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By common notion, Outsourcing comprises of only IT or BPO Services that get executed by a vendor firm. But ideally, outsourcing encompasses almost anything under the sun that comes under the purview of a third party service provider or a vendor. So, services like consultancy too would come under the banner of outsourcing, as it is an activity that is
conducted by an external agency, as they have the requisite competency and economies of scale to perform the same.

Any service that has been provided comes with a price. And Consulting is no exception to this rule. The two common pricing models that have been popular in most outsourcing deals have been used in consulting assignments too. They are the Fixed Price Model and the Time & Material (T&M) Model.

In a Fixed Price Model, the two parties (client and the consultancy) agree to a fixed sum of money to be paid as contract fee irrespective of the number of people engaged in the work. The work, as defined by the contract, needs to be performed to get the contract amount.

On the other hand, in a T&M Project, the two parties agree on the rate (in monetary terms) which needs to be paid for the service provided. So, the amount to be paid by the client is not fixed, or pre-defined, and depends completely on the number of people assigned to do the work, and the total number of hours worked by each person.

One important aspect that has been driving these models is the Service Level Agreement or SLA between the two parties. The disbursing of fees to the outsourcing service provider also depends on meeting the expectations of these SLAs.

Although, all of these might be sound concepts theoretically, but lot of practical difficulties have been observed in the area of SLA Management. Storing and tracking the required SLA data becomes difficult at times. Also, SLA, as a concept, has not been understood in totality at the base level, thus, rendering its adherence difficult. Similarly, certain SLAs (like customer satisfaction) have ceased to be objective and measurable, and become subjective and person dependent, thus, leading to its inability to serve its purpose.

In this perspective, the Value Based Pricing (VBP) Model has been conceptualized, which has been able to tackle all of the inefficiencies of the other two models. This model is based on the basic premise of collaborating with the clients and providing tangible business benefits to the client through the process of outsourcing, and then drawing the pay cheque from the client based on the benefit provided.

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Devroop Dhar is a Management Consultant with PricewaterhouseCoopers in Mumbai. He has almost 5 years of experience in the field of Consultancy, Project Management, IT. He is an alumnus of IIM Kozhikode, specializing in Finance & Operations. He has also worked with TCS & Bristlecone in the past, and done internship with EXL Service. He also holds BE Degree in Production Engineering from Jadavpur University, Kolkata.
All views expressed in this article are author's own, and not related in any way to his employer.