The end of the first or second generation of outsourcing is a time when enterprises are eager to explore creative pricing constructs. They want to know the services they are paying for directly contribute to their business objectives. A growing number of these companies are looking to Business Process-as-a-Service (BPaaS)—and its associated outcome-based pricing—as a means to improve their service delivery and performance. It’s an emerging trend that’s worth exploring, but those who do will find reexamining their service level methodology is essential to getting the most out of the new model.
The benefits of labor arbitrage and economies of scale from outsourcing have been built into business budgets for years now, but in many cases the business has become disconnected from IT in its measurement of performance. Indeed, it’s difficult to determine value from a service provider on the back end of an outsourcing deal. This is where we most often see the “the watermelon effect”—service levels are reporting green, but stakeholders are seeing red. The watermelon effect is a clear sign that service levels are 1) not measuring what is important to the business, 2) not capturing service deficiencies or 3) not validated by operations.
An effective service level agreement (SLA) is meant to align the service provider’s operational decisions with the client’s business needs and provide a quantitative measure of actual performance. As companies move to BPaaS pricing constructs, they may be surprised at how quickly—and drastically—their interpretation of satisfactory service levels diverges from the service providers’. In this context, traditional SLAs—those requiring measurement only at the end of a defined period and those not tied to business outcomes—become almost completely devoid of meaning.
With outcome-based pricing, end-to-end service levels are fundamental. Instead of merely measuring output, such as mean time to respond, new SLA methodology measures outcomes that are more tightly connected to the business, such as the number of health care claims processed without error, and it measures them proactively throughout the measurement period. Reporting a failure to achieve service levels at month-end is no longer enough.
We know service levels that punish subpar performance inevitably discourage provider flexibility and create a downward spiral for the relationship. Instead, service levels in a BPaaS environment should do six things:
- Align with business outcomes;
- Be measurable throughout a period of time, not just at period end;
- Establish objective measures of quality service;
- Proactively guide the provider by setting targets in advance;
- Be adaptable enough to leverage technology and business needs without renegotiation, and
- Encourage continually improving provider performance year after year.
A company can address the fact that service levels are not well-understood or owned by the service provider with some simple tools, and by assigning clear responsibility. Click through the deck for my recent webinar Managing Service Providers for Today’s Digital Business here to learn how SLA methodology is evolving toward outcome-based pricing models and how software tools can automate and standardize these important measurements.
Contact me to discuss how ISG can help you determine if BPaaS and outcome-based pricing are right for you.