Between 5 percent and 25 percent of IT services agreements incorporate outcomes-based pricing, in which the IT pro is paid based on a specific business “outcome” desired by the client.
By Martin Sinderman
July 29, 2013
A new model for pricing it services by results is slowly gaining traction in the business marketplace. And while service providers and clients can benefit from this approach, both need to realize that putting together deals like these can be more complicated than they might be accustomed to.
The way today’s IT service providers price/bill their clients typically falls within one of two models, “fixed-price” and “time and materials.” In the fixed-price model, provider and client negotiate a statement of work (SOW) defining goods and services the provider will deliver, in exchange for a fixed payment by the client. Under the time-and-materials model, provider and client negotiate an agreement in which the terms for compensation include a fixed amount that the client pays per hour for the service provider’s time, along with the provider’s costs for materials and other expenses incurred in carrying out the project.
A third model getting a lot of media play lately is “outcomes-based” pricing or billing. Here, the service provider’s fees are based on a specific business “outcome” desired by the client. The provider gets paid when it meets this outcome; if the provider falls short, it is paid less.
An example in a recent white paper from DISYS, a McLean, Va.-based global IT staffing and consulting company, is that of a manufacturer needing updates to its software. If the manufacturer needs 300 automated test scripts written, an IT provider utilizing an outcomes-based model will price and bill based on each script that is delivered satisfactorily—that is, if the client is happy with 290 of 300 scripts, it only pays for that 290.
Between 5 percent and 25 percent of IT services agreements these days incorporate outcomes-based pricing, quite often in the form of “hybrid” transaction structures that also include SOW and/or time-and-materials elements, according to Liz Herbert, principal analyst with Forrester Research Inc.
As you might imagine, outcomes-based deals often fall through when it comes time to agree on the outcomes. The concept is new enough, Herbert notes, that both service providers and buyers still have trouble determining if this is a profitable way for them to go.
Herbert reports that many deals that are getting done tend to be IT-outcome focused, in which payment is based upon metrics such as system uptime or help-desk tickets successfully handled.
In the leading-edge department, “where we see this going is where IT providers embed themselves in the business solution,” says Herbert. “So if a business is doing email ad campaigns, for example, the provider’s pricing could be based on the number of leads generated, or number of emails sent—outcomes that are defined more in terms of the goal of the client.”—