As the outsourcing industry evolves, enterprises continue to raise the bar on what they expect from their services providers. While cost arbitrage and access to talent remain important, the maturity of the business process outsourcing industry and the availability of improved artificial intelligence mean enterprises want higher operational efficiency and more direct impact on business outcomes.
Offering these benefits can help a service provider stand out from the competition. A buy-side client can gauge a service provider’s confidence and maturity by its willingness to embrace and offer emerging pricing models that re-balance the risk-reward equation between the two parties.
By incenting certain behavior, two such pricing models—transaction-based pricing and outcome-based pricing—offer opportunities for both parties to derive greater potential value from the outsourcing relationship. Though these two models have been proposed for some time, we are seeing more and more sourcing contracts and mature existing relationships employ them successfully.
Transaction-based models involve pricing by unit of output, such as invoices processed, customer accounts reconciled, insurance claims processed or checks disbursed. In this way, output—not input or effort—becomes the measure for billing, and the service fee is decoupled from the number of full-time equivalent (FTE) employees. Outcome-based pricing ties service provider fees to metrics that are directly relevant to the business, such as customer churn rate reduction, customer satisfaction, incremental revenues earned and cost savings.
Transaction-based pricing is applicable when the service can be easily disaggregated into a finite set of standard transactions, when the enterprise needs to scale rapidly, or when FTEs are a relatively small proportion of total costs. Outcome-based pricing works best when service providers have mature operations and end-to-end control of the particular process in question.
Most often, these kinds of nonconventional pricing constructs come with time in an outsourcing relationship, after the parties have formed a trusted partnership and when the FTE-based model has run its course. Even so, successful pricing model experiments usually start small, with carefully selected process areas, and gradually expand in scope.
Because non-linear pricing incents the provider to apply its best practices and tools, it is possible for both parties to achieve higher margins. Governance in these models involves managing results and milestones instead of service provider resources and leverages service provider capabilities for higher business impact.
Helping enterprises and outsourcing service providers think through the nuances and applicability of such pricing models is one of ISG’s core competencies. To learn more, read this ISG white paper, Dynamics of Emerging Pricing Models in Business Process Management: A Perspective on Current Prevalence and Future Adoption, or contact me.About the author
Dinesh is a highly experienced and well-respected advisor in the outsourcing industry with more than 23 years of experience in management consulting and outsourcing. He works with enterprises to craft sourcing strategies, structure and negotiate complex sourcing transactions and design and implement sourcing governance organizations. Prior to joining ISG, Dinesh worked with Infosys and Accenture, where he led large transition programs and consulted on IT strategy and implementations, business process-reengineering and operational improvement programs. He is a published thought leader and a regular speaker at industry conferences. Dinesh manages the ISG India Business.