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The Roundup September 16

Dreamweaver becomes Dreamcounter and Acrobat Reader becomes Acrobat Number Cruncher. It may not be hot, but it’s cool.

Adobe will acquire Web analytics software firm Omniture for $1.8 billion later this year, the companies announced on September 15. As a result, Omniture’s analytic software will be embedded in Adobe’s content-creation tools. . . .

Omniture has a portfolio of 12 products spanning online analytics, multichannel analytics, acquisition and conversion. It has more than 5,000 customers in more than 20 countries. Adobe’s Reader software is available in 26 languages on 10 major platforms in more than 40 countries.

(“Adobe to acquire Omniture,” DM News, September 16) We reviewed Omniture products for the first edition of Shoestring Venture: The Startup Bible and decided both the learning curve and the price was a bit too steep. What Adobe means by “incorporating” Omniture products into their content creation tools (Dreamweaver, which is a Web page coding application, Flash, a vector-image animation application with heavy use on the Web, and Acrobat, a PDF-generating application) is anyone’s guess. My guess is that we’ll see more sophistication when it comes to tracking user views of PDF and Flash files. Currently, Web analytics only tells you if someone has opened or downloaded a Flash or PDF — the software can’t trace which pages or parts of a Flash or PDF are viewed. My second guess is that Adobe will turn Dreamweaver into a “always hot” (logged in) application that examines server logs and includes the full range of Omniture analytics. This simply means that if you, or your developer, are developing and editing your site in Dreamweaver, the analytics will be built right into the application. I’m not sure how valuable this is to the common run of Web entrepreneurs since they outsource the development of their site. But stay tuned . . . when Adobe makes bold moves, it’s always good news for entrepreneurs.

Hybrid tomatoes. Hybrid cars. Now: hybrid outsourcing. And it’s a great idea if you’re a vendor or a client.

As IT leaders focus on cutting costs, they continue to put pricing pressure on offshore outsourcers. . . . Bangalore-based IT service provider MindTree is talking up its new “hybrid” pricing for offshore IT services

Say a customer wants to set up an offshore development center to create an e-commerce solution. The client is clear about the twenty features to be included in the first release, but beyond that, can only say that it wants multiple iterations to incorporate enhancements and fixes to the software throughout the year.

MindTree would draw up a deal with a fixed price for the first release and time-and-materials pricing for the remaining work. “Typically, when a fixed-price quote is given for a defined piece of work, the service provider plans the full-time employees for the project lifecycle, ramping up and down according to need,” says Hegde. “In a hybrid model, the service provider plans fractional full-time employees for the fixed-price engagement to meet service level agreements, then the remaining [man-hours] for each role are made available to the client on a time-and-materials basis.”

(“Offshore Outsourcing: Introducing a New, Hybrid Pricing Model,” CIO, September 16) Many of our readers are shoestring venture entrepreneurs that offer services. And most of them and all the rest have a hankering to do some outsourcing themselves. I, for instance, started in business working for a marketing and advertising agency and I currently run a marketing services consultancy. There are two models for pricing or paying for vendor services: cost-plus (or “time and materials”) and fixed cost. As those who read this blog know (and stay tuned, we’re halfway finished with a Shoestring Venture book that focuses exclusively on how to manage outsourced resources), I am an absolute evangelist for fixed cost models for one simple reason: transparency. Fixed cost forces both the vendor and the client to manage the relationship with enormous attention and precision. Clients have to get their act together and vendors have to communicate religiously with the client to track changes to the fixed cost. In addition, it puts all the risk on the vendor — where it belongs. As long as the client sits down and does all the necessary work planning out what needs to be done and manages the relationship with due diligence and effort, most if not all the risk should belong to the vendor.

Cost plus, on the other hand, encourages vendors to increase costs because, well, that increases the plus part. Say you have a contract that pretty much guarantees you a margin or 20%. You need to buy a server for your client. If you buy a server for $2,000, your profit will be $400 (you’ll charge the client $2,400). If you buy a server for $10,000, your profit will be $2,000 (you’ll charge the client $12,000 for the server). That’s why Halliburton, which had a cost plus contract with the Bush Administration in the early years of the Iraq War, would buy gasoline at $200 a gallon. Sure, it’s outrageous, but there’s more profit in it.

On the other hand, vendors shouldn’t have to shoulder any risk due to a client’s wishy-washyness. “I want a database but I’m not sure what I want it to do.” With guidelines like this, the vendor will want a cost plus deal. We had one VP of Marketing who would make us do literally hundreds of covers for his catalog every year. We’d show him a dozen catalog cover comps and he’d say, “That’s not right. I’m not getting the right feeling.” “Well,” we’d reply, “give us some specifics.” “I can’t give you specifics. I’ll know the cover is right when I see it.” Since we were on a fixed price agreement with them and losing significant moolah, the next year, we would estimate the comping cost at this considerably larger price. “Why is the comping part of the estimate so high?” “Because last year we had to do almost 300 cover comps for you — photography included.” “Oh, that won’t happen this year.” And he’d threaten and bully the estimate down and . . . we’d do several hundred cover comps for him and lose money. “I’ll know it’s right when I see it.” When a client says those words, fire them.

When done correctly, a pricing model apportions risk to the partner whose ineffiicencies are most responsible for overages and delays. Until hybrid pricing, this risk apportionment was an all-or-nothing affair. Fixed pricing is the best model when the client has their act together (in which case, vendor inefficiencies are the most likely source of overages and delays) and cost plus is the best model when the client does not have their act together (the “I don’t know what I want but I’ll know it when I see it” a**holes — in this case, client inefficiencies are most likely to produce overages and delays). But what happens when one part of the work bears risk because of client inefficiencies (such as photographing and comping out covers because the client has no idea what they want) and other parts of the work bear risk because of vendor inefficiencies (say, typesetting or print management). That’s the genius of a hybrid pricing model.

While CIO magazine largely thinks of hybrid outsourcing pricing as a gimmick, done properly, a hybrid pricing model accurately reflects the source of risk in any outsourcing relationship and directly assigns the potential cost of that risk to the responsible partner. It’s a brilliant idea. If you’re a designer, programmer, or any other service provider — or you’re looking to outsource some of these services — you should take it very seriously.

However, why would you, as a client, want a pricing model where you bear some risk for overages and delays? If you can outsource your work on a fixed price basis, why take responsibility for your inefficiencies? The answer is twofold. First, when asked to cost out a fixed price when you, the client, have not gotten your act together, vendors, if they’re smart, will inflate their costs dramatically. You now shoulder the risk of having the work done efficiently (in which case you overpay) and the vendor shoulders much less risk if the work is not done efficiently (since they’ve estimated the work at such a high price). Even if you get your act together eventually, a high-priced estimate means that you’re shouldering all the risk of the vendor’s inefficiencies. Second, if the vendor does not provide a high estimate (thus assuming all the risk for your inefficiencies) and agrees to take the work, they may find themselves losing money because of you. As a result, they’ll show you to the door and throw your work out after you. Adding costly delays and expenses to your work.

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