Abstract
In this paper, such outsourcing practices as time and materials, a fixed price, and gain sharing are studied. In the first case, the client pays the vendor hours and materials spent on creating a product or service. The advantage of the method is its flexibility, and the disadvantage is the lack of clarity in determining the final costs. The fixed price, on the contrary, offers a precise determination of the expenses but does not allow flexibility.
Gain-sharing is the most convenient way of interaction between a supplier and a client to develop products, since the vendor receives part of the client’s profit for the contribution to the project. However, in the absence of trust between the parties, such interaction does not make sense. Therefore, all three practices are useful in different cases of outsourcing, and the profit of both the client and the supplier depends on their correct application.
Introduction
Outsourcing is a widespread modern practice for many business companies. Organizations save money, time, and effort by using third-party services assistance. However, the customer and the client can use different outsourcing approaches depending on the goals of the project and their capabilities to provide the most convenient way of interaction. The most popular and useful practices that can be used for different types of outsourcing are time and material, a fixed price, and gain sharing.
Time and Materials
Time and materials is one of the models of home and international outsourcing that it is simple and flexible. In this case, the client pays the vendor for the time spent on creating the product and materials that were used for this purpose (Wachira, Brookes, & Haines, 2016). Its main advantage for the client is the convenience of making changes, especially if the requirements for the project are not precise enough.
For example, a company needs to install and configure a CRM system; however, its managers are not aware of all functions and options that the supplier can offer. Therefore, after consulting with specialists, the client receives the approximate number of hours that will be required to complete the project. Thus, if the client needs to make additional changes, then there is no need to amend the contract, since the payment will be calculated according to the actual number of working hours. The advantage of this practice for a supplier is the ability to focus only on clients’ requirements but not the total budget.
However, this flexibility also creates several disadvantages of time and materials practice. Its main flaw for the client is the difficulty in calculating the final costs, since they can grow with the advent of new requirements, refinements, or unforeseen circumstances. For this reason, an organization that wanted to use outsourcing services should also be especially careful in choosing a contractor.
Some vendors may offer false information about the complexity of the project and the time it takes to complete it, change the conditions, and add hours of work to get more money. The disadvantage of this system for a supplier is that the company takes the responsibility to adapt to any changes by providing the flexibility of conditions. If the client’s requirements become difficult or impossible to fulfill due to the capabilities of the company, then it can lead to termination of a contract, which negatively affects the reputation of the supplier.
Fixed- Price Practice
The practice of fixed-price is also popular for outsourcing as it immediately puts the scope of the project. In this case, a company that has a limited budget choose an outsourcing contractor who can create a product or service according to customer requirements (Wachira, Brookes, & Haines, 2016). Therefore, the advantage of this practice for the client-company is that it can consider several offers and choose the most profitable one.
The benefit for the contractor is that it initially sees the requirements for the project and the amount of money that will be received; thus, a company can evaluate its profitability. However, this advantage is valid only if all requirements and working conditions are described and discussed in the first stages of negotiations and project implementation.
The disadvantage of a fixed price is that it does not take into account possible changes and unexpected expenses. Consequently, complex projects can get stuck at some stage of development, or the budget runs out earlier than the product is implemented because of external conditions. In addition, this approach requires a very accurate and detailed budget planning for each stage and a sub-stage of the project to monitor its implementation. At the same time, the lack of flexibility harms both a client and a vendor, since any unexpected interference leads to lengthy negotiations and price revisions (Wachira, Brookes, & Haines, 2016).
However, in the absence of communication, a project may be delayed or not be implemented. A product or service also can ultimately cost several times more as happened in the situation at BSkyB and EDS, when the development of the CPM system cost the company £ 265 million instead of an initial £ 48 million (BSKYB V EDS, 2020). Consequently, although the budget should be fixed, the misuse of this practice can lead to even higher costs.
Gain-Sharing Practice
Gain-Sharing is also a convenient outsourcing practice that is used in the business world. However, this option for company interaction is not so popular, since only 6% of companies use it, while time and material and a fixed price occupy 58% of transactions together (Willcocks, Oshri, & Kotlarsky, 2018). In this interaction model, the vendor receives a percentage of the company’s profit in the event of its active participation in the development of a product or service, except for its immediate responsibilities (Willcocks, Oshri, & Kotlarsky, 2018).
For example, a supplier offers to develop a new unique service or product for a company by using its resources, and the client sells it by using its brand. Thus, a client makes a profit by diversifying or improving the quality of its services, and the supplier finds a channel of distribution.
Moreover, this approach provides an opportunity for the development of innovations as it puts some obligations on both sides of the contract. Willcocks, Oshri, and Kotlarsky (2018) note that fixed-price contracts often restrict suppliers from proposing new ideas to customers, since in the absence of clarity, a client can use the proposition but hire another vendor for its implementation. However, gain-sharing initially implies the exchange of ideas, so suppliers are protected from such situations.
However, the disadvantages of this practice are that often the conditions for sharing risks and profits are blurry, and in the absence of trust, the parties may be afraid to offer ideas without guarantees of fair profit distribution. Therefore, this practice is beneficial for companies with a high level of trust and communication.
Conclusion
Therefore, such practices as time and materials, fixed-price, and gain-sharing are among the most frequently used and convenient in outsourcing. However, they all have their advantages and disadvantages that vendors and customers need to consider before signing the contract. In addition, each of the practices can be more suitable for one type of outsourcing, while in the second, its benefits may turn into problems that cause the failure of the project.
References
BSKYB v EDS: Avoiding ‘Joe Galloway” syndrome. (2020). Web.
Wachira, W, Brookes, M., & Haines, R. (2016). Contextualizing outsourcing and development from a theoretical and practical perspective. International Journal of Multidisciplinary and Current Research, 4(2016), 332-342.
Willcocks, L., Oshri, I., & Kotlarsky, J. (Eds.) (2018). Dynamic innovation in outsourcing theories, cases and practices. Cham, Switzerland: Palgrave Macmillan.