The document discusses different approaches to pricing outsourcing deals. It argues that pricing is often disconnected from risk and value, leading to suboptimal solutions and performance. The document recommends defining risk through service level agreements and using a pricing model that balances value and risk, such as gain/risk sharing or fixed pricing plus variables. This approach provides clearer communication, better solutions, and greater profits for both clients and service providers.

1. Winning Customers, Making Profits: Pricing For Success Mark Burton Vice President, Holden Advisors

2. Agenda What clients are looking for Problems with current approaches How to combine risk and reward in pricing Final thoughts

3. What Clients Are Looking For* Transaction Relationships For well-defined, repeatable processes Co-sourcing Alliances Client and vendor share responsibility for success Strategic Partnerships Outsourcer takes on responsibility for a bundle of client services or processes The problem is that many clients don’t define this well - and many service providers lack the service management and pricing expertise to profitably manage these relationships. *Source: MIT Center for Information Systems Research and CIO Magazine

4. Negotiating Outsourcing Deals Solution Price Logic is often the first casualty.

5. The Solution? SLA’s! Solution Price

6. The Problem With SLA’s What the Client Wants What’s in the RFP A Better Solution? Needs definitions lead to suboptimal solutions, pricing, and performance!

7. This Approaches Misses Something Risk is a critical element of all outsourcing relationships. It must be evaluated, negotiated, and priced.

8. Defining Risk Call Center Example Understanding operations enables a risk score to be developed – and negotiated Forecast attrition less than site attrition actuals Spans higher than 1:YY No AHT ranges of +/- X% (per call) Occupancy floors of MM% or greater (per minute, per call) Forecast variability ranges outside standards Min volume floor of XX% Forecast lock period less than 2wks plus training period CPI paid by client less than ZZ% Penalties greater than MM% Client controls training curriculum +1 +2 +3 Ramp training paid for by supplier Wage less than site starting wage or HR provided estimate Billing metric is per minute No currency fluctuation capture (billed in US dollar) Billing metric is per contact Risk range from 1 to 10 (highest risk is 10) More Risk Less Risk

9. Services Pricing Models Two Key Drivers Is the value to the customer known? Has that value been communicated? Is value assignable to the offering? Do conditions favor being able to deliver against requirements on time, on budget, and to a high degree of quality? Risk to Supplier Connection to Value LOW HIGH LOW HIGH

10. Value and Risk Drive Pricing Model Output-based Find Balance Input-Based Danger Zone Low High Low High Risk Connection to Customer Value

11. Example: IT Outsourcer Output-based Gain/risk share Hybrid - fixed + variable Fixed-price Hybrid - fixed + variable Fixed - at higher margin to capture risk premium Fixed-price Time and materials Time and materials Fixed - at higher margin to capture risk premium Low High Low High Risk Connection to Customer Value

12. Pricing: Risk, Value, and Offering Software Application Development Deal Guidance +% Deal Guidance -% Region Service Line Gold Package SLA’s Base Package SLA’s Price Levers +% +% -% -% Price Levers Initial Fixed-Price Level Set by: Type of Application Size Complexity Criticality

13. Final Thoughts Pricing must be built on Offering Value Risk Results are better for the client and the service provider Clearer communications Better solution definition Better outcomes …And greater profits for everyone

14. Thank You! Mark Burton Holden Advisors 978-405-0020 x1021 [email_address] www.holdenadvisors.com www.pricingwithconfidencebook.com