Leading Edge

There is no dearth of discussion among various stakeholders about the future direction of BPO pricing — business-risk sharing, gain sharing and so on.

But are these newer pricing models in use? These are scattered examples, with little indication that they have taken hold in the industry.

“There is a greater desire to try out innovative pricing models like gain sharing, though in reality there are very few contracts signed today with a gain-sharing arrangement,” says Finkel of Milbank, who has worked with clients such as CBS, AT&T and MasterCard.

And customers of services are aware that the option exists. “Gain sharing is discussed in a majority of deals,” adds Finkel. “The number of contracts with some gain-sharing provisions in the current deal is very, very few. Some contracts have provisions for a possible future gain sharing.”

Simply speaking, managers know that the current pricing models are not adequate, but they think it is better to wait and watch and try something out some time down the line, as the “provisions for a possible future gain sharing” point toward.

“Risk/reward sharing models need a significant maturity and experience behind a given BPO process. It is still in a very nascent stage,” says Avinash Vashistha, CEO, Tholons, a consulting and private equity firm in the outsourcing space.

The push for change needs to come from customers, not service providers. “Initially, customers need to be more willing to take risks,” asserts Richard Garnick, President, North America and Global Business Lines, Keane, an outsourcing firm. Garnick believes the risk is worth the reward. “This can result in more asset-acquisition driven deals and outsourcing of higher-end processes,” he says.

However, in the early stages of anything new, people usually take a once-bitten-twice-shy approach because every failure puts a question mark on the idea itself, and not on the execution.

“In a few cases, some innovative pricing models tried out by some of my clients with offshore deals with American vendors did not work out and the contracts had to be terminated,” says Milbank’s Finkel.

Understanding the New Rules

For a part of your core business processes to be successfully outsourced, a service provider must understand your business and respond quickly to market changes. The BPO business that has been built on process efficiency may not reflect the entire expectation from either the buyer or supplier’s perspectives.

A re-alignment of BPO pricing models to business outcomes may lead to the enactment of a success-based pricing model. The service provider has to be given a share of the business rewards that it helps achieve. This shift may lead to a complete elimination of certain short-term cost reduction metrics or at least a dilution of them. And it may lead to a better integration of offshore captives with outsourcing service providers.

While there’s no broad-scale shift to gain-sharing pricing models, what we know for certain is that the business rules have changed. The definition of value creation has changed. And to be in sync with the changing times, the outsourcing engagement deals need to change, too.