Research

Publication Date: 30 April 2008 ID Number: G00156670

Pricing Model Definitions, Benefits and Risks for IT Services and Outsourcing Contracts
William Maurer, Lorrie Scardino, Kris Doering, Frank Ridder

This research identifies the eight most commonly used pricing models for IT services and outsourcing contracts and the pros, cons and risks for each. Buyers of these services should use these findings to determine which pricing models they want to use. Key Findings
Organizations often make the mistake of not dealing with pricing-model issues during the sourcing strategy phase of activities. They wait too long in the selection process to give pricing analysis the attention it needs, resulting in the transference of the design phase to providers. Although every pricing model has benefits and risks for the organization and provider, many organizations do not understand these risks and base their pricing-model decisions on ease of use or familiarity with particular models. Organizations do not fully understand the implications of or misjudge the role that requirements and baselines play in enabling providers to propose competitive and realistic prices for services. Pricing issues are among the leading causes of relationship problems between business and IT, and between IT and external service providers.

Recommendations
When developing a sourcing strategy, commonly known as Phase 1 of the Gartner Sourcing Life Cycle, organizations must analyze their requirements and must select the pricing model that best meets their needs, which may mean using two or more models in a single contract. Understand that the model sets the prices to be paid for a service (representing the cost to the organization), whereas performance, value, results or outcome-based terms are used to reward or penalize the provider for achieving or failing to achieve predefined business outcomes. Use Gartner research to understand the market issues that will influence a provider's willingness to accept the organization's preferred pricing model.

2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner's research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.

TABLE OF CONTENTS
Analysis ............................................................................................................................................. 3 1.0 Introduction..................................................................................................................... 3 1.1 Make Pricing Model Decisions Early and Revisit Them Often .......................... 3 1.2 The Organization, Not the Provider, Should Define the Pricing Model ............. 3 1.3 Risk Is an Important Factor in the Context of Pricing Models ........................... 4 2.0 The Eight Most Commonly Used Pricing Models ........................................................... 5 2.1 T&M ................................................................................................................... 5 2.2 Fixed Price......................................................................................................... 6 2.3 Cost Plus ........................................................................................................... 7 2.4 Open Book......................................................................................................... 7 2.5 Unit-Based/Use-Based ...................................................................................... 8 2.6 IncentiveBased .............................................................................................. 9 2.7 Shared Risk/Shared Reward........................................................................... 10 2.8 Gain Sharing/Business Benefits Based........................................................... 11 3.0 Additional Factors to Consider When Making Pricing Model Decisions ...................... 12 3.1 Balance of Risk Between Organization and Provider ..................................... 12 3.2 Alternative Delivery and Acquisition Models Will Affect Pricing ...................... 13 Recommended Reading.................................................................................................................. 13

LIST OF TABLES
Table 1. Pricing Model: T&M ............................................................................................................. 6 Table 2. Pricing Model: Fixed Price................................................................................................... 6 Table 3. Pricing Model: Cost Plus ..................................................................................................... 7 Table 4. Pricing Model: Open Book................................................................................................... 8 Table 5. Pricing Model: Unit-Based and Use-Based ......................................................................... 9 Table 6. Pricing Model: Incentive-Based......................................................................................... 10 Table 7. Pricing Model: Shared Risk/Shared Reward ..................................................................... 10 Table 8. Pricing Model: Gain Sharing/Business-Based Results ..................................................... 11 Table 9. Ratings for Key Factors in Pricing-Model Decision Making .............................................. 12

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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ANALYSIS

1.0 Introduction
Organizations must use the right pricing model to meet their business objectives when contracting for IT services or outsourcing. Buyers of these services, whether they are sourcing managers, procurement professionals, leaders of negotiating teams, business unit leaders or even the CIO, should decide which pricing models to consider for specific services in the sourcing-strategy phase of activities. To help with this task, Gartner has identified eight commonly used pricing models, along with the risks, pros and cons for each model, for the organization and provider.

1.1 Make Pricing Model Decisions Early and Revisit Them Often
Buyers of IT services and outsourcing contracts must consider the cost of services, as well as the risks in the sourcing business case. Because the pricing model is integral to the cost of services, all buyers should analyze their options and should make recommendations early, before they embark on the analysis of providers or begin creating an RFP. Once the evaluation and selection process gets under way, buyers should revisit and validate their pricing-model decisions based on the detailed requirements that are unfolding. They also should revisit the decisions throughout the source selection, up to and including contract negotiation. Additionally, it is important to periodically revisit pricing during the life of the engagement to ensure that the business objectives for the organization and the provider are being achieved. The focus should be on whether the organization and provider are each getting the results they expected when the contract was signed. If results are in line with expectations, then the relationship has a much better chance of remaining healthy and mutually satisfying.

1.2 The Organization, Not the Provider, Should Define the Pricing Model
During Phase I of the sourcing strategy, the organization's sourcing team begins the process of defining the constructs and parameters of sourcing relationships. Consequently, the organization should begin with this work, and the pricing models should become a derivation, or further refinement, of it. In competitive bid situations, organizations must define the pricing model they want to use in their comparative analyses during the evaluation and selection process, which becomes explicit in the RFP. The organization, not the provider, should define the pricing model. Therefore, the organization must understand the risks and benefits associated with various models (for the organization and provider) and must require providers to use the defined pricing model. Many organizations allow each responding external service provider to propose the pricing model. Therefore, organizations should take the lead in defining the pricing models because: Price proposals will not be based on the same model, and the organization cannot compare prices equally among respondents. The provider generally will select a pricing model that poses the least amount of risk to its financial performance, which may not be the most appropriate model for the organization's requirements. The organization often finds that it cannot account for costs or allocate them appropriately in the organization once services begin.
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Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

Pricing models proposed by providers often do not offer aspects that the organization's business units require, such as flexibility for changes in the organization's business, protection against changes in the IT marketplace or transparency of cost to the organization's resource use.

To prevent rigidity and to allow service providers to fully share their creativity, innovation and best practices, RFPs also may request or allow providers to submit alternative pricing scenarios. Organizations generally request alternatives because they want to consider provider-specific scenarios that would offer greater benefits, such as lowering the overall cost of service and accelerating a project schedule. Alternative pricing proposals should be submitted in addition to the pricing model required by the organization.

1.3 Risk Is an Important Factor in the Context of Pricing Models

Risk is different for the organization than for the provider. For the organization, risk is tied to its operating budget and to significant changes in the business model. The organization's ability to mitigate or manage risk is a critical element for ensuring success during the life of the deal. These factors influence an organization's risk tolerance: Level of experience with external sourcing Demand management maturity Awareness of pricing alternatives Willingness or ability to fix the requirements Degree of predictability and flexibility sought in the pricing model Risk of the provider's ability to deliver, including security/intellectual property (IP), country, maturity and competency risks The risk of hidden costs, including project and relationship management, telecommunication costs, transition and knowledge transfer

Additional risk may result from financial engineering on specific deals. For the provider, risk is tied primarily to the financial performance and potential profitability of the deal. The risk also is tied, ultimately, to the company's overall financial performance, because the provider's business is a collection of contracts. The provider estimates potential revenue and profit when it considers its pricing strategy, and both of these factors influence the amount of risk the provider is willing to assume. A provider's perception of performance is tied to price the higher the perceived risk, the higher the price. Additional risks may result from financial engineering on specific deals. Provider risk factors include: Resourcing Demands for specific resources Alignment of organizational requests to service provider offerings and solutions Level of leverageable IP or knowledge Levels of similar engagements (booked or planned) to spread cost structures

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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Buyers of IT services and outsourcing contracts must understand their risks and the provider's risks to get the clearest picture of what the various pricing models mean. Too often, organizations focus only on their risks and opportunities and do not understand the risks and opportunities the service provider takes on when it signs the deal. This tunnel vision can lead to dissatisfying engagements, where goals and expectations are misaligned or misunderstood. For more information about risk, see Section 3.1, "Balance of Risk Between Organization and Provider." Pricing risk is assessed in each pricing model in this research, with "high," "medium" or "low" assigned to each model for the client and service provider. This risk assessment is related directly to the risk of obtaining the best results for the organization or service provider.

2.0 The Eight Most Commonly Used Pricing Models

Gartner has identified eight pricing models that are most commonly used in today's IT services and outsourcing contracts: Time and materials (T&M) Fixed price Cost plus Open book Unit-based/use-based Incentive-based Shared risk/shared reward Gain sharing/business benefits-based

For each pricing model, we provide the types of requirements, scope of service and other factors that work best with the model. We describe the level of risk and the pros and cons of each model when the model is appropriately used. If the model used does not suit the requirements, then the level of risk, pros and cons will change.

2.1 T&M
The organization pays the provider for the labor supplied at negotiated labor rates (such as hourly, daily or monthly), based on supplying the appropriate skills for the work to be performed or meeting deliverables, milestones, schedules or service levels. The provider is reimbursed for the cost for the materials used or other costs incurred, such as travel expenses. Best use: When the organization must obtain essential resources, cannot accurately estimate the work effort (in resource requirements) and expects the scope or project requirements to change. T&M is effective for staff augmentation contracts. Providers will bid T&M contracts based on resource availability, level of effort and product duration. Short-term T&M contracts generally are premium-priced, because they usually are for project work, with little commitment to an ongoing relationship between the organization and the provider (see Table 1). Pricing risk: Organization: high Provider: low

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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Table 1. Pricing Model: T&M

Organization Pros Organization pays only for the resources used Cons No incentive for the provider to improve efficiency or effectiveness High administrative costs to track resources with billings Hard to control costs and compare pricing Pros Low risk on potential disconnect between revenue and cost Good margin on noncommoditized skill sets Enables the use of resources on the provider's bench Provider Cons No long-term revenue commitments

Enables the organization to choose and adjust resources No long-term commitments to the provider
Source: Gartner (May 2008)

Administrative overhead to track resources with billings Unable to charge for value; challenge to grow the relationship

2.2 Fixed Price

The organization pays the provider a fixed amount, in preset periodic increments, for a fixed scope of work (SOW) at the completion of the project or when milestones are achieved. Fixedprice contracts often include performance-based penalties to help drive provider performance toward successful completion of contracted work products or service levels. Incentives also can be used to drive provider behavior toward the achievement of contracted business outcomes. Best use: When the organization needs to control or cut costs and obtain predictable pricing for services, has a well-defined fixed SOW, known service needs and stable requirements, and can define measurable service levels and success criteria. The organization also must understand that it is trading off some flexibility in market-based pricing to ensure predictability. To agree to a fixed-price contract, the provider is locking in a price for services based on the confidence that it can accurately scope the level of work effort. Unstable environments or those without reliable performance metrics are difficult and risky for providers to set as fixed-price deals (see Table 2). Pricing risk: Organization: low to medium Provider: medium to high

Table 2. Pricing Model: Fixed Price

Organization Pros Low risk of cost overrun on "as bid" engagement Forces organization to have well-defined scope and requirements Cons Change orders required for any modification to scope or requirements Challenge to introduce innovation Pros Committed revenue stream for the engagement The ability to manage margins and profitability through accurate use of resources Provider Cons Risk of margin erosion if pricing assumptions are incorrect or engagement is poorly managed Relationship strain if many change orders are required

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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Organization Predictable service levels and costs; easy to budget

Source: Gartner (May 2008)

Provider Lock-in for contract term creates up-selling opportunity Customer satisfaction problems when moving from custom to standard environment

Potential to pay more than market price, especially on long-term engagements

2.3 Cost Plus

The organization pays the provider for the actual cost of doing the work, plus an additional negotiated profit margin. In the cost-plus model, the provider has no incentive to reduce costs, so this pricing model should be enhanced with incentive-based terms and generally should not be used on a long-term basis. Best use: When the organization cannot clearly define the work effort or does not have a good baseline of its services, must develop its true costs and obtain essential resources, and anticipates that the requirements will change. The provider trades the ability to improve its margin for the assurance that it will recover costs and earn a predetermined profit margin. The use of this model requires the organization and provider to agree on allowable costs during the life of the engagement, which requires that a healthy relationship be maintained (see Table 3). Pricing risk: Organization: high Provider: low

Table 3. Pricing Model: Cost Plus

Organization Pros Organization can obtain an accurate baseline of costs Cons Potential for disagreement on allowable costs and allocation for one-tomany solutions Potential for costs to escalate if environment is not carefully managed No incentive for provider to improve efficiency and effectiveness Pros Low risk on potential disconnect between revenue and cost Provider Cons Disclosure of margin to the organization

Easy to transition to another pricing model with the same provider Organization develops a good understanding of the elements of cost and relationship between price and service levels
Source: Gartner (May 2008)

Low risk for immature, new or undocumented services Ability to transition to more-profitable engagement

Relationship problems if allowable costs are not easily agreed to High administrative overhead to track resources and allocate costs

2.4 Open Book

The organization pays the provider based on the actual cost of service delivery, plus a negotiated profit margin. This model is similar to the cost-plus pricing model, except that the organization has full disclosure of financials for the engagement. Again, the provider has no incentive to reduce costs, so the model should include incentive-based terms. The requirement for the provider to

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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open its books, especially when mass-customized, one-to-many services are being delivered, makes this model difficult for providers to accept. This model is used in government contracts and may be effective when an organization spins off its IT organization as a separate entity, for branded service companies or joint ventures. Best use: When the organization must develop its true costs and obtain essential resources, and anticipate that requirements will change. In addition, this model is best used when organizations want the flexibility to convert to another pricing model once they obtain the true costs and when they need visibility into the provider's financials for engagement (see Table 4). Pricing risk: Organization: high Provider: low (as long as the provider fully supports full disclosure of financials)

Table 4. Pricing Model: Open Book

Organization Pros Organization can obtain an accurate baseline of costs Cons Potential for disagreement on allowable costs and allocation for one-tomany solutions Potential for costs to escalate if the environment is not carefully managed No incentive for provider to improve efficiency and effectiveness Pros Low risk on potential disconnect between revenue and cost Provider Cons Full disclosure of financials to the organization

Easy to transition to another pricing model with the same provider

Low risk for immature, new or undocumented services Ability to transition to more-profitable engagement

Relationship problems if allowable costs are not easily agreed to or if organization tries to get into provider's business High administrative overhead to track resources and allocate costs

Organization develops good understanding of the elements of cost and relationship between price and service levels
Source: Gartner (May 2008)

2.5 Unit-Based/Use-Based
The organization pays the provider for each service unit or service transaction, which is based on output or consumption. Unit-based/use-based pricing may be specified as the number of users, workload volumes, device counts, capacity, transactions or incidents, for example. This pricing approach accommodates fluctuations in service output or consumption. Typically, a base fee is applied within specified bands for output or consumption, with a negotiated increase or decrease in price as the unit or use goes above or falls below the baseline. This model is sometimes called "fee for service," or transaction-based pricing, especially in business process outsourcing contracts. This type of pricing often is used in combination with other models, because it is rare that everything in a SOW can be expressed as a unit or linked to use. Unit-based/use-based pricing is the standard for alternative delivery and acquisition models, such as infrastructure, application or business process utility. Best use: When the organization has accurate baselines that can be validated by a third party, well-defined service requirements that are expected to remain stable (even if the number of units or users is not stable) and well-defined, measurable service levels. This model is a good choice

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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when the organization must accommodate fluctuations in service output or consumption with predictable service levels and costs. In this type of contract, the provider's ability to deliver profitably is tied to volume and scale, so providers favor unit-based/use-based pricing for services that are or can become standardized, and when the services are transaction-intensive and demand-driven. A key success factor for this pricing model is an effective process (understood and auditable by the provider and organization) for the accurate and timely counting of the units or use that serve as the basis for invoice billing (see Table 5). Pricing risk: Organization: low Provider: medium to high

Table 5. Pricing Model: Unit-Based and Use-Based

Organization Pros Organization pays only for services it uses Cons Unit or use costs can be problematic for very high unplanned volumes Demand forecasting, if immature, makes this model too reactive and perceived as expensive Challenge to benchmark for industry-specific and point solutions Pros Provider can leverage its solutions and is in control of delivery Ability to create value and charge for it Provider Cons Only committed revenue stream is the minimum base amount Lower switching costs and less lock-in

Low capital investment for new technologies or processes or to accommodate growth in business Opportunity for moreaccurate chargeback

Higher margin potential on oneto-many, standard solutions

Immature contracting and pricing practices for alternative delivery and acquisition models

Source: Gartner (May 2008)

2.6 IncentiveBased
The organization pays the provider a base fee for service, and there is the potential for a bonus if it achieves performance goals, such as reduced cost of service or early completion of a project. The incentive should be tied to the business value achieved by the provider. If the business value cannot be measured, then this model should not be used. This model sometimes is used with a T&M or cost-plus pricing model, where an incentive is paid in addition to the contracted price. Best use: When the organization must obtain essential resources for engagements that are tied to high-priority business objectives. It also is effective when the organization can clearly define requirements and success criteria that can be measured and audited to determine whether an incentive payment is warranted (see Table 6). Pricing risk: Organization: low Provider: high

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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Table 6. Pricing Model: Incentive-Based

Organization Pros Aligns business value with costs Cons Payment of incentives can be contentious, especially if there has been a change in leadership from contract initiation to service completion Value of IP and ownership of outcomes can be contentious Pros Incentive payments go straight to the bottom line Provider Cons Increased risk for margin erosion if business value is not delivered Requires the provider to drive the engagement if organization momentum or attention slips Value demarcation of IP between provider and organization can become contentious

Ability to bolt on incentives to another pricing model, such as T&M, fixed price or cost plus Forces organization to document the business case and quantify value of provider performance
Source: Gartner (May 2008)

Enables the provider to show true value

If incentive cannot be earned, then there is risk of performance degradation

Increases visibility of the provider and casts it as partner with the business

2.7 Shared Risk/Shared Reward

The provider and organization share the upfront costs of the development of the service or solution, and share in the downstream revenue generated by the new product or service. The mechanisms for sharing upfront costs vary. A typical scenario is that the organization provides IP (such as expert resources) at no cost to the project, and the provider is compensated at a reduced labor rate or for only a certain percentage of the resources applied to the project. The level of upfront investment is negotiated and then used to determine the level of return on investment. Best use: When the organization has a culture and a governance framework that supports partnering with a provider and is willing to share the upside or downside potential of the relationship. This model is a good choice when the organization must innovate with low upfront costs, has material value to contribute to the initiative and can develop a strong business case with the provider. Because this type of contract requires true partnering, it is imperative that each organization has an executive sponsor who is involved actively throughout the engagement (see Table 7). Pricing risk: Organization: high Provider: high

Table 7. Pricing Model: Shared Risk/Shared Reward

Organization Pros Leverages the organization's IP Cons Difficult to determine value of contribution and reasonable return Pros Joint development of business case enables confirmation of the organization's true commitment Provider Cons Risk of no return if organization backs out after project initiation

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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Organization Mitigates some risk of new technologies, business processes or models by assigning risk and responsibility to the provider Stimulates the provider to top performance Provider typically has management of project plans and organization's resources

Provider Opportunity to create a severable solution with downstream review potential Value of IP, resources, overhead and other investments, and rate of return, can become contentious Difficult to manage and maintain alignment

Difficult to manage and maintain alignment

Increases visibility of the provider and casts it as a partner with the business

Source: Gartner (April 2008)

2.8 Gain Sharing/Business Benefits Based

The organization pays the provider in proportion to the business value generated by the project or service, such as a percentage of increased profits or reduced operating expenses. The mechanisms for paying the provider vary, but generally payment is made in one lump sum when the result is achieved, or over a short period of time, so that the provider can recoup its investment in a timely way. Best use: When the organization has accurate baselines, well-defined, measurable service levels and performance goals, and is willing to accept the provider's solution to meet the requirements. If the organization wants to pay only for bottom-line results and can fulfill its commitments to pay the gains or business benefits generated, then this model generally is effective (see Table 8). Pricing risk: Organization: low Provider: high

Table 8. Pricing Model: Gain Sharing/Business-Based Results

Organization Pros Aligns business value and cost Cons Organization must accept and internally sell the value of provider's solution Pros Provider can leverage its solutions and is in control of delivery Ability to create value and get paid based on the outcomes to the organization High margins on highly leverageble solution Provider Cons Cost recovery and margin risk if organization does not accept solution or backs out Difficult to manage and get acceptance of solution from all stakeholders

No investment for new technologies or processes or to accommodate growth in business Forces organization to document the business case and quality value of provider performance
Source: Gartner (May 2008)

Payment of gain or bottom-line results can be contentious, especially if there has been a change in leadership from contract initiation to service completion Potential for disagreement on the actual "gain" provided to the business by the provider

Potential for disagreement on the actual "gain" provided to the business by the provider

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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3.0 Additional Factors to Consider When Making Pricing Model Decisions

Many other factors affect the decision-making process. Here is a comprehensive look at all the factors: Flexibility Organizations must consider the amount of flexibility they likely will need during the life of the contract. If the pricing is locked in for a long time, for example, in a fixed-price arrangement, then it will be difficult to make a change. Certain models are more flexible than others to accommodate changes in the business environment, technology and other factors. Transparency Pricing must be transparent to ensure that the organization understands its costs, the relationships between service levels and pricing, the impact of increased or decreased use and other factors. This does not mean that the organization has access to the provider's proprietary information; rather, it must understand the elements of price, service categories and the relationship of various terms to the price. The organization must ensure that it gets the transparency it needs. Some pricing models offer more transparency than others. Predictability Although predictability may seem the opposite of flexibility, many organizations need to know precisely how much services will cost throughout each fiscal year and, often, beyond that. Some organizations have strict budget planning processes. In such organizations, predictability can be more important than other attributes. Some pricing models provide for more predictability than others, so the organization must determine how much predictability it needs.

3.1 Balance of Risk Between Organization and Provider

The organization must not only consider its risks but also those of the provider. For example, if the organization requires a fixed price for an unstable and poorly defined set of requirements, then it might think its risk is low. This is not so. The risk is actually high because the provider will stick to the documented requirements and will force additional pricing for additional services. So, the organization may not pay more for the services it procured, but it will pay more for the services that were not made explicit in the procurement. Only when there is a win-win pricing scenario can the organization and provider enjoy a mutually beneficial relationship. Table 9 shows each pricing model and a rating for each factor discussed in this research. Although these are not absolute values, they provide a good indication of how well each model accommodates these factors. Table 9. Ratings for Key Factors in Pricing-Model Decision Making
Pricing Model Flexibility Transparency Predictability Client Risk High Low to Medium High High Service Provider Risk Low Medium to High Low Low

T&M Fixed Price Cost Plus Open Book

High Low High High

High Medium High High

Low High Low Low

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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Pricing Model

Flexibility

Transparency

Predictability

Client Risk Low Low High Low

Service Provider Risk Medium to High High High High

Unit-Based/Use-Based Incentive-Based Shared Risk/Shared Reward Gain Sharing/Business BenefitsBased *Provides high flexibility for fluctuations in volume but low flexibility for services and solutions
Source: Gartner (May 2008)

High* Low Medium Low

Medium Medium High Low

High Medium Low Low

3.2 Alternative Delivery and Acquisition Models Will Affect Pricing

The pricing models described and analyzed in this research represent common models in use today. A powerful and potentially disintermediating force called alternative delivery and acquisition models (see "Alternative Delivery Models: A Sea of New Opportunities and Threats") undoubtedly will affect pricing models. Most alternative models are priced using some permutation of a unit- or use-based model. For highly focused solutions, such as a single application, one pricing model may cover the entire contract. For larger operations, such as those that combine traditional outsourcing with several alternative models, pricing is a smorgasbord of models. Although we cannot say exactly how pricing models will be affected in the future, we know that change is under way. Gartner will continue to track, analyze and provide research and analyses on these crucial issues.

RECOMMENDED READING
"Alternative Delivery Models: A Sea of New Opportunities and Threats" Evaluation and Section Process "Guidelines of an RFP Process for Standardized IT Service Provider Selections" "How to Use a Vendor Evaluation Model to Standardize IT Services Provider Selections" "Toolkit Sample Template: RFP Template for Professional Service Requirements" "Toolkit: Vendor Evaluation Model Scorecard for IT Services Provider Selection" "Use Pricing Principles to Improve the Selection and Management of Service Providers" Contracting and Negotiation "A Guide for Building and Understanding Outsourcing Contracts: The 19 Distinct Articles in a Master Service Agreement" "Fifteen Ways to Reduce Risk When Building an Offshore Outsourcing Contract" "Outsourcing Contracts: Guidelines for Master Service Agreements and Schedules"

Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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Publication Date: 30 April 2008/ID Number: G00156670 2008 Gartner, Inc. and/or its Affiliates. All Rights Reserved.

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