50 Shades and Outcome Based Pricing

“Do you trust me?” I just couldn’t resist given the extremely hyped release of 50 Shades of Grey this past Valentine’s Day weekend.

Since I have been in the ITO business and discussing pricing models with prospects and the advisor community for years, time and time again the discussion eventually switches to the holy grail of pricing models – Outcome Based Pricing Models.

While we all like to talk about Outcome Based Pricing Models, it is painfully clear that there are very few real world examples. So, why haven’t we heard more about these type of arrangements? Perhaps it’s because it has been too difficult for the client and ITO provider to reach the high level of trust that is required for such an engagement.

Here are a couple of observations to illustrate my point:

Trust from the client: In order for an Outcome Based Pricing Model to be successful, the client must relinquish control over a large majority of the processes that influence the business outcome.

Example: In a case in which the ITO provider is being paid a percentage of gaining and retaining new user registrations for an on-line or mobile service, the client must allow the provider to participate in the planning, implementation, and deployment of a new app releases. Moreover, the client must allow the ITO provider to stop or delay a new app release if the provider can specifically identify and quantify the risk impact.

Trust from the ITO provider: The provider must also trust the client to communicate all they know about the relevant processes and potential impact to the success of the business.

Example: If the ITO provider’s revenue from a 3 year term is dependent upon registration and retention of on-line and mobile customers, the ITO provider must trust that the client will be completely transparent regarding all things that influence the registration and retention processes including such things as up-coming marketing campaigns, releases of apps from the competition, and knowledge of a potential security threat within the client’s edge network.

Given the current trend toward Everything-as-a-Service (XaaS) and the growth of ITO services in general, especially within the mid-market (<$5B), the discussions about Outcome Based Pricing Models will definitely continue. So, when it does, and you find yourself in that discussion, do yourself a favor – talk about trust.