Outcome-Based Pricing: Incentivising Innovation-Led IT Services

The IT services

provided by external vendors are no longer simply tools for keeping costs under control; that is very much a given. Today, clients increasingly demand that their vendors deliver innovation together with either reduced costs or increased value for money, when they confer the running of their IT systems to an external supplier, or seek to hire a supplier for the development of a new system. While many clients are achieving the desired cost benefits, most are disappointed with the level of innovation they have received so far, leading to a consistent majority of clients who remain dissatisfied with their external IT service experience.

The core of an 'outsourcing paradox'

lies in the misaligned incentives in the IT service relationships and their legal manifestations - the contracts. Most contracts today are not written to incentivise innovation. The majority of contracts primarily focus on inputs and costs, and partly technology outcomes, but very little on business outcomes, often for good reasons. This report examines the case for outcome-based pricing as a solution to incentivise greater innovation in next-generation IT services.