with any period of market turbulence there are significant opportunities for firms that are proactive about challenges they face. To begin this path outsourcers need to:

    • Recognize that some clients want full-blown collaborative relationships, but some will buy on the basis of minimum specifications and lowest price while still others want to maximize their ROI.
    • Develop very specific offerings for these different requirements.
    • Deploy a range of pricing models that can avoid price-based comparisons by connecting to very clear measures of client value.

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