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? Here, we look at some outsourcing pricing principles. For information about pricing model, visit our Transparent Pricing section. The information we provide here 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:
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.
Once your provider has decided on a unit of cost, which is usually cost per FTE, your provider will have to decide on the mark-up to be added. This mark-up will not only be determined by the profit they want to make, but also the risks they will have to cover:
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 visibility into all the factors described above. We can work with any type of pricing model and we have a standard solution that minimizes risk mark-ups. For more details, visit our Outsourcing Services section.