IT Outsourcing on the brink of being disrupted

The traditional IT outsourcing business is being challenged through its own "medicine" like Cloud and the buyers strategies of multi-sourcing and cost reductions. Even the IT technology itself is challenging the IT outsourcing business through cost effective technology convergence that simplifies the delivery and reduces the resource requirements. 

Both the outsourcing provider and the buyers alike wants to build relationships based on [long term] strategic advantages that provides revenue growth for the provider and cost reduction for the buyer - apparently contradicting interests - at least within the current metrics based SLA and FTE based model, thus this model is being disrupted by innovative value-based pricing models like the outcome based pricing model. Even the traditional consultancy business is being disrupted by value based pricing models (ref HBR October 2013), the clients are simply expecting the providers to put real value behind the value proposition they used when they sold their services to the buyer, thus if the consultants claim they can improve the efficiency of a specific process etc by applying their services, they should then quantify the improvement and price their services according to the achievement of a realistic target and possibly exceeding this target (a generous bonus for exceeding the target is very effective) - that would really be something the buyer would appreciate.

There cannot be any doubt that such a model will be beneficial to the buyer as the buyer hardly pays for the service if the agreed target is not achieved and the provider will be able to improve its revenue significantly if the they are able to exceed the benefits of their services - a real win-win scenario.

Similarly an outcome based pricing model could be applied to the IT outsourcing business, however such a model is complex and difficult to manage compared to a metrics based SLA-model. Also, the provider would need to have significant experience from the IT outsourcing business in order to be able to apply an outcome based model as it will be critical to the provider to have an experienced delivery organization to find the best outcome based model that realizes the benefits for both parties. A hybrid model would possibly be the best first step as the buyer can select specific strategic business areas like Help desks, Mobility, Big Data & Analytics etc as in such business areas its easier to quantify incentives in terms of expected business value to the buyer and more revenue to the provider.

As the traditional IT outsourcing model is being disrupted, providers need to take the first step and offer an outcome based price model, many large Indian companies are already doing so, waiting for the buyer to request a new business model is probably too late ....



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