Efficiency is Not Enough
Core business processes, which directly map to business value creation are difficult to outsource for a variety of reasons, not the least of which is the one that they can’t simply be executed in the same way at a lower labor cost. The value of these processes is aligned with business objectives, which in turn depends on organizational strategy and external market conditions. In short, these are not discrete, isolated processes that can be run exactly in the same manner irrespective of market realities, as is the case with most support functions.
This is where most of the disruption is happening.
To start with, the rules of outsourcing these activities have never been fully understood by C-level executives. In the absence of anything else, most executives tried to import the rules of noncore outsourcing and replicate them here. And quite often, these tactics worked. Stock market analysts were impressed by measurable cost savings.
Most processes that were offshored — core or noncore, through outsourcing or captive model — achieved huge cost savings. But that, as it is common knowledge now, was not the result of a managers’ ability to transform processes, but because the wage gap between U.S. workers and other global service-delivery areas remains significant.
There was no innovation that was capable of achieving so much cost reduction (synonymous with value creation, then) in such a short time as offshoring did. With that one-time gain from offshoring now established, the real quest for innovation has just begun.
BPO PRICING MODELS
| Pricing model |
What it means |
Advantages |
Limitations |
Where the model is/can be used |
| Time and material |
The customer pays the service provider for a number of FTEs engaged in providing the services per fixed time denomination (e.g per hour, per month). The price per FTE varies, and is based on the skill set of the employee and the complexity of the processes. The customer pays for the input that provides the services, and not for the output. |
* Least risk for both the customer and the service provider
* Easy to work out the pricing as it is directly related to cost of manpower, which is often replaced while outsourcing/offshoring. |
Is inefficient, as it provides no incentive for the service provider to enhance efficiency and productivity. |
Virtually any process can be priced in this model. Customers and service providers prefer this model, when there is lack of information on both the sides and they want to minimize the risk till both the parties understand the dynamics completely. |
| Transaction-based pricing or the utility pricing |
The customer pays the service provider for the number of transactions processed. How many employees are involved and how much time is taken to process the transactions are costs that the service provider manages. Also called utility pricing, pay-as-you-go, pay-per-use and pay-by-the-drink model. |
* Since the service provider is paid for the output, he is incentivized to produce better outputs using the same quantity of input, leading to productivity enhancements
* The comparison between service providers is easier, as it measures the cost of each transaction, which is what the customer is looking at managing
* It often leads to innovation and better use of technology by the service provider, which sometimes results in drastic improvements in efficiency. In a highly competitive market, part of the cost savings due to enhanced productivity is passed on to the customer. |
* Can be disastrous if the customer and the service provider have no idea of what the future may bring in. In fact, incorrect transaction-based pricing may lead to frustration by one or both parties in the future, leading to relationship turning sour
* Lower per-transaction cost may not always be the objective of outsourcing. For example, in a typical collections process, how much debt (as a percentage) is collected by the service provider is more important than the cost per call. |
Any high-volume, repetitive process, with no direct impact on revenue is a good candidate for this model. Also, processes which have traditionally been inefficient are outsourced by customers to achieve efficiency. Examples include claims processing and cheque processing. |
| Performance based |
The customer pays the service provider based on the performance levels such as number of leads generated by cold calling. It is often clubbed with a fixed base fee. |
Incentivizes the service provider for better operational performance. |
If not applied to right processes, it may backfire. For example, in a collections process, being able to speak to more debtors is not necessarily of business value to a credit card company as amount of debt recovered is. |
Any process where operational performance needs to be improved is a candidate for performance-based pricing. Examples are lead generation, resolution of common customer problems in many inbound customer calls etc. Many processes with performance-based pricing can move to transaction-based pricing when the processes involved are standardized completely. |
| Result based |
The customer pays the service provider based on the success rate in a task assigned such as amount of debt collected in a collections process or value of sales generated in a telemarketing process. It is often clubbed with a base fee that is fixed and/or a variable fee that is performance-based. The critical difference between performance and success based pricing is that in the first, the service provider is paid for quantity and efficiency of effort, whereas in the latter, the payment is made for the business results of that effort. |
Directly maps to the customer’s business objectives. |
In reality, very few processes that have direct impact on business are outsourced now. But as outsourcing becomes more mature, this will be the ultimate pricing model that customers will aim for. |
Collections, telemarketing, procurement (where it could be linked to cost saved). |
| Cost-plus |
The most primitive form of pricing, the service provider in this model is paid the cost incurred plus some margin. Usually prevalent in some older captive facilities and traditional claims and policy administration outsourcing by the insurance companies to some smaller third-party administrators. |
Safest for absolute beginners. Some larger corporations too use this, especially in the captive scenario. |
It goes against the basic philosophy of outsourcing, which is to be more efficient. |
Some captives. |
| Hybrid |
Most pricing is a combination of two or more of the above, and sometimes some amount of fixed fee. |
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