Adopting outcome-based pricing drives cloud deals

HFS’ OneOffice™ Pulse Study, H1 2021 of 800 business and technology executives proves that traditional input-based pricing is being replaced by more dynamic models that share risk and rewards between services providers and their customers.

Sixty-seven percent (67%) of executives surveyed indicated they are signing deals with outcomes (payments are due when specific business outcomes, risk, milestone, gain sharing, etc. are achieved) or output (payments due when adoption or monetization thresholds are reached) for new projects or services.

As identified in HFS’ forthcoming Top 10 Applications Modernization Services report (to be published January 2022), executives can expect to negotiate beyond fixed fee, time and material, or research units when pricing their next project. The most popular outcome or output-based modes include

• Business outcome-based, with predefined internal targets or milestones;
• Gain-share, with a variable percentage of revenue creation or cost savings based on successful delivery of project over a set period;
• Consumption-based, with adoption or usage of a solution not based on tickets or services calls and measured with satisfaction and user self-support metrics.

Source: HFS OneOffice™ Pulse Study, H1 2021
Surveying 800 of the Global 2000 enterprises

Insights from 20 global services providers and their applications modernization practices indicate a substantial change is happening when it comes to winning new deals. Increasingly, enterprise customers are requiring services partners to share the opportunities, risks, and outcomes with their customers. This is leading to these partners offering a broader range of pricing models.

• Time and materials, resource units, and fixed-fee models are legacy pricing modes that still account for most application development, delivery, management, and support. They are based mainly on established relationships and contracts and favor to the services provider. The partner gets paid based on effort over outcome.
• Milestone, zero or self-funded, and t-shirt models have become popular hybrid pricing models. They are based on legacy models but have aspects of success metrics, cost offsets, or packaged pricing to contain scope and fees based on stage-gates or pre-set commitments by both parties. These offer moderate risk to service providers, as they have set parameters for project time, resources, and costs. For the enterprise, they reduce costs risks but don’t ensure success as additional investments may still be required.
• Gain share, risk-based, outcome-based, and consumption-based models are helpful when funding new projects and attracting new customers. Services providers are willing to position services that can be quantified by the desired results. These ease costs for the enterprise up front in modernizing services and applications and require the services provider to commit to a joint success with the customer. The services provider will accept a higher risk if the upside and metrics are clear. The enterprise may end up paying more, but only if success exceeds expectations and value is multiplied.

The Bottom Line:The Bottom Line: Enterprises should push their services provider partners toward bringing pricing models to the table that establish a baseline for resourcing and share in the project’s risks and rewards. Sharing financial, technical, or business objectives will create partnerships where both parties share their North Star objectives

We will publish a detailed Market Analysis report on outcome and output-based pricing modes and best practices in January 2022. The report will detail the pros and cons of pricing models and compare thought leadership and innovation across services providers and consulting firms currently offering business and technology transformation initiatives.