Optimal price design for variable capacity outsourcing contracts

Outsourcing of information technology (IT) infrastructure and business processes (BP) is a significant aspect of the business landscape. Recently, attention has moved to variable capacity contracts linked to business or IT metrics for medium to long term (two to ten year) deals. This new emphasis on variability is accompanied by a growth in interest in the accompanying pricing schemes. A basic tension in the design of these pricing schemes occurs between the objectives of the outsourcing provider (hereafter Provider) and the company whose IT or BP is being outsourced (hereafter Client). In other words, their utility functions on contract attributes differ. For example, the Client may desire utility–style pricing, while the Provider may be interested in the certainty with which it achieves a given margin. This paper characterises and solves the price design problem (PDP) for variable capacity IT/BP outsourcing contracts within a descriptive multi–attribute utility theory framework from the point of view of the bid team, ie they know costs and must negotiate prices. In these situations, costs are usually granular, non–linear and history dependent.