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Seeing is believing – Outcomes based pricing

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By Mark Atterby

pricing-modelTo achieve greater innovation and strategic value client organisations need to move away from resource driven pricing models to incorporate transactional and outcomes based pricing. However, outcomes based pricing presents its own sets of risks and challenges.

Outcome-based pricing, where clients are paying for a predetermined business result, can be very complicated and require considerable levels of trust between the two organisations involved.

Typically, you will only see it with clients that have a strong history and experience of outsourcing working with providers they trust and whose services they’ve relied on in the past. Numerous issues around transparency can result where the client, yes they may be experiencing the benefits of the outcomes, but are unaware of how they are being achieved.

This lack of transparency can make it difficult for buyers to put out a bid to other suppliers at the end of a contract or even to renegotiate their contract with the existing supplier. Clients my feel they have trouble getting issues resolved due to a lack of transparency into a provider’s operations.

Outcome-based pricing, where clients are paying for a predetermined business result, can be very complicated and require considerable levels of trust between the two organisations involved

For an outsourcing relationship based on outcomes to be successful, the client organisation needs to set realistic objectives and set appropriate incentives for when they are met. In a customer service scenario, rather than how many FTEs are employed to answer calls (resource driven) or amount of calls answered (transaction based), outcome based metrics and rewards would look at how quickly calls are answered within a certain time frame.

With the outcome-based model, at least in theory, buyers can enjoy additional cost savings and/or more strategic business benefits. Providers can benefit by further cementing their relationship with clients. The relationship tends to break down, however, if desired outcomes are not met.

The most prevalent pricing model is based on the commonly accepted concept of a full-time equivalent (FTE), which is generally used to indicate how many full-time workers are needed to perform tasks.

The FTE model’s popularity is largely due to the fact it is the easiest to govern and typically yields immediate cost savings, says Sarthak Brahma, VP and head of Pricing Assurance for the Everest Group. The objectives of both buyers and providers are initially well aligned, with both looking to drive down costs. Over time, however, buyers seek to further lower their costs while providers seek to maintain and improve their margins.

This leads to what Everest Group calls a “point of dissonance” and can result in the parties considering alternate pricing models based on a buyer paying for individual transactions or rewarding providers for helping them achieve desired business outcomes, sometimes by sharing added revenues.

With the outcome-based model, at least in theory, buyers can enjoy additional cost savings and/or more strategic business benefits. Providers can benefit by further cementing their relationship with clients. The relationship tends to break down, however, if desired outcomes are not met.

Getting the Incentives Right

Outcome-based pricing will not work better than FTE or transaction-based pricing if the client does not understand the drivers and put the right incentives in place, according to Steven Kirz, a principal with Pace Harmon. He uses the example of a help desk to illustrate the importance of providing the right incentives. If a client agrees to pay for every call handled by the help desk, it may not get improved service.

“What is the help desk’s incentive not to have calls? They want people to keep calling,” he says. “This may lead to the help desk not solving issues on the first or even second call, so quality can actually decline.”

But if a client agrees to pay for an outcome of call reduction, providers might choose to offer self-service technology that allows users to re-set their own passwords and/or make other investments that should cut down on the number of calls while improving service.
July 15, 2015
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