The following is a contributed piece from Sameer Bhagwat, vice president, and Raakesh Boyapati, principal, at Capgemini North America. Opinions expressed are authors' own.
Some of the first results enterprises felt from COVID-19 last March were financial. With so much uncertainty, budgets were constrained and projects were put on hold. But as we’ve seen in the year since, organizations that continued to progress their technology transformations were far better for it. Even with the economic downturn, companies found ways to innovate and digitally transform.
How did they do it? In many cases, it was by working with their technology providers to come up with creative pricing models that forgave short-term costs and postponed remaining costs.
The cost reductions allowed these companies to continue their transformation journey and positioned them to withstand the disruption without lagging behind competitors. Now, these companies are poised to thrive in their post-pandemic recoveries.
Although the pricing changes are a win-win, navigating the process takes strategic coordination and planning. From the enterprise perspective, how do you pick the right pricing model based on your situation? What are your priorities given where your organization is within its transformation journey? It’s crucial to select the right model to enable speed, efficiency and, of course, affordability. There is no one-size-fits-all when organizations have different levels of maturity and benefits they hope to achieve.
Importantly, while these flexible pricing models were vital during the pandemic, they will continue to be beneficial for enterprises in the future when navigating and responding to changing market conditions. Given the risks and rewards to the model selection process, here are options companies can explore when evaluating their current strategic and financial situations.
In a fixed-pricing model, the enterprise pays pre-determined, set fees to the technology provider either at regular time intervals, the end of the project, or when milestones are achieved. This model works particularly well for managed services transactions and projects with clearly documented requirements. It’s also a beneficial when there is a good cost baseline with predictable service levels over time. From the service providers perspective, the model gives it full control over resource use, enabling them to reduce costs.
Time and material pricing model
The time and material pricing model gives more control to the enterprise than it does to the technology provider and is more suitable for long-term projects with dynamically changing requirements. This model works best for organizations that want a flexible and agile project execution, with varying workloads across development teams. IT product development projects typically prefer this model, when deploying hybrid teams with their own resources and provider resources working together, as it offers flexibility in negotiating budgets across project requirements. Organizations should be mindful that within the time and material pricing model, the final cost can be different from budget estimates, and there won’t be strict timelines for tracked completion of the project.
Transaction-based pricing model
If the business is cyclical in nature or transaction-intensive and demand-driven, organizations might want to consider the transaction-based pricing model. This model works well for operations or projects with a baseline and clear forecasts for transaction volume, or that have standard per-transaction rates of service. The volume of transactions is known, with some confidence, and the organization pays for the output it receives. Technology providers helped their strategic clients hit by the COVID crisis by using transaction based “pay-per-use” pricing models to adjust their price to match volatile demand. While there can be opportunities for volume discounts, keeping the total operational cost lower, this model also heavily relies on accurate demand forecasting to ensure there aren’t unexpected added costs throughout the lifecycle of the engagement.
Outcome-based pricing model
For projects that deliver measurable impacts on the overall business outcome for the organization, an outcome-based pricing model is a strong fit. This model is preferred for projects involving digital transformation, procurement savings, and sales campaigns. With an outcome focus, the project can achieve highly tangible, long lasting business benefits with limited investment costs for new technologies or processes. Still, in this model there can be a lack of transparency on the progress of the project as the work is being performed, and potential disagreements on the project’s results and whether it was successful.
As companies recover from the pandemic and look toward the future, expanding their capabilities in flexible and resilient ways can be a catalyst for success. Choosing a pricing model to support technology transformation that enables the right cost structure and outcome delivery for the specific business needs can make this process smooth, convenient, and provide the desired results on time. Even if your business didn’t take advantage of a flexible pricing model to accelerate technology transformation during the COVID-19 crisis, the opportunity still exists. It’s time to get started.