Time and Material Model versus Outcome Based Pricing
Blog | 10.15.2014

Evaluate the Time & Material Model vs. Outcome Based Pricing

Outsourcing is no more being looked at as just a cost advantage. Gone are the days when it was looked at as “Outsource and forget.” Companies are ready to invest time in working closely with outsourcing vendor to get a better control over management, get in-depth insights into supplier disruptions and thereby lower the risks. Companies are also willing to spend more provided they see a clear value. Trust and transparency play a crucial role in a successful outsourcing partnership.

Downturn in the global markets has forced many companies to relook at their outsourcing strategy. Traditionally, companies have been working on Time and Material Model wherein what was counted was the number of resources working on a project. But as outsourcing is getting more and more integral to the overall business strategy, companies are increasingly adopting for output based pricing in which billing is proportionate to the actual outcome delivered such as defects fixed, test cases completed, support incidents addressed, impact on sales etc. This is enabling them to seek ROI on every dollar spent.

From the vendors’ perspective, there is an upside in this model, provided they are paying attention to productivity at work. After all, Working smart should count more than working late

The earlier trend of time and material (T&M) based pricing caused many vendors to ignore productivity. Interestingly, low productivity meant higher revenue at times since the vendor could ask for more headcount to meet deadlines. With fixed price contracts and output based pricing, this is no longer the case.

Services companies now focus on increasing employee work efficiency and productivity more than ever. Sapience delivers automated facts about work i.e. work trends across teams and business units. This visibility triggers a self-improvement cycle thereby increasing the work output.

With Sapience work can be delivered with the existing team in lesser time. In the long term, a performance oriented culture benefits every company and project – whether your business model is based on T&M, output or fixed price.

Here is a good review of the output based pricing model: Short Case Studies – Industry Analysis & Reviews