The key is to not reinvent the wheel but make a differentiated space for oneself. This would require a series of strategic decisions and a conscious effort to steer away from the trodden path. Opportunities not only need to be identified but also captured and executed in a novel and innovative way. Despite the challenges, the solutions should enable one to be distinguished from the pack and create building blocks for success.

"The key is to not reinvent the wheel but make a differentiated space for oneself."

A risk / reward sharing model is one such differentiated pricing model that encompasses all the essential elements of volume, usage, business processes, customer satisfaction, cost savings and revenue share, thereby creating a win-win situation for all the parties involved i.e. the client, the service provider or vendor as well as the end customer.

This model enables a vendor to take over those products of a client which have a limited shelf life, but continue to be essential to many customers due to their proven record of generating revenue. The client can then shift its resources and energies from these mature products and focus on their core initiatives.
The way it works is that the service provider obtains the license of the product, injects additional R&D funds to enhance it and eventually breathes new life into a mature product. This collaboration allows a client to continue to grow its strategic initiatives, without sacrificing mature lines.

Interestingly, in this system, the vendor does not make money from its immediate customer, but recovers it from the end customer from the market.

A successful long term relationship with the client is a key factor here, as it enables a service provider to understand a client’s portfolio in totality and identify products with significant installed base. The client in turn also needs to build a deep level of trust in the vendor’s capability of delivery and continued partnerships.

However, a solid value proposition requires significant due diligence before a vendor actually commits to taking over the entire life cycle of supporting and enhancing the product. Factors like the level of investment required, expected growth over the next few years, addressing the buyers concerns on change of ownership, realignment of clients R&D expenditure, feasibility to shift work offshore and the future roadmap of the product need to be addressed.

In a majority of cases, a substantial investment is required by the service provider to generate growth in these products. It is imperative to factor in the people cost, infrastructure cost and other operating costs. Pricing on the basis of real costs ensures profits don’t needlessly have to be trimmed. As these products have a proven revenue record, an outsourcing model helps to better manage their costs.

The products need to resonate with the needs of the customers and have a significant differentiating element. The pricing should also be segmented for altered markets to leverage a better competitive
advantage.

"Over the course of the next five years, outcome based pricing is predicted to encompass 40-50 percent of the contracts, as against only 5 percent currently."

Once executed, this is a win-win situation in effective relationship management. It results in reduced costs, ability to focus on core products, new market opportunities being accessed, better productivity, manual processes being automated and improved time to market. It also gives the client access to IT skills which are not affordable in-house or not available and thus reduces their capital expenditure. The end customer is happy due to the continuity of the product, the client is pleased due to its resources getting freed and the vendor is thrilled because of the share in the revenue it gets as well as ownership of the IP.

For the successful establishment of an outcome based pricing model, it is essential that there should be collaboration and sharing of information between the two parties. The service provider needs to understand the buyer’s landscape perfectly and ensure that measures taken align with the strategic business outcome. This relationship works on several grounds, with the buyer’s determination to succeed, the supplier’s commitment to the buyer’s success, two way effective communication and an in-depth understanding of the subject matter.

These creative and strategic partnership models create greater incentives for the service providers to change their thinking and increase their risk taking appetite for newer avenues of revenue. The vendor’s competitive advantage is his complete understanding of the client’s ecosystem. Strong governance and relationship management between the parties is essential. Over the course of the next five years, outcome based pricing is predicted to encompass 40-50 percent of the contracts, as against only 5 percent currently. The planning and budgeting must factor in the fluctuating nature of revenue of some of these products.

Significant value has been added to businesses with outsourcing over the past few years, and with outcome based pricing, outsourcing has come a full circle to its initial vision of enhancing value.