osw pricing for success mark burton
DESCRIPTION
Key factors in successful pricing of outsourced servicesTRANSCRIPT
copyright 2008 - Holden Advisors 1
Winning Customers, Making Profits:
Pricing For Success
Mark BurtonVice President, Holden Advisors
copyright 2008 - Holden Advisors2
AgendaAgenda What clients are looking for Problems with current approaches How to combine risk and reward in pricing Final thoughts
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What Clients Are Looking For* Transaction Relationships◦ For well-defined, repeatable processes
Co-sourcing Alliances◦ Client and vendor share responsibility for success
Strategic Partnerships◦ Outsourcer takes on responsibility for a bundle of
client services or processesThe problem is that many clients don’t define this well - and many service providers lack the service
management and pricing expertise to profitably manage these relationships.
*Source: MIT Center for Information Systems Research and CIO Magazine
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Negotiating Outsourcing DealsNegotiating Outsourcing Deals
Solution Price
Logic is often the first casualty.
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The Solution? SLA’s!The Solution? SLA’s!
Solution Price
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The Problem With SLA’sWhat the Client Wants
What’s in the RFP A Better Solution?
Needs definitions lead to suboptimal solutions,pricing, and performance!
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This Approaches Misses SomethingThis Approaches Misses Something
Risk is a critical element of all outsourcing relationships. It must be evaluated, negotiated, and priced.
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Defining RiskCall Center Example
Understanding operations enables a risk score to be developed – and negotiated
• Forecast attrition less than site attrition actuals
• Spans higher than 1:YY• No AHT ranges of +/- X% (per call)• Occupancy floors of MM% or
greater (per minute, per call)• Forecast variability ranges outside
standards• Min volume floor of XX%• Forecast lock period less than
2wks plus training period• CPI paid by client less than ZZ%• Penalties greater than MM%• Client controls training curriculum
+1+2
+3
• Ramp training paid for by supplier
• Wage less than site starting wage or HR provided estimate
• Billing metric is per minute• No currency fluctuation
capture (billed in US dollar)
• Billing metric is per contact
Risk range from 1 to 10 (highest risk is 10) More RiskLess Risk
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Services Pricing Models Two Key Drivers
Risk to Supplier
Co
nn
ecti
on
to V
alu
e
LOW HIGH
LO
WH
IGH • Is the value to the customer known?
• Has that value been communicated?• Is value assignable to the offering?
Do conditions favor being able to deliver against requirements on time, on budget, and to a high degree of quality?
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Value and Risk Drive Pricing Model
Output-based Find Balance
Input-Based Danger Zone
Low High
Low
Hig
h
Risk
Con
nect
ion
to C
usto
mer
Val
ue
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Example: IT Outsourcer
•Output-based•Gain/risk share•Hybrid - fixed + variable
•Fixed-price
•Hybrid - fixed + variable
•Fixed - at higher margin to capture risk premium
•Fixed-price•Time and materials
•Time and materials•Fixed - at higher margin to capture risk premium
Low High
Low
Hig
h
Risk
Con
nect
ion
to C
usto
mer
Val
ue
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Pricing: Risk, Value, and OfferingSoftware Application Development
Deal Guidance
+%
Deal Guidance
-%
-Region
-Service Line
GoldPackage
SLA’s
BasePackage
SLA’s
Price Levers
+%
+%-%
-%
Price Levers
Initial Fixed-Price Level Set by:
Type of ApplicationSize
ComplexityCriticality
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Final Thoughts Pricing must be built on◦ Offering◦ Value◦ Risk
Results are better for the client and the service provider◦ Clearer communications◦ Better solution definition◦ Better outcomes
…And greater profits for everyone
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Thank You!
Mark Burton
Holden Advisors
978-405-0020 x1021
www.holdenadvisors.com
www.pricingwithconfidencebook.com