Cost Plus Outsourcing Model

Cost Plus ModelWhen a company decides to outsource it is often faced with several questions:

  • What to outsource
  • Finding a right partner
  • How to train new resources

One questions that is rarely asked is what outsourcing model will you use.

The most common way to setup an outsourcing project is based on a fixed price per head. The price could be per hour, per day, or per month, but in any case it’s an all inclusive number that encompasses contractor’s salary, all overhead costs, and company’s profit.

While this is the simplest way it is also the least efficient. Under this model you and your service provider have exactly the opposite motivations.

You’ve agreed on a price, so that becomes a fixed cost. You are now looking for the absolute best person who will do the job. In other words you are looking for the best person for you buck. Your provider, on the other hand, is looking for the least expensive person who is good enough to do the job. Every dollar saved is profit to them. See the difference?

One way to try to solve this is to break your cost into two parts – salary and management fee. Lets call it a “Cost Plus” model. Under this model you agree with your provider on a fixed management cost per employee and you negotiate directly each employees salary. You negotiate it with an employee like you would if you were hiring someone locally.

This does require some more work. You need to understand salary levels and structures for the market you are hiring in. You also need to understand what benefits the company is offering because it will play a role in how much money you’ll pay.

While, this requires a bit more effort on your side, it gives you the flexibility and full control of who you hire. It also forces your and your partner to have a very open and transparent relationship which will benefit both sides in a long run.

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