8 Types of outsourcing pricing models

Business process outsourcing helps businesses control costs, scale their operation, and expand more flexibly.

Since the rise of the popularity of call centers, it has helped companies generate savings and provide better service to their customers.

This also builds a partnership between the clients and their service providers.

Currently, outsourcing not only applies to large enterprises but to small businesses as well. In fact, some startups now use this to build a distributed workforce.

8 outsourcing pricing models

Over time, the pricing structure of outsourced services changes and adapts.  Below are the most common outsourcing pricing models:

1. Staffing model

The staffing model refers to the pricing structure where clients contract resources to a service provider for a specific period.

In BPOs, staffing comes with workspaces, desktops, internet phones, and other tools that employees need for the operation.

The service provider and employees are usually located away from the client, either in a different city or country.

One of the advantages of this outsourcing model is that the client has control of the project. Clients may send in-house employees to train and supervise their staff and scale them depending on the demand.

2. Fixed price (FP) model

In a fixed pricing (FP) model, a standard rate is set by the service provider for their services.

This may be charged monthly or annually depending on the client’s preference and already includes charges for the tools and workspace.

Fixed price models may also be adjusted based on several factors such as salaries, incentives, and success targets.

Fixed price adjustments

Fixed price adjustments can be in the form of:

Fixed price with economic price adjustment (FP EPA)

A service provider’s pricing may be affected by adjustments in the costs of labor, materials, workspaces, and other resources included in their rate.

For instance, salaries between junior and senior levels, upgrades of materials, and changes in the number of employees may affect this.

Fixed price with incentive (FPI)

Fixed pricing can also be combined with an incentive-based model. However, adjustments in this model are definite based on the client’s metrics.

For instance, a sales team can receive incentives quarterly when they exceed their target quota by up to 10%.

FPI successive target (FPI ST)

This model works the same as FPI. However, FPI ST lets clients adjust their target costs and profit values for the entire project.

They usually have initial pricing at the start of their projects. Then, when they see progress in their operation, they may slowly adjust their incentives and the period when they give it.

3. Cost reimbursable model

The cost reimbursable model or cost-plus model allows the service provider to set limits to their consumable expenses, and then add a percentage of it for profit.

This differs from the fixed price model, where they agree to a standard fee regardless of consumed expenses. With this, the service provider may or may not combine cost-plus pricing with incentive pricing.

Cost reimbursable adjustment

Cost reimbursable adjustment can be in the form of:

Cost Plus Fixed Fee (CPFF)

The client only pays a fixed fee upon project completion. The consumable cost, meanwhile, may vary for the entire project.

Service providers get their profit from the fixed fee, so they may not need incentive charging for this model.

Cost Plus Incentive (CPI)

Unlike CPFF, CPI only adds incentives when the provider exceeds its performance for a certain period. This is measured based on the metrics given by the client.

Cost Plus Award (CPA)

Unlike CPI, CPA only charges clients based on the service provider’s work performance.

This may also depend on the client’s metrics on whether the provider achieves a certain timeline, deliverable, and expectation.

4. Time and materials (T&M) model

Also known as the cost and materials (C&M) model, the time and materials (T&M) model is typical with long-term IT projects. This requires service providers to bid on a certain project and set a proposal based on the requirements of the client.

This may also be found in a build-operate-transfer (BOT) process, where the outsourcing provider initially builds and manages the development of a project.

T&M model also requires the provider to do its operation in-house or within the client’s supervision.

T&M variation

Time and materials model has one variation:

T&M with cap

To control costs, the client sets a cap or upper limit on a certain project. This helps them keep an eye on the budget of their proposal and avoid excessive charges for the project.

5. Consumption-based pricing model

Cloud service providers, meanwhile, mostly use consumption-based pricing for their services.

Here, they charge clients based on their actual usage within a month or a year. The clients, meanwhile, enjoy the flexibility of this cost since they only pay for what they use.

Examples

• Call centers allow a per-minute charge for clients expecting a low volume of calls each month.
• Cloud services, such as OneDrive and Dropbox, only charge customers for additional storage per month.

6. Profit-sharing pricing model

Profit-sharing model, meanwhile, may depend on the agreement between the client and service provider.

Unlike the incentive-based model, profit-sharing allows clients to allocate a percentage of their profit to the service provider.

This usually serves as a reward for a good work performance resulting in a great outcome for the client.

In profit-sharing, the client and the service provider take their partnership to a higher level. This allows them to collaborate more and solve problems within the company and their team’s operation for a smoother workflow.

7. Incentive-based pricing model

On top of their usual pricing, clients may agree to send a bonus or commission to their service provider to increase their performance.

Incentive-based pricing model usually applies to seasonal accounts and extra services such as 24/7 line and after-office hours service.

Example

• Outbound lead generation teams get an incentive upon exceeding their quota by up to 20%.
• Sales teams receive a monthly or quarterly incentive for every successful deal closed.

8. Shared risk-reward pricing model

Like the incentive-based model, a shared risk-reward model also comes on top of the usual flat rate. However, the client and service provider share the risks and developments of their operation.

This can be combined with either T&M, FP, or profit-sharing models.

Gartner states that assigning responsibilities to the partner mitigates risks associated with risks such as new technologies, processes, or models.

This has become an advantage to both the provider and their clients.