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Offshoring: Introducing a new, hybrid pricing model

Stephanie Overby | Sept. 16, 2009
As IT leaders focus on cutting costs, they continue to put pricing pressure on offshore outsourcers

A common gripe in outsourcing deals is that the pricing mechanisms built into fixed-price deals are opaque. IT leaders will notice an additional resource charge from their vendor even though no new people have been added to the project. "Certain price mechanisms charge more when there is no clear cost associated with it," says Strichman.

While MindTree's hybrid model seems to provide more visibility into costs, Strichman says it's more like window dressing. "Customers want to ensure they are getting what they pay for. If a hybrid pricing model makes them feel better, that is great," says Strichman. "But make no mistake, not a thing is different in operations. It is just different icing on the same cake. This was dreamt up by someone in accounting because a salesperson asked for a price model that was new and different."

Hegde, however, insists the hybrid model is innovative. "The underlying assumptions will not be the same, as the customer has a detailed view on the costs," he says. "Customers are expecting innovative pricing from service providers, especially in this economic environment. The customer will get maximum ROI in this model for every dollar spent with little more monitoring."

The hybrid model offers benefits for MindTree, including more guaranteed revenue than it would get from time-and-materials deals. But, Hegde says, there are drawbacks as well, including more management overhead, limited flexibility to rotate resources from client to client, and few opportunities to incorporate cost buffers into the deal.

Strichman says he's seen "cutting edge" pricing models come and go over the years. The changes that have stuck are the more incremental modifications to pricing models that have value for provider and customer, such as the unbundling of database administration costs from the cost of server services.

"These new models are often too confusing to last," says Strichman. "And the truth is, the vendor is doing nothing different, which quickly becomes apparent."

 

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