Anna Frazzetto's Blog

Digital Innovations and Technology Solutions

Outcome-based Pricing: The Wrong Way to the Right Goals

Outcome-based pricing has its place. In my experience, it belongs squarely in the world of manufacturing where quantity and speed are fundamental measures of success. It belongs in product-based industries where ideas and development lead to a finished product sold to consumers and businesses.

Where doesn't outcome-based pricing belong? It doesn't belong in IT outsourcing. IT outsourcing doesn't produce material things -- a car, a can of soup or an X-Box. IT outsourcing, when done right, produces business results in terms of efficiency, process optimization and innovation. Great results, but they cannot be materialized.

This talk of outcome-based pricing in outsourcing has grown louder and more frequent in recent years. This article in Forbes described outcome-based pricing as "the way of the future" and today many companies are studying its potential to determine if it is a new and better model for contracting IT support and solutions. The discussion takes me straight back to my early IT career and my first job as a programmer. 

Back when I began writing code, we programmers were measured by how many lines of codes we produced. That's right, not by the quality of the code or its effectiveness but by the amount of material (code) produced. The measure was "how much?" not "how good?" It seems very silly to us today because we all now know that the number of lines has nothing to do with the elegance, efficiency, maintainability and readability of the code. But that is exactly how the case for outcome-based pricing in IT outsourcing hits me--silly and more than a bit aggravating.

IT outsourcing is a business service that requires a myriad of both people and technology performance measures to determine effectiveness and value. At Harvey Nash, our SLAs (service level agreements) are used to measure how well we are addressing the business goals of our clients:

• Customer satisfaction
• Clients' customer churn
• Problem resolution
• Speed to resolution - tickets, calls, etc.
• Code walkthroughs
• Quality reviews

It's not one outcome. It's a dashboard of business-driven SLAs that are established with the client and revisited and adjusted over time to meet the changing needs of the business. I can't think of one singular, constant output that day in and day out would determine the success of the hundreds of IT outsourcing engagements we manage. In the world of service, output changes. Take for example our application development outsourcing engagements. Each sprint results in different outcomes that must change and adjust with the dynamic, iterative Agile development process. SLAs are set but in development, outcomes must be dynamic to allow for innovation and ingenuity.

One great thing about today's outcome-based pricing discussions is that it emphasizes the importance of aligning the outsourcing engagement with business goals. SLAs cannot be generic performance measures. In outsourcing IT services, SLAs should be aligned with specific business goals:

Business goals and SLAs.jpg 

 

 

 

The more we can do in IT outsourcing to produce steady performance results that support business goals, the better we are at making our clients' business better. And that's our job in IT outsourcing--making our clients' businesses more efficient and successful.