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Building Out-Come Based Pricing Models

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By Martin Conboy

pricingThe continuing rise in the number of contracts containing outcome-based pricing models provides obvious rewards and benefits for BPO buyers and vendors. But there are dangers and challenges where the vendor can be expected to take on all the risks.

Traditionally, outsourcing buyers and providers have engaged in sourcing models that were safe but suboptimal. Contracts, arrangements and pricing based on providing staff, materials or fixed capacity service delivery.

Outcome pricing has accelerated strongly in recent years, across industries, both as a response to rapid commoditization and as a strategy for increasing value capture and margins. Outcome based pricing mechanisms cannot only help to combat commoditization, but to create customer value.

In the past, buyers approached sourcing as a way to access the right skills at the right price at the right time, without exploring the full potential of their outsourcing relationships. Meanwhile, providers have tended to play it safe by sticking to time and material manpower-linked growth models that do not necessarily maximise value.

Outcome pricing has accelerated strongly in recent years, across industries, both as a response to rapid commoditization and as a strategy for increasing value capture and margins. Outcome based pricing mechanisms cannot only help to combat commoditization, but to create customer value.

For BPO and outsourcing relationships to help clients innovate and add value to their organisation, the contracts need to contain outcome-based pricing models.  Outcomes based pricing means the customer contracts and pays for business results delivered by the provider, rather than for defined activities, tasks or assets[i]. The contract focuses on the desired outcome of the work to be performed rather than how it will be performed.

What is Gainsharing?

Gainsharing is a system that includes (1) a financial measurement and feedback system to monitor company performance and distribute gains in the form of bonuses when appropriate, and (2) a focused involvement system to eliminate barriers to improved company performance. Gainsharing systems vary widely in terms of their design and the degree to which they are integrated into the regular operating systems of the company. Of course, the more they are integrated into the day-to-day operational systems, the more commitment there is to the Gainsharing system. And, the more commitment there is to achieving overall business goals (including the Gainsharing goals) the better the resulting performance is.

Shifting control and risk to the provider

This shifts control and risk to the service provider. But it also means that if the provider builds a more efficient way of delivering the same results, it will be financially rewarded for its innovation. Traditional input based pricing is safer and easier to manage and understand from the vendor point of view.

If the contract states that 50 FTEs will be provided for 40 hours a week for 12 months, to manage all inbound customer service calls, there is no incentive for the provider to innovate and provide better service with fewer staff. The model is built around a fixed cost per agent per hour with all of the known costs factored into that hourly rate. Thus rightly or wrongly KPIs like average handling time (AHT) become the main measure for success and efficiency.

The client doesn’t want 50 people answering phones as such, they actually want their customers to have their issues resolved

Leaving it up to the provider to decide how it will deliver on the customer requirements and being rewarded for innovation, means it has the incentive to develop and improve how the service is delivered.

quickly and efficiently,( First Call Resolution)  but they do not have all of the necessary resources, skills and capacity to allow that to happen.  It follows that if AHT is a key performance indicator many clients are going to not have their issues resolved to their satisfaction and consequently may have to call back to get more assistance, thus driving costs up as the BPO has to handle additional calls.

Leaving it up to the provider to decide how it will deliver on the customer requirements and being rewarded for innovation, means it has the incentive to develop and improve how the service is delivered.

With outcomes based pricing, however, the service provider must assume a great deal of risk since it does not have influence over all aspects that impact its ability to achieve the outcome. And the amount of risk increases significantly when the outcome is higher up on the value chain[ii]. In the above example the provider does not have control over every channel or interaction with the end consumers. Something the client does, or something generally in the market, or anything beyond the control of the provider could impact the delivery of the service.

A true partnership is required

For a pricing model to be successful, it should strike the right balance between the customer’s expectations of quality, timeliness and price, and the service provider’s cost and operational efficiency. Customer engagements may not be successful with one type of pricing model every time. it’s a journey for both the parties to explore based on best fit for the scoped services and engagement models

For outcomes based pricing to work the two different organisations need to know more about each other and trust each other as partners. The vendor needs greater understanding of the industry and markets the client operates in, as the vendor is now potentially exposed to the threats and challenges of the clients business.

A deeper partnership approach to outsourcing relationships is required. Outcome based sourcing engenders a greater level of dependency on the service provider. The buyer needs to understand the level of risk that the provider must accept to help the customer achieve the desired business outcome[iii].

Buyer and provider need to work closer together in a partner relationship where there is strong governance and relationship management. This will entail greater collaboration and longer contracts that can change and adapt over time. Both organizations must work towards a position of Interoperability and have the ability of making systems and organizations work together.

The days of a client simply throwing their BPO challenge over the fence and making their problem someone else problem for a cheaper price are well and truly over.

[i] http://www.corrs.com.au/publications/corrs-in-brief/outcome-based-contracting-is-on-the-up-who-s-doing-it-why-and-what-you-need-to-know-about-it/

[ii] http://www.outsourcing-center.com/2010-01-what-companies-need-to-understand-about-switching-to-outcome-based-approaches-in-outsourcing-article-37264.html#sthash.zvQV79Fk.dpuf.

[iii] http://www.outsourcing-center.com/2010-01-what-companies-need-to-understand-about-switching-to-outcome-based-approaches-in-outsourcing-article-37264.html#sthash.zvQV79Fk.dpuf


March 31, 2015
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