It is not news that buyers and providers need to recalibrate their contractual relationships within the context of the evolving BPO services landscape. The challenge, however, is to determine the correct approach. Everest Research has stepped up to the plate, offering detailed advice on how outsourcing relationships can be taken to the next level.
“Cost reduction is now table stakes,” says Saurabh Gupta, VP of BPO research at Everest. “Relationships that started three to five years ago have not kept up, and people now need to see how to value next generation models such as business process as a service – known as BPaaS – as well as cloud, analytics, and robotics.”
Everest has found that outsourced relationships typically deteriorate in value over time as buyer-provider objectives begin to diverge. A buyer wants to contain outsourced spend, whereas a provider is looking to grow work volume. Then pricing, service levels, and technology adoption begin to lag.
“To fix this, we conduct something called a strategic engagement review, or SER,” says Gupta. “We start with a solution review, followed by a contract and delivery metrics assessment, and then cost and price benchmarking.”
Analytics has proven to be a game changer – it can bring the false positives down to between 40 percent and 50 percent.”
In a recent strategic review of their clients, Everest found that most had some functional abilities for finance, administration, and human resources, but that the organizations were weak in technology, analytics, and governance.
“Governance is very important, but we rarely see it,” says Gupta. “There are examples of investments in relationship governance, but rarely at the enterprise level, where we would see a center of excellence that manages all contracts across the relationship.”
The result is a poor communication, which then makes it harder to implement a strategy. The answer is for the scope of service to be more process driven, and to leverage analytics to get the job done. Everest has found that BPaaS brings the biggest savings for smaller clients, but larger organizations can also see a measurable reduction in total cost of ownership (TCO).
“Anti-money laundering in banking is a good example,” says Gupta. “Most banks will have suspicious activity reporting in place, but only 10 percent of alerts might be real, and the other 90 percent false. There is a lot of time, money, and effort spent working through that 90 percent. However, analytics has proven to be a game changer – it can bring the false positives down to between 40 percent and 50 percent.”
The end result, according to Everest, is that overall BPaaS delivers between 10 percent and 14 percent reduction in TCO when compared with traditional BPO. And though SMBs saw a bigger return across the board, larger organizations benefitted, too, particularly in banking, insurance, and healthcare.
The customer could be happier
Whether it is in terms of the pricing model, gain sharing/incentives, performance metrics, or terms and conditions, Everest has found a high level of customer dissatisfaction with contracts.
“Sometimes contracts get too wordy qualifying what people want,” says Sarthak Brahma, VP for pricing assurance at Everest. “Automation and standardization can help, but not if the focus is on bringing down cost as opposed to business optimization.”
One problem, says Brahma, is that key performance indicators (KPIs) tend to be lopsided, with more enforcement for either the provider or customer.
“Maybe at the start they needed it to be lopsided, because processes weren’t standardized, but when you hit a steady state there might be reason to ensure you are playing to the middle ground,” says Brahma.
The solution is to move away from a flat pricing model for the entire contract, and to create hybrid pricing structures that include performance incentives. Performance metrics can then move up the value chain, from straightforward timeliness and throughput, to accuracy and quality, and finally to customer satisfaction aligned with business outcomes.
“To get there, it makes sense to tie pricing to specific scope areas,” says Brahma. “Cost and price calibration then become important issues, as does transparency and mechanisms for price adjustment.”
In this context, a best practice is a TCO view to pricing calibration, as opposed to one that takes a tactical view of rate cards. This way, costs can be annualized by the buyer, and an understanding of underlying drivers, interdependencies, and trade-offs can result in contextualized pricing. The result might be a change in the offshore/onshore blend, staffing adjustments, and changes to cost-of-living clauses.
“The important thing when renegotiating is not to leave these considerations to the last moment,” says Brahma. “You need ample time to plan for this. You need to re-assess rates and skills definitions. Are fixed costs about base charges, or could some of them be variable? It might just be a matter of categorization.”
Having the ability to measure and monitor KPIs for staff is a huge advantage, particularly if a buyer wants to shift to a model that is more clearly focussed on business outcomes. Ideally, the result is then a clearer view of a workforce that can be understood both in terms of cost take out and value creation.