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Pricing Risk
Pricing risks arise as soon as the parties agree upon the service terms, conditions and pricing.
For the enterprise customer, the “pricing risk” is that the marketplace will provide better pricing than contract pricing, whether for insourced or outsourced services. Benchmarking and other techniques commonly used to manage or mitigate this risk.
For the service provider, the “pricing risk” is that the benchmarking process or other price adjustment will result in a loss or significant reduction in profitability and an inability to recapture the investment made in capturing and transitioning an enterprise customer to the outsourced business process platform. The service provider can never stand still, though, since if it fails to make ongoing investments in process improvement and cost containment, upon the expiration of the contract, it will cease to be competitive for new customers.
The art of outsourcing includes identifying and providing commercially reasonable solutions for both parties.
Commercial and financial transactions contain pricing risks at many levels.
The enterprise customer has many risks the need to be addressed in the services agreement:
Similarly, the service provider faces similar risks that might make its services uncompetitive over the long term, or unprofitable under foreseeable circumstances. Such risks include:
The design of contracts to manage and mitigate pricing risks is an art form. Multiple techniques are available, each with its own limitations and additional risks.
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