Watch Out For: Internal reluctance to add needed services in order to keep monthly bills low. In addition, "this model only works from the service provider's perspective if the services provided are directly related to the cost incurred as reflected in the price of the resource units," says Helms. "The service provider bears the risk that an insufficient number of resource units will be used and the provider will not recover its fixed costs, but the customer bears the risk that it continues to pay an inflated price after the service provider has recovered all of its fixed costs."
Shared Risk-Reward Pricing Model
What It Is: Provider and customer jointly fund the development of new products, solutions, and services with the provider sharing in rewards for a defined period of time.
Best For: Customers with the level of governance necessary to partner with the provider on these projects. Most importantly, according to analysis by Gartner, the client must be willing to share in either the upside or downside potential.
Pros: This model encourages the provider to come up with ideas to improve the business and spreads the financial risk between both parties. It mitigates some of the risks of new technologies, processes, or models by assigning risk and responsibility to the vendor, according to Gartner.
Cons: Results can difficult to measure and rewards tricky to quantify, says Tisnovsky of the Everest Group. Clients must hand over much of the management to the provider.
Watch Out For: Arguments over resources, overhead, investments and rate of return.
Stephanie Overby is regular contributor to CIO.com's IT Outsourcing section.
Read more about outsourcing in CIO's Outsourcing Drilldown.