Suitable pricing models for business process outsourcing

Suitable pricing models for business process outsourcing

In many business discussions and negotiations, pricing ends up being the make, or break variable. Among the many qualitative criteria that buyers and sellers evaluate, pricing stands out for its objectivity. It is a number, and hence leaves no room for ambiguity. It means the same thing to all people, even though the attached conditions and qualifications could connote different meanings to different people.

And it translates into revenue for one party and cost for the other, the two most important numbers in the life of an organization. The reason why they are created and nurtured.

The challenge arises in pricing because the two parties are ranged on opposite sides of the fence and benefit from diametrically opposing movement of the number. For one, the client or buyer, cost needs to be minimized while for the other, the service provider or seller, the revenue needs to be minimized. Of course, when the intent is there, companies find many ways of navigating these challenges which is why there are perhaps millions of business contracts that are in effect in the world at any point of time.

Many companies sacrifice value for price, as the value of value often cannot be converted to a number. It is a judgment. Many executives are loath to take a decision based on judgment as the cookie crumbling the wrong way is likely to bring their capability into question. A decision based on numbers, therefore, is easy and also easy to justify. There is no judgment involved.

The business process outsourcing (BPO) industry is no different when it comes to business contracts and negotiations. However, pricing models for business process outsourcing have evolved, even as the industry has continued to grow, prosper and mature. These provide a great starting point for new engagements, without the need to invent the wheel again and again. Any modification required can be built on top of one of these models.

The pricing model of oWorkers gives a choice to clients between different models; they can choose the one that suits them. We have to say that we have not come across a client who does not like this model.  We are able to do this because our pricing is transparent.

 

Standard pricing models for business process outsourcing

Input based model

As suggested by the name, the focus is on the capacity that is made available for the client’s project which also becomes the variable on which the pricing is based.

In this model, skill-based pricing is the focus of the negotiations. For each skill, a price point is agreed. The second, related variable is the capacity. For the agreed work, how many people, or hours of work per day or per week, are required.

As an example, say they agree on $10 as the rate per hour for handling customer service voice calls. They would also agree on how many people, or hours the vendor will provide for the service. A tracking mechanism might also be included in the contract along with penal and bonus provisions.

FTE, or full-time equivalent resources, is the most common method of specifying the capacity requirement. Once it is agreed, the vendor becomes responsible for factors like leave and absenteeism. The skill level and other qualifications required are also specified.

Though this may sound like an arrangement where the vendor works as a recruitment partner, it is much more than that. The specification of required resources is to cater to the expected volumes. The vendor also has responsibility for the performance of the resources being provided. While the client is actively involved in the operations, the contract usually has rewards and penalties based on the team’s performance. Among pricing models for business process outsourcing, this continues to be a popular model.

As a preferred employer in the communities our delivery centers operate from, oWorkers attracts a steady stream of walk-in job applicants. It prefers to work with employees, and not contractors and freelancers as some of its competitors do. This creates flexibility in deployment and creates a supervisory layer of committed resources.

Output based model

The name makes this model also reasonably clear. The focus here shifts to production, or output, from the capacity focus in the earlier model with a rate being agreed per unit of output.

There is greater complexity in this model as the vendor has little or no control over events that trigger volumes that require vendor processing for producing the output. As such, the output-based pricing model usually comes with certain boundary conditions being agreed with regard to the minimum and maximum volumes to be expected.

Continuing with the call center example, and it is perhaps easiest to use, being the most standardized offering in a BPO environment, the client, based on past trends as well as their new initiatives, will provide an estimate of possible calls to be received. The vendor is expected to handle within a given range of the forecast, with penalties for breaching the minimum and rewards for handling more than the peak of the range.

The volume-based arrangement, once again, is overlaid with performance standards. While the volume drives the arrangement, performance standards are also important.

oWorkers is well equipped to expand and stretch time to maximize output. All its centers are equipped to operate on a 24×7 schedule if required. Time zone differences also, sometimes, enable overnight processing of work.

Outcome based model

Among pricing models for business process outsourcing, the outcome-based model is considered by many to be the most mature model. It is often believed that the input and output-based models are merely steps of the ladder till the relationship reaches a point when it can upgrade to the outcome-based model. It is based on pure performance and eschews surrogate variables such as input and output. The variables of interest to the client, that they would themselves use to measure the effectiveness of the function, are usually the measures adopted as the outcome variables on which the pricing rate is based.

In our call center example, with an outcome model, the contract might define customer satisfaction as the variable on which the pricing is dependent, instead of how many calls they were able to handle.

Unfortunately, in many cases, there are so many other factors that can influence the outcome, that this model gets ruled out. Though it is popular in the ‘product’ BPO space, in the ‘service’ BPO sector very few contracts make it to this point.

With its partnerships with technology companies that have survived and flourished over time, oWorkers can access the latest technologies for client projects. This creates good outcomes for all parties involved.

 

Determinants of pricing

While pricing models for business process outsourcing are important to understand, it is also important to understand the variables that go into the price itself, and makes it high or low:

Salary

Manpower is the greatest dependency for providers. They pride themselves on having access to deep talent pools that are available for work at reasonable rates that don’t break the bank. From time to time, they also uncover either new talent pools or develop strategies to reach deeper into the pool.

Salary cost of people assigned to client projects is the largest, by far, direct cost for BPOs, generally accounting for more than a 50 percent share. Working within regulations for minimum wages which most jurisdictions have, from a vendor’s point of view, a lower salary works better than higher

oWorkers operates with local registration in all its centers. We pay local and social taxes for our employees and are well placed to compete with local employers for the best resources at the best prices.  

Attrition

Attrition has long been a bugbear of the industry and needs to be factored into all pricing models for business process outsourcing companies. Many companies have tried many different methods to stem attrition, but with only marginal success, at best. They have come to recognize it as a ‘feature and not a bug’ and try to do the best they can given the situation and tools. Now the effort is focused on reduction rather than elimination, while hiring employees likely to last longer based on past data and experience.

That being said, attrition creates a huge drag on cost as there is cost not only in finding replacements but also in training and equipping them to take the place of the person who left. Keeping attrition low goes a long way in delivering a strong Income Statement.

oWorkers regularly received employee feedback on independent platforms such as Glassdoor. We are proud of the fact that both present and past employees routinely rate us above 4.6 on a scale of 5.

Training

One of the reasons why the BPO industry has been successful in taking up work and doing it more efficiently and cheaply is their ability to deskill jobs and break them into smaller components that can be taught to people to perform as repetitive tasks.

The other major reason is their ability to train people. Training, in fact, might be one of the unsung heroes of the success of the industry.

But training is also a cost. In many engagements, the burden of hiring and training, especially for replacement of people leaving, is on the vendor. Since attrition is a significant factor, training is also a recurring requirement and hence, a recurring cost. The more efficiently the training is delivered, the better it is for the financial position of the company.

By providing quick turnaround for short-term requirements of clients, oWorkers perhaps saves a huge cost for them that is not even factored into the calculations. We can hire an additional 100 resources within 48 hours who can be made ‘fit’ thanks to the efforts of our training team.

Supervisory and support staff

This may or may not be a part of direct cost, depending on the accounting practices of the company. The amount of support required in the project contributes to cost. Some of it may be defined in the contract, while some may be an effort on the provider’s part to ensure that they are able to deliver the required standards.

As a simple example, everything else being equal, if one project requires a supervisor to manage 20 frontline staff members, while another requires one to manage 10 frontline staff members, on a per unit of FTE, or staff, basis, the second project is a higher-cost project. That, in itself, is not an absolute criterion. It is possible that the second project is more complex and also generates more revenue for the vendor. Hence, an overall perspective is important. What we are saying, however, is that the second project being a higher-cost project should be recognized.

With the help of a policy that encourages a multi-ethnic and multi-cultural workforce, oWorkers is able to offer multi-lingual support to clients in 22 languages.

Technology

Though a key enabler for the industry, over the almost three decades of globalization of the industry, technologies have become standardized and reliable. Many operators, in fact, offer plug and play facilities to BPO companies in case they need to accommodate some overflow from their regular ones.

Of course, the one additional aspect that providers need to bear in mind is the provision of virtual services, which have become acceptable and commonplace. If these are offered by the vendor and if it is a need for the client, is there a different pricing engagement that needs to kick-in or is it accommodated within the overall pricing models for business process outsourcing in place.

With the standardization of technology, security has emerged as a concern. oWorkers operates from

Super secure facilities & protocols designed to maximize data security with ISO certifications (27001:2013 & 9001:2015). We are also GDPR compliant.

Infrastructure

Infrastructure has become fairly standardized in terms of workspaces. Based on the industry and location there would be a worker seat for a certain amount of floor space. Defined services and spaces for washrooms, refreshments, breakouts, conference rooms etc. would be built in. Wiring and cabling will follow fairly standard norms and we will be up and running.

Some provider locations, on account of certain aspects of infrastructure not being fully developed or reliable, require additional components of expense. It could be in the form of diesel power generators to make up the shortfall in grid-supplied power. Or, it could be the provision of a pickup and drop facility for employees, especially those working off-peak hours such as night shifts. The vendor needs to be conscious of these expenses and ensure these are baked into their costing models.

The 20 years of hands-on experience our leadership team possesses is evident in the setting up of our infrastructure that is designed to maximize utility for clients at the lowest cost.

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