Research continues to indicate that clients embrace outsourcing strategies to achieve, among other goals, a reduction in total cost of ownership. It follows that you clients will negotiate hard for low prices – giving great weight to the issue of ‘how much you pay.' However, we still see at an alarming level of frequency, a lack of attention placed on the commercial price mechanisms that determine ‘how you pay.'

In this article, we contend that commercial price mechanisms that do not pragmatically and contractually align relationships may themselves become causes for contract failure. In other words, how you pay is as important as how much you pay.

‘Price equals Risk'

Outsourcing practitioners will quickly acknowledge a strong correlation between risk and price when developing the commercial deal. So, it makes good sense to work at aligning and balancing risk for the sake of a fair and balanced price. With such good intentions in hand, many clients and their potential providers diligently identify scopes of work activity, list roles and responsibilities; some may even quantify expectations in terms of a resource baseline and service level agreements.

All such hard work is goodness for all involved. However, the price / risk alignment task is not complete until we pragmatically align delivery expectations to the price mechanism.

A Simple Case Study

Let's look at a simple case study where our Client and potential Provider have worked out a commercial agreement for outsourced managed services. After much collaboration, they agree:

• The Client will chair an executive committee comprised of employees from both parties; the Client sets strategy and monitors quality and service levels; and all help resolve disputes (Governance)
  
  
• The Provider will manage the team that conducts service delivery; the delivery team is comprised of Provider employees ('Program Management.')
  
  
• The Provider will process 5000 business transactions per day meeting quality and service level standards documented by the Client (‘Business Process.')
  
  
• The Provider will keep a team of technically proficient report writers on site to develop new or enhance existing reports for Client business staff (‘Report Enhancements'.)
  
  
• The Client will pay a fixed monthly fee payable in advance for all Provider services for a term of three years (Fixed Price.)

Change is Our Only Constant

Let's say in this little case study that eight months after an amicable negotiation session and a celebratory signing event, the parties are at the brink of irrevocably losing each other's trust in the relationship. What went so wrong so quickly? Of course, things changed. That is, the client's business requirements shifted and now the parties are no longer aligned. What was said to the provider before was ‘then' and this is ‘now.' And a suggestion to re-open negotiation sessions is met with icy indifference.

How You Pay is Important

To fix this small example of a first class mess, let's reconstruct the commercial agreement as it applies to the price mechanism. The table below outlines some expanded commercial terminology that pragmatically and contractually maintains alignment between the parties as change continues to happen.

Summary: One Commercial Deal with Multiple Price Mechanisms

• Provider charges for Governance are built into the Baseline charge. Both parties are committed to Governance regardless of circumstance
  
  
• Provider charges for Program Management are built into the Baseline charge. The Provider is committed to Program Management regardless of circumstance. (However, variable levels of Provider operational supervision that may be required as transaction volumes change are built into the Business Process charges)
  
  
• Provider Business Process charges may vary within agreed-upon thresholds using unit price rates. No one is surprised with price effects based on variation in volumes
  
  
• Provider development activities, such as Report Enhancements, that are unpredictable in scope, complexity and volume are directly managed by the Client. The Client commits to a minimum budgeted funding level
  
  
• The Fixed Price applies to activities within a quantified Baseline and aligns commitment to governance, quality and service targets. Variations in other charges are pre-agreed through unit rates or controlled by the Client with a budget.

Our Conclusion

Even though our case study Client and Provider worked hard to allocate and balance risk, the inevitable business change occurred. By using price mechanisms that assure alignment, flexibility and commitment, the commercial relationship has a greater opportunity for success.