Guiding Principles of Outcome Based Pricing in BPO

The worldwide economy shows sluggish growth numbers. Global corporations are posting modest earnings growth. What does this really mean to Business Process Outsourcing (BPO)?

• Leadership must not only produce more with less, but they also have to ensure that they are clearing their internal ROI hurdle, as well as realizing their forecasted rates of return on capital projects.
• To address this need from customers, BPO service providers have become even more creative and innovative with the financial engineering aspect of pricing. Questions are now being asked, more than ever before, about the feasibility of outcome based pricing.
• Corporate management needs to more directly link investment dollars to the velocity of savings. Outcome based pricing, or contingency based pricing as commonly called, can be a pragmatic means of achieving these objectives.
• Before heading “full bore” into a BPO agreement with outcome based pricing, there are a few basic principles that lend themselves to the full comprehension of the dynamics of this type of arrangement and its practicability for a BPO project.

Think of these guiding principles in the acrostic ACE… Applicability, Calculability, Enforceability.

Applicability – How strongly interrelated is the outcome to the scope of services being performed? Will the outcome be materially impacted by the proficiency of service delivery? This is the most difficult assessment to make, specifically related to BPO. To date, the evolution of outcome based pricing hasn’t been commonly demonstrated in many BPO towers (HR, Legal, F&A); however momentum is building for outcome based pricing with respect to Strategic Sourcing (managed services) and Call Center solutions.

Calculability – Is the outcome of services being delivered definitively identifiable and quantifiable? Whether the outcome is savings or other business metrics, there should be clear definition with respect to the calculation. For example, as related to strategic sourcing managed services—-what exactly is “realized savings”? What are the measurement periods?

Enforceability – What contractual conditions are being leveraged to enhance the likelihood of the desired outcome? An important caution here is that this driver is not the “run of the mill” service levels agreement (SLA). The main idea is to not only impact price, but to also influence the viability of the contract life, through “push and pull” terms for both parties.

As the market continues to mature, anticipate more and more BPO deals to incorporate some element of outcome based pricing. To take full advantage of the benefits of BPO, business leaders must stay on top of evolving advancements in pricing and service delivery in order to take full advantage of the benefits BPO can bring to their business.

To learn more about Wavestone US’ Demand Management services, visit http://thinkwgroup.com/services/demand-management.