Science & Technology

Time and Material: Pricing based Information Technology Outsourcing Model

An earlier article published on this site, describes at a high level the various types of information technology outsourcing models in operation today.

Time and Material or T & M is a pricing based information technology outsourcing model. This model is utilized not only in the information technology industry, but in other industries as well, and as such it has been in existence for quite some time now.

As the name implies, the payments to the vendors or contractors are based on the number of hours of work completed per day.

Salient Features

The salient feature or key characteristics of the Time and Material model of information technology outsourcing is outlined below:

  • There is an agreed rate per hour between the vendor and the client organization.
  • The number of hours clocked are tracked through a time sheet system, either maintained by the client or by the vendor.
  • Time sheets need to be approved by client managers before it can be used for billing.
  • Sometime vendor organizations define a minimum hours of utilization in order to cover fixed costs.
  • This model is typically used when the scope of work and the deliverables cannot be clearly defined. It is also utilized when a certain level of research and development needs to be done.

Example

 An insurance company has decided to overhaul its existing Claims Management System. Due to few limitations, chief among them being cost, the company has decided to undertake a customized development spread over a period of time. Though budgets are approved, it is available only in regular instalments over an 18 month period.

The company has decided to engage a vendor to do the initial scoping exercise that will involve a senior level business analyst with experience in the Insurance domain and a technical analyst. The scoping exercise will last anywhere between 2 and 3 months depending upon the availability of the key stakeholders of the new system.

This initial scoping phase will follow the Time and Material model. Once the scoping phase is completed, the entire project will be shifted to an offshore location and will be executed as a Fixed Price project.

Pros and Cons of Time and Material Model

Pros

  • This model is very effective if there are too many unknowns in a project.
  • This model also enables the client organization to quickly ramp-up and ramp-down project teams as per requirements and budgets.
  • It is the model of choice for the initial phase of new development projects and for performing R & D.

Cons

  • Client needs to set aside management hours for controlling and tracking vendor resources including the approval and clearance of time-sheets.
  • It is often difficult to provide accurate budget estimates since there would not be any limits on the hours of utilization.
  • Vendor managers will not take responsibility of deliverables and management of stakeholder expectations.

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