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Myths About Delivery Models

There are a growing number of delivery models for sourcing IT services, from utility-based services, to fixed-price engagements to time and materials arrangements. Choosing viable, long-term models for your business is one of the most important steps in successfully outsourcing services. This article explores some of the myths associated with different delivery models.

Myth #1: Fixed Price contracts protect me from future price fluxuations.
The reality is that fixed-price contracts are rarely structured in ways that easily accommodate future changes to the underlying environment or requirements. Easily standardised services, such as infrastructure support, application monitoring and help desk can certainly be priced on a fixed basis, but agreements need to address future changes in service volume. While a supplier would not want to manage an additional 50 servers on a fixed-price deal, a client wouldn't want to continue paying a set price if they significantly consolidate hardware. On more specialised projects, such as product integration and application development, it is very difficult for a supplier to accurately estimate the level of resources required to satisfactorily deliver the work - particularly if business analysis and requirements gathering are part of the engagement. If a supplier realises that they've significantly underestimated the amount of work, they will likely either request a renegotiation or become extremely stringent on even the smallest items that could be arguably out of scope. Contracts need to reflect a very realistic look at potential changes/fluxuations in the future, and consistent supplier relationship management should facilitate changes if and when they become necessary.

Myth #2: Fixed Price deals are cheaper than time and materials based arrangements.
In the right circumstances, with the right contract, they certainly can be cheaper. Suppliers are greatly incentivised to perform more quickly and cheaply when they know that they cannot increase revenue by adding resources to a project. However, keep in mind how these kinds of deals are priced. Generally, service providers simply provide a single-price estimate derived directly from their estimated number of resources, multiplied by their billing rates. The savings often come during the negotiation phase, where sales teams often find it easier to reduce a large price than individual hourly or daily rates. The bigger opportunity, however, comes later. Once the supplier has passed the learning curve, they should be able to find efficiencies (i.e. do the same work with fewer resources). Fixed-price service contracts should be structured so that both the client and supplier share the gains realised by streamlining processes and reducing resource count - bona fide mutual wins are one of the holy grails of supplier management.

Myth #3: Staff augmentation or time and materials deals with an established outsourcer is the same as hiring contractors.
This may be a bit obvious, but there are a number of benefits, and very little downside, to working with an established outsourcer. As with hiring contractors, you can review the CVs and interview every person that will be on your team. Additionally, most service providers will allow you to terminate and/or replace individuals with 30 or 60 days notice. The similarities stop there. Depending on the skill set you require, outsourcers will generally have deep 'benches' of resources from whom to interview and contract. This capacity also ensures continuity, and significantly easier handoffs if new people are brought into the mix. Pricing will generally be more competitive, and you will likely be able to obtain discounts if you reach a target number of resources. Outsourcers also provide their staff with coaching, training and personnel management - activities that you may have to provide an independent contractor. Individual contractors are invaluable when you need specific industry experience or technology skill sets, but if you are establishing a technical team, you can get more and spend less with an established outsourcer.

To summarise, there is an optimal service delivery model for every circumstance. As a general rule, the more stable and controlled an IT process, the more you will be able to benefit from fixed-priced engagements. Conversely, blended or fully time and materials based contracts will better serve situations where there is expected variability or a large 'unknown' factor. Additionally, models should work to your strengths... for example, if you have a strong in-house expertise, you will be better able to manage less rigid contracts as your technical experts should be able to have better visibility (and thus more control) around supplier performance. The important thing is to consider the all applicable models for your outsourcing project or programme, rather than rigidly adhering to any one method.

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