Fixed pricing is also hard on the vendor, which has to meet service levels at a certain price no matter how many resources those services end up requiring. Cost-plus: The contract is written so that the client pays the supplier for its actual costs, plus a predetermined percentage for profit. Such a pricing plan does not allow for flexibility as business objectives or technologies change, and it provides little incentive for a supplier to perform effectively.
Performance-based pricing: The buyer provides financial incentives that encourage the supplier to perform optimally.
Conversely, this type of pricing plan requires suppliers to pay a penalty for unsatisfactory service levels. Performance-based pricing is often used in conjunction with a traditional pricing method, such as time-and-materials or fixed price. This approach can be beneficial when the customers can identify specific investments the vendor could make in order to deliver a higher level of performance. But the key is to ensure that the delivered outcome creates incremental business value for the customer, otherwise they may end up rewarding their vendors for work they should be doing anyway.
Gain-sharing: Pricing is based on the value delivered by the vendor beyond its typical responsibilities but deriving from its expertise and contribution. For example, an automobile manufacturer may pay a service provider based on the number of cars it produces. With this kind of arrangement, the customer and vendor each have skin in the game.
Each has money at risk, and each stands to gain a percentage of profits if the supplier's performance is optimum and meets the buyer's objectives. This model encourages the provider to come up with ideas to improve the business and spreads the financial risk between both parties. It also mitigates some risks by sharing them with the vendor.
But it requires a greater level of governance to do well. IT organizations are increasingly looking for partners who can work with them as they embrace agile development and devops approaches. The term outsourcing is often used interchangeably — and incorrectly — with offshoring, usually by those in a heated debate.
But offshoring or, more accurately, offshore outsourcing is a subset of outsourcing wherein a company outsources services to a third party in a country other than the one in which the client company is based, typically to take advantage of lower labor costs. This subject continues to be charged politically because unlike domestic outsourcing, in which employees often have the opportunity to keep their jobs and transfer to the outsourcer, offshore outsourcing is more likely to result in layoffs.
Estimates of jobs displaced or jobs created due to offshoring tend to vary widely due to lack of reliable data, which makes it challenging to assess the net effect on IT jobs. In some cases, global companies set up their own captive offshore IT service centers to to reduce costs or access skills that may not result in net job loss but will shift jobs to overseas locations.
In recent years, IT service providers have begun increasing investments in IT delivery centers in the U. Demand for digital transformation—related technologies specifically is driving interest in certain metropolitan areas. Offshore outsourcing providers have also increased their hiring of U.
IT professionals to gird against potential increased restrictions on the H-1B visas they use to bring offshore workers to the U.
Some industry experts point out that increased automation and robotic capabilities may actually eliminate more IT jobs than offshore outsourcing.
Outsourcing is difficult to implement, and the failure rate of outsourcing relationships remains high. Depending on whom you ask, it can be anywhere from 40 to 70 percent. At the heart of the problem is the inherent conflict of interest in any outsourcing arrangement.
The client seeks better service, often at lower costs, than it would get doing the work itself. The vendor, however, wants to make a profit. That tension must be managed closely to ensure a successful outcome for both client and vendor. Another cause of outsourcing failure is the rush to outsource in the absence of a good business case.
Outsourcing pursued as a "quick fix" cost-cutting maneuver rather than an investment designed to enhance capabilities, expand globally, increase agility and profitability, or bolster competitive advantage is more likely to disappoint. Generally speaking, risks increase as the boundaries between client and vendor responsibilities blur and the scope of responsibilities expands.
Whatever the type of outsourcing, the relationship will succeed only if both the vendor and the client achieve expected benefits. See also: " 9 IT outsourcing mistakes to avoid " and " 10 early warning signs of IT outsourcing disaster.
A service level agreement SLA is a contract between an IT services provider and a customer that specifies, usually in measurable terms, what services the vendor will furnish.
Service levels are determined at the beginning of any outsourcing relationship and are used to measure and monitor a supplier's performance. Often, a customer can charge a vendor a penalty fee if certain SLAs are not met. But no CIO wants to be in the business of penalty-charging and collecting.
Bad service from an outsourcing vendor, even at a deep discount, is still bad service, and can lead to greater problems. While the outsourcing industry is not quite as fickle as fashion, the prevailing wisdom about the best length for an outsourcing contract has changed over the years. When outsourcing first emerged as a viable option, long contracts — as many as 10 years in length — were the norm. As some of those initial deals lost their shine, clients and vendors moved to shorter contracts.
While decade-long deals have largely gone by the wayside, a transformational outsourcing deal may require more time to reap benefits for both client and vendor. My Deloitte. Undo My Deloitte. Save for later. Explore content About the survey Four key outsourcing trends Additional key outsourcing insights Lessons learned from the latest outsourcing trends Preparing for the postpandemic world Get in touch Join the conversation Related topics. About the survey For more than a decade, our biennial survey has been the cornerstone of our outsourcing market research.
Back to top. Four key outsourcing trends Cost reduction is back on top. Additional key outsourcing insights. Lessons learned from the latest outsourcing trends. Organizations that have migrated their functions and processes to the cloud will be in a better position to scale their technology resources with the changing demand. This will help them not only pay for what they need, but also provide technology resources required to meet that demand. They will also be in a better position to adjust their technology footprint once the pandemic has subsided.
COVID has banished the idea that physical colocation of resources is necessary to develop a trusting relationship in the workplace. This will likely lead to an increase in outsourcing. A remote work culture is gradually being ingrained within companies, and this will help them access global talent from the most cost-effective locations. It would also allow companies to hedge their risks by diversifying their delivery locations. Access previous editions of Deloitte's global outsourcing survey global outsourcing survey: executive summary global outsourcing survey: executive summary.
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There are 59 million freelance workers in the US. About , jobs get outsourced out of the US each year. Ads by Money. We may be compensated if you click this ad. Want to see your investments grow? Robo-advisors can make it happen. If you have ambitious goals with your investments but need to be smart about the risks, a robo-advisor can make practical recommendations. To find out more, click below. Saving money is a major motivation for outsourcing IT. Read full story.
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