5 Ways to Beat IT Services Hybrid Pricing Challenges

Pricing models for IT outsourcing have always been relatively straightforward. However, a growing portion of IT outsourcing deals are being inked with more complex hybrid pricing structures. Here are five things to consider when implementing a hybrid pricing model for IT services.

By Stephanie Overby
Fri, March 08, 2013

CIO — Historically, pricing models for IT outsourcing were relatively straightforward: input-based pricing for application maintenance and development services and output-based pricing for infrastructure services.

And while the cloud-based segment of the IT services market is becoming even more unit-based and commoditized, a growing portion of IT outsourcing deals are being inked with more complex hybrid pricing structures that combine input-, output-, and occasionally business outcome-based pricing mechanisms.

"Because clients typically have various requirements across and within services, hybrid pricing models are quite prevalent and are growing in usage," says Steven Kirz, a principal for outsourcing advisory firm Pace Harmon.

"This is driven by dissatisfaction with traditional models on the part of both the customers and the providers, including customer disappointment with traditional rate-per-hour models that deliver poor results, and the commoditization of technology resources that reduces provider margins," Kirz says.

[Related: 4 New IT Outsourcing Pricing Models Gain Popularity]

Some IT outsourcing customers are using a hybrid pricing model to experiment with business outcome-based pricing. "It is rare to go all in with outcome based pricing across the full IT suite, so outcome-based pricing will be part of a mixed approach, targeted to where outcome-based pricing can be distinctly applied to advance client objectives," says Rich Kabrt, associate partner with outsourcing research and consultancy firm Everest Group.

Challenges of Hybrid Pricing

But hybrid pricing models can also be a challenge. "CIOs are faced with integrating not only a disparate set of services but also a disparate set of pricing and contracting models associated with those services," says Charles Arnold, principal with KPMG Advisory.

A mix of pricing mechanisms theoretically allows for greater flexibility to meet future needs. But "delivery models--and their supporting pricing--are changing fast. Making sure that the model memorialized in the contract is still relevant in the [later] years is hard."

For those that approach hybrid pricing with due diligence, however, the effort can pay off. "Assuming the incentives and contracts are done right, hybrid pricing can result in a more business-oriented focus, improved service delivery, reduced and predictable operating costs, mitigated delivery risk, reduced redundancy and ongoing innovation and transformation," says Kirz.

[Related: Decline in IT Outsourcing Market Challenges Service Providers]

Here are five things to consider when implementing a hybrid pricing model for IT services.

1. The type of hybrid pricing model should be dictated by customer requirements and type of services. "Customers that are buying application development and maintenance (ADM) services may be savvy enough to bid out a finite scope of services in a managed services model, but that is unlikely to satisfy all of their ADM needs during the life of their managed services agreement," says Kirz. In that case, the client might consider a contract that includes both managed services and full-time-equivalent hours-based pricing.

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