How the Economics Work for Service Providers

If you're still a bit confused about how the economics of outsourcing work in a typical deal, Craig Baty, group vice president and chief of research at Gartner Asia-Pacific, explains the basics in CNET article, “Where's the money in outsourcing?”

The consulting phase grapples with the what, why and how of outsourcing — usually involving the senior executives on the client side. Repeatable quote: Service providers “make their money by having excellent frameworks, models and repeatable solutions for various verticals, and they invest a lot in developing best practices.”

The development and integration phase is where the project design takes place — including specifics such as equipment, personnel and applications required. Here's where offshore often comes into play to keep labor costs down. Repeatable quote: Service providers “make their money by charging a combination of fixed and time-and-materials fees, and rely on repeatable solutions, frameworks, configurators, and highly trained technical staff. They need to constantly look for business, as their cash flow is not continuous. They get paid when a phase completes.”

The management phase, the final one, is the most lucrative for the provider, since the hard work's been done. Repeatable quote: “The major difference between the management components and the consulting/SI component is that for the life of the contract the service provider receives and ongoing payment, monthly, or quarterly in many cases. This type of arrangement is called an “annuity service” and provides a long-term stable cash flow to the service provider.”

The article also includes a “good mix” of types of revenue that a healthy service provider should have coming in. Worth reading to evaluate the health of your partner in outsourcing.