When customers decide to outsource part of their operations there are many factors to be considered and decisions to be made over the course of the initiative. Getting to the “right price” is obviously one of the key objectives in any outsourcing transaction. Nobody wants to pay too much for a particular service and, while it might seem nice at first blush, nobody really wants to pay substantially below market price for a service because of the problems that will ensue later in the relationship. However, once the right price has been determined, then a decision must be made as to how to structure the payment of this right price.
The Dead-Band Method: For some customers, especially those with little variance in their monthly usage, having a consistent invoice amount from month to month may be more important than perhaps squeezing that last dollar of cost savings out of the operations. For such customers, paying the same amount for volumes that are within some small percentage (up or down) of the original baseline volumes can be a preferred way to structure the payment.
With the Dead-Band Method, the amount the customer pays each month doesn’t change within a small percentage of volume changes (e.g., +/- 5%). In addition to the stability in amount paid, this method can also reduce the angst created by conflicts with the supplier over the accuracy of volume counts. Counting issues often arise in the early days of outsourcing relationships as volumes that have been loosely measured in the past suddenly take on far greater importance. If the invoice price doesn’t change until the dead-band is passed, then small changes in volumes can be validated and worked through without the pressure of an aging supplier invoice. Ideally, by the time the dead-band limit is reached, the counting issues have been worked out.
