There are multiple ways to establish a management fee structure for your outsourcing engagement. As I mentioned in an earlier post I am a big fan of a Cost Plus Outsourcing Model. Here are my thoughts on how you can establish your management fee with this scenario. The first and the most important goal is to make it simple and transparent for everyone. Don’t overcomplicate things. Your service provider is your partner, not your vendor.
You agree with your provider that your fee is based on a certain percentage of each employees salary. It provides you with transparency and it is easy to understand. The biggest downside is that every time you want to give you a raise to your employee it will increase your management fee. You may not think much of it now, but when budgets get tight you may need to squeeze every dollar. You maybe forced to not recognize your top performers because of this setup.
Fee based on an employee’s title
You pay a different management fee depending on level of your employees. Entry level vs Mid level vs Senior. I don’t know of a single positive attribute of this structure. Why does it matter to your provider what title your employees have. The biggest negative is that to save money you will be playing with titles. You’ll hold people back. You will not hire people at the right level. You will lose people because they want to be recognized for the work they do and knowledge they have.
Flat fee based on a number of people (my favorite)
This is my favorite type of management fee. Set it and forget it. You know exactly what you’ll pay for each person you hire. You have full control of their salaries, titles, positions, etc. It’s very transparent as there is no way to hide anything from each other. You may consider setting this up on a sliding scale. The more people you hire the lower this fee gets. This provides right incentives for both sides, provided that the overhead cost for your provider goes down at scale.
Combination of a flat fee and a per person fee
This is a combination of the one above. It’s as good, but a little more complicated. This may work well when you have a larger team but might be more difficult for small groups. With this model you establish some base amount that you pay your provider to cover basics and some additional fee for each person.
Flat fee with expenses.
This is where you are asking for trouble. Under this model you’ll pay a fixed rate either for your team or by person and your provider bills you for expenses occurred. While this might work financially it’s the least transparent model of all and not the one I would recommend to anyone.