BPO Pricing Simplified

The BPO market can be confusing when it comes to pricing.  As BPO providers mature into core business processes it is becoming even more complex.  It’s starting to look like “anything goes”, but there is some reason to the madness.

There are three basic models for BPO pricing:

1.       INPUT / OUTPUT:  Traditional services based pricing.  Pay for units of input and maximize output (i.e.  hours, FTE’s).

2.       ACTIVITY / VOLUME: Pay per unit of activity within a volume range (i.e. transactions, documents, scans, calls). 

3.       VALUE / BUSINESS OUTCOMES: Pay based on the value a service provides.  Often a hybrid of the activity / volume model and performance measures (i.e. claims processed within 3 hrs, issues resolved in single contact).  It could also be based on a percentage of savings or growth (i.e. increased sales, reduced cost per transaction, reduced aggregate procurement spend).

An entire book can be written on the variations of these models in practice.  That being said, the slate is usually wide open.  BPO vendors often entertain any model they feel comfortable with in terms of risk, quality performance and reasonable profitability.

Here is a simple process to follow when talking to your BPO vendor:

1.       Decide what processes make the most sense to outsource.  These usually bubble up easily based on organizational strategy, pain, cost and capabilities.

2.       Define your strategic goals for the process.  Are you looking for growth, quality improvement, scalability, reduction in cost, innovation or consistency in cost per transaction?

3.       Define who you feel should take ownership and risk for that process.  Not just execution quality but process innovation, design, performance, outcomes, etc.  The more risk you want the BPO vendor to take, the more value you want them to add, the more control they will want over the process.

4.       Now define a proposed pricing model based on the above attributes.

The outcome will best represent your expectations and significantly simplify BPO vendor discussions.    

 

Consider these links:

http://www.outsourcing-law.com/2012/05/four-%E2%80%9Chot%E2%80%9D-deal-structures-and-pricing-models-in-sourcing-of-bpo-and-kpo-services/

http://www.offshoringtimes.com/Pages/2006/BPO_news1255.html

http://www.siliconindia.com/shownews/BPOs_see_better_revenues_through_new_pricing_models-nid-46430-cid-2.html

http://www.internetviz.com/psjblog/2012/07/outcome-based-engagements/

BPO: Going Deep and Wide Requires Commitment

Business Process Outsourcing traditionally has focused on high volume, low value activities.  Labor arbitrage and streamlined processes created price and process efficiencies: 

“The traditional cost centers such as HR, finance and accounting and some low-value, high-volume customer-facing functions have been the most frequently outsourced activities. In such services, reducing cost has been the objective, though the means of achieving that have evolved over time.”

 (http://www.offshoringtimes.com/Pages/2006/BPO_news1255.html)

Many companies have already outsourced cross-functional support processes.  In addition, the cost of global labor is eroding margins for BPO firms. So how are BPO providers responding? 

One method has been moving the focus to core business process outsourcing.  This will deepen the customer relationship and divert discussions from “savings” to “value”.  Value can be anything:  Market agility, scalability, global delivery capability, etc.

I often hear the words: “We want to go deep and wide.”  Yet there is little tolerance for taking on anything but the highest margin work.  In my experience with IBM going “wide” requires investment on both sides.  Customers will want the BPO provider to take over processes that THEY HAVE THE MOST TROUBLE WITH, high margin or not.  If it was easy and cheap for them to manage why would they outsource it?

Is it a matter of BPO firm contract profitability measurement?  Is it a myopic view of relationships?  My experience is customer portfolio measurement provides better outcomes for service companies.  It measures the profitability of the relationship, not individual contracts.  It allows for taking on a broader selection of processes from customers, with different margins, to lock in customer trust and relationships.  It shows the commitment of the BPO vendor to the benefit of the customer.

Don't let past experience inhibit growth!

In recent months I have discovered a disturbing trend.  There is a vicious cycle where economic risk has caused executives to become very conservative.  They are avoiding taking risks to grow their company, blaming their actions on their "experience".

Webster defines experience as:

"a :  direct observation of or participation in events as a basis of knowledge"

OR

"b :  the fact or state of having been affected by or gained knowledge through direct observation or participation"

I contend that experience is not static.  Experience is based on many variables that change over time.  Cultural norms, economic conditions, business practices, technologies available and the legal / regulatory environment are just a few.

Executives count on their experience to drive decisions.  It provides a base of stability to feel empowered, important and valuable.  It is the executive "comfort zone".  Challenging that experience means challenging the very essence of executive value.  Or does it?

It is far easier to say "no, that business is not profitable" than to say "how would you make that profitable under today's environment and would it be sustainable".  Yet how many times in the last ten years have companies redefined ways to drive profit out of their business?  Too many to count.

This is where I see opportunity lost.  Who is going back to re-review industries, processes, growth ideas and business models in light of changed variables?  These ideas are intellectual capital that has already been invested in that could drive growth.

There are numerous examples in history:

The steel manufacturing market was considered "saturated" and having "high barriers to entry".  The Japanese said "what if we use the arc furnace to recycle scrap steel?"  This fundamentally changed the process, profit margins, the supply chain model and removed the barriers to entry.

The beer industry was a highly localized, fragmented industry.  It was when Adolphus Busch in the early 1870's asked "how can we keep beer fresh to transport it long distances".  Pasteurization was applied to the process opening the door to national distributing and national brands.

Buying a software company in its "mature > decline" life cycle was once considered a catastrophic mistake.  Computer Associates thought "this is when the purchase price is lowest; what if I buy them and fund only required maintenance through the end of life".  This increased margins, severely reduced sales expenses (buy existing customer base) and provided instant brand recognition.

An outsourcing example for today:

Healthcare Payers (insurance) have been consolidating for years.  Providers started a few years ago but are in the midst of a long cycle of consolidation.  Labor intensive process like coding, collections, billing and transcription have been outsourced for decades.  Most of this work is done regionally by small businesses.

One might say "But given the labor involved margins are low."  True, if you follow the traditional labor model. 

What if you consider your company a "business process outsourcing" company instead of a "services" company.  Reduce the use of labor through automation (natural language processing) for electronic coding.  Buy the receivables at a discount (very common) and make arbitrage between the buy price and collections.  Integrate with the provider's billing systems to handle bill generation and automate distribution processes. This fundamentally reshapes the profitability of the business.

Now, take the lead from Computer Associates, BUY YOUR CUSTOMERS.  Quickly buy up the local / regional revenue cycle companies.  Eliminate overhead through centralization of administration and processing but keep the local sales rep's for their relationship.  Rapid growth and low cost of sales.  Oh, and a stronger national brand.  Now I'm getting excited!

So now you have a profitable, high volume, national business line.  Economies of scale and automation provide high margins.  A large customer base and geographical presence provide create a strong national brand.  Now cross-sell and upsell those customers and grow to the next level.



"No" is too easy.  Relying too much on experience can be detrimental.  Re-assess opportunities and reshape your experience frequently to grow the business and your career.