This question comes up whenever a client considers outsourcing IT. What they are really asking is: “Am I paying the right price for the entire life of the deal?”
At the beginning of a deal the outsourcing customer typically relies on competition to get the lowest price. On the other hand the supplier’s goal is to submit the highest price while winning the business. That’s how the free market is supposed to work. Not surprisingly, suppliers routinely acknowledge margin expansion as a strategic goal. With that in mind, is competition enough to ensure the customer is paying the right price? Does the competitive process really achieve the right price or just the highest price the supplier can quote while beating the competition?
We believe the best way to get to the right price is to link price with the underlying reasonable costs of production (allowing also for a reasonable profit margin) and then ensure it remains closely linked throughout the term of the deal.
This series of postings will address pricing on complex IT services agreements that will help establish and maintain the right price with your IT suppliers.
Next: Outsourcing Pricing and Implied Productivity