Offshore outsourcing can be especially non-transparent. As an outsourcing client, you may often wonder about the margins your provider earns. Is the outsourcing cost reasonable or overpriced? In this section, we will have a look at some outsourcing pricing principles. For information about MicroSourcing's pricing structures, visit our Outsourcing Pricing section. The information we provide is very general as the actual mechanisms of outsourcing pricing are a lot more complicated. It helps to understand that an outsourcing provider is just like any other company and deals with the same costs:
- Office space - rental, building dues, utilities
- Infrastructure - workstations, office equipment
- Manpower - salaries, benefits, recruitment costs
- Telecommunication - telephone, fax, internet connectivity
- Third party services - accountants, lawyers, headhunters
Unit of Cost
Like any other company, providers need to cover these costs and make a profit. A big problem is that the outsourcing cost is hard to quantify in a unit of measurement. In most cases, the computation is based on manpower:
Total Costs of Operation / Billable Full-time Employees (FTEs) = Costs per FTE
Billable FTEs refer to the people inside the provider's company who can work on client projects. This leaves out management, HR, tech support, marketing, sales, and other overhead and support functions. This pricing per FTE can then be used to decide on a cost per month, per day or even per hour. Even if the outsourcing model requires pricing per deliverable, your outsourcing provider will likely use the cost per FTE and the time required to produce a deliverable in order to get the final cost.
Provider Risk & Determining the Markup
Once your provider has decided on a unit of cost, which is usually cost per FTE, your provider will have to decide on the markup to be added. This markup will not only be determined by the profit they want to make, but also the risks they will have to cover:
- Staffing / Non-billable hours
Our founders are from a consulting background and fully understand the troubles that consultancies go through to make sure their people are staffed on projects. After all, there is nothing more costly than paying salaries to employees who are not working on any client project. These are so-called non-billable hours. If your outsourcing provider is looking to charge you by the hour, it is almost certain that a large part of their markup will cover the costs of non-billable hours.
- Service Level Agreements (SLAs)
SLAs are a great way for a client to impose a certain quantity/quality level of deliverables. Although this might move responsibility from the client to the provider, this type of guarantee comes at higher costs. The provider will need to make an assessment of the resources required to meet the SLA and factor in a risk margin. After all, the costs of not meeting the SLA may be very large. For example: a provider guarantees his client at least 100 units of X each month. The provider will likely make the following equation:
Manpower for Client = Manpower to create 100 units of X + 25% Extra Manpower for Risk CoverageThis risk margin will cover events such as delays in production, equipment problems, resignation of employee/s, etc. In the end, this 25% extra manpower might never be used. However, for the pricing of the project, the provider is likely to include it anyway.
At MicroSourcing, we try to keep our pricing as transparent as possible and give our clients full insight into all the factors described above. We can work with any type of pricing model and we have a standard solution that minimizes risk markups. For more details, visit our Outsourcing Services section.