Study of outsourcing models in the information technology industry

Abstract

Whether in manufacturing or services, outsourcing has become increasingly cross-national and global. It would be broadly agreed that manufacturing is a process that involves the transformation of a tangible good. Further manufacturing does not require face-to-face contact between buyer and seller. However, most services require at least some level of faceto- face interactivity, either among co-workers or with persons outside the organization, such as vendors and clients. Also requirements and output quality of vendor can be easily measured in manufacturing outsourcing while it is difficult to measure the vendor performance or lay down clear service levels in services outsourcing. As a result of these differences pricing models in both these industries have been distinctly different. In any outsourcing agreement between a company (the client) and its IT service provider (the vendor), there are a wide variety of options available to the parties concerned with regards to the outsourcing model to be employed. The ultimate objective of a company in choosing an appropriate model is to negotiate a contract type and price (or estimated cost and fee), that will result in reasonable vendor risk and provide the vendor with the greatest incentive for efficient and economical performance. Outsourcing contract types vary according to: The degree and timing of the responsibility assumed by the vendor for the costs of performance, and The amount and nature of the profit incentive offered to the vendor for achieving or exceeding specified standards or goals. In the information technology industry, specifically, contract types range from a fixed-price model, in which the vendor has full responsibility for the performance costs and resulting profit (or loss), to a time & material based pricing model, in which the vendor has minimal responsibility for the performance costs and the negotiated fee (profit) is fixed. In between are the various incentive contracts, in which the vendor’s responsibility for the performance costs and the profit or fee incentives offered are tailored to the uncertainties involved in contract performance.