August 27, 2006
Reducing Cost Adjustments in Outsourcing Contracts
Many buyers of outsourced services are approaching the contract negotiation process without a full understanding of the issues that negatively affect their businesses. Companies that fail to implement appropriate price inflation mechanisms in outsourcing contract negotiations face risk of losing millions of dollars during the lifetime of a typical contract.
Buyers of outsourcing services often pay more than the standard price because they do not negotiate the impact of economic factors such as inflation. It is necessary for the corporate buyers to understand how future pricing factors will affect the duration of their outsourcing arrangement. Due to the diverse elements in outsourcing service providers' cost structures, the role of labor costs versus non-labor costs should be based on economic cost adjustment formulas. An accurate price inflator will reflect realistic inflation rates for labor, hardware, facilities and other factors.
Read my previous post titled “Offshore Outsourcing is Set for a Huge Growth” for more information on offshore outsourcing.
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