Outsourcing Contract Model Success
contract model, outsourcing May 21, 2010
While there are many contract models, a complex outsourcing arrangement with many subcontracted services is typically best handled with a management fee and a flow-through arrangement for most of the costs. This provides flexibility, visibility, and control over the resources, costs, and specifications of the subcontracted service while eliminating some of the issues involved with a fully included fixed price.
You can build in a sharing arrangement for savings, but continuous savings simply won't be sustainable if you want to maintain the same service levels. This shouldn't be the way the service provider expects to make its profits.
The contract model can also stifle innovation, continuous improvement and the introduction of new techniques and technologies. These are areas where a service provider can provide some of the best value as a partner. A flexible approach to implementing the service provider’s ideas can provide incentive for both parties.
For instance, if the service provider can implement innovations that improve your results or save you money, yet the financial model means related costs must be absorbed by the service provider, the provider is not likely to implement these innovations. It's better to have your contract include a cost/benefit sharing mechanism or a way to fund these types of incremental costs to provide flexibility.