It is a well-known fact that outsourcing services have advanced from simple basic needs and services to more complex partnerships with the ability to produce transformation and innovation within the industry. In the light, this article seeks to establish the most common ways to structure an outsourcing engagement.

Time and Materials

As the name implies, the clients pay the outsourcing vendor based on the time and material used to finish the work. This engagement model can be most suitable in situations whereby there are difficulties with respect to the estimation of the scope and specifications of the work or where rapid changes often occur with the needs of the work.

Fixed Pricing

In this structure, the engagement price is determined at the beginning. This engagement model can work excellently when there are firmly established objectives, scope, and requirements. Paying a fixed price for outsourced services can be interesting because it equipped clients to be able to predict costs. The only challenge will be when market pricing goes down over time. A fixed price remains fixed and this may be on hard the outsourced provider who have to meet service levels at a certain price no matter the extra resources required to accomplish those services.

Cost-Plus

The contract in this engagement structure is often written so that the client pays the supplier for the real costs, in addition to a predetermined percentage for gain. Such a pricing plan does not make room for flexibility as business objectives or technologies change. However, it provides little incentive for a supplier to perform at its best.

Shared Risk/Reward

The outsourcing vendor and clients collectively fund the development of new products and services with the vendor sharing in the risk and rewards for a clearly marked out period of time. This structure of engagement model motivates the vendor to come up with ideas to make the business better and circulates the financial risk between both parties. The structure of engagement also decreases some risks by sharing them with the vendor. However, it requires a high level of governance and commitment to achieve success.