Outsourcing and especially offshore outsourcing can be very non-transparent and you will probably wonder if you are getting your money's worth. In this section we will have a look at general outsourcing pricing principles. For information about our pricing structures you should visit Our Pricing  . The information we provide is very general and of course the actual mechanisms of outsourcing pricing are a lot more complicated. It helps to understand your outsourcing provider and 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 they need to cover these costs and make a profit. A big problem is that the costs of a service like outsourcing are hard to quantify in a unit of measurement. In the end the simplest formula is:
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Total Costs of Operation / Billable Fulltime Employees (FTEs) = Costs per FTE |
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With Billable FTEs we mean the people inside the provider's company that can work on client projects. So 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 a pricing per deliverable, it is more than likely that your outsourcing provider will use the cost per FTE and the time required to produce a deliverable to come up with a cost per deliverable.
Provider Risk & Determining the Markup
Once your provider has decided on a unit of cost, probably cost per FTE, your provider will have to decide on the markup he has to add to those costs to make a profit. This markup will be determined by the profit he wants to make but also largely on the risk he will have to cover:
- Staffing / Non-billable hours
Our directors are from a consulting background and we fully understand the troubles that consultancies go through to make sure that their people are staffed on projects. After all there is nothing more costly than having employees that are not working on any client project. These are so called non-billable hours. If your outsourcing provider accepts projects and is willing to charge you by the hour then you can be sure of it that inside their markup there will be a large coverage for 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 you also have to realize that this type of guarantee comes at higher costs. The provider will have to make an assessment about the resources needed to meet the SLA and will of course have to build in a risk margin. An example: provider A guarantees client B at least 100 units of C each month. Provider will likely make the following equation:
Manpower for client B = Manpower to create 100 units of C + 25% Extra Manpower for Risk Coverage
This risk margin will cover events such as delays in production, equipment problems, people calling in sick, etc, etc. In the end this 25% extra manpower might never be used but for the pricing of the project the provider is likely to include it.
At MicroSourcing we try to keep our pricing as transparent as possible and give our clients full insight into all the factors we described above. This is why we offer an outsourcing solution that minimizes risk markups. For more details please read our section about Offshore Staff Leasing
In the last few section we have analyzed what outsourcing is, how to analyze the benefits and drawbacks of outsourcing and how outsourcing solutions are modelled and priced. We can now found out if outsourcing is something for you
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