Is Outcome-Based Pricing in BPO Here to Stay?

The recent rise in the number of contracts containing outcome-based pricing models provides obvious benefits for buyers in the contact center industry. These agreements, which reward service providers …

The recent rise in the number of contracts containing outcome-based pricing models provides obvious benefits for buyers in the contact center industry. These agreements, which reward service providers for meeting specific objectives, can prove mutually beneficial by encouraging better results and enabling sellers to increase their earnings, but that is not always the case. Although this model is evidence of a closer strategic relationship between clients and service providers, its continued growth may be stemmed by the fact that the sellers have to assume almost all of the risk involved.

The aim of outcome-based pricing is to provide incentives for service providers to achieve certain goals, while reducing risk from the buyer’s perspective by limiting costs if their aims are not met. “Outcome-based pricing is a very fast-growing area within contact center contracting models and I think that’s important because it tells you that the goal of the contracts has changed and that the perception of service providers is better aligned with the business outlook of the client organization rather than being just a cost-saving mechanism,” Katrina Menzigian, Vice President of Research Relations at Everest Group, told Nearshore Americas. “This whole concept of outcome-based pricing has been growing in the BPO space for about five years and in contact centers we’ve noticed a bigger pickup in the last two to three years.”

Bob Dechant, Chief Sales and Marketing Officer at Qualfon, believes that this trend has emerged because the prices of outsourcing contracts have dropped as far as they can. “People have been offshoring now for a long time and there’s not much room for negotiation for lower price points,” he told Nearshore Americas. “The outsourcers and their clients have gotten to the point when they realize there’s no more room to take the price-per-hour down any lower and have the outsourcer make a profit, which they need in order to reinvest in the business. There’s no more wriggle room so what you’re seeing now is people trying to be creative.” In this context, outcome-based pricing is growing more popular because it enables buyers to pay even less if their vendors are not performing well, while guaranteeing that they only have to pay top dollar if their goals are being met.

Measuring the Metrics

The outcomes that buyers typically want to achieve differ depending on whether they are outsourcing sales or customer care, Dechant said. “The three key metrics on the sales side are close rates, average order spend, and the other one is revenue-generating units, which is very common in the telecom world. They’re all really based around generating revenue.” On top of these are the typical call center metrics like service level, handle time, quality experience, but “those are just a given, you have to do them to be effective,” he added.

“The metrics on the care side are a little bit harder to define, but they’re often more around quality experience,” Dechant said. “Again clients are moving away from the more one-dimensional metrics like handle time and service level and towards the important ones as they see it, which include quality, customer experience, net promoter – all similar things around enhancing the value that the customer has with their brand.”

Such metrics must be very clearly defined in the contract because measuring them can be complicated. Service providers must agree with their clients whether the outcomes are to be measured internally or externally, through surveys for example, Dechant said. While the metrics on the sales side are easily definable and measurable, some of those on the customer care side can be somewhat ambiguous. For this reason, incentives account for anywhere from 10% to 100% of pricing in sale contracts, but in care they are typically limited to around 10%, he explained.

Other outcomes typically linked to financial incentives in outcome-based contracts include churn, growth in a particular product line, client satisfaction levels and collection achievement, Menzigian added. Many of these metrics are measured in ranges “because business outcomes typically involve some fluidity,” she said. Most contracts involve hybrid payment structures rather than 100% outcome-based pricing, Menzigian said, explaining that “part of it needs to be fixed to cover the expenses that the service providers are incurring and then part of it is incremental.”

Who’s Buying?

According to Everest research, 34% of all contact center contracts signed in the last two to three years used some kind of hybrid pricing model. Of these, 69% included some kind of outcome-based component, Menzigian said. This means almost one in four of all contact center contracts now contain some degree of outcome-based pricing.

“The range of buyers involved in outcome-based contracts is fairly broad,” Menzigian noted. But they tend to be companies that “are very mature in their outsourcing processes” and that want to improve their customer experience.

According to Dechant, outcome-based contracts are “probably most prevalent in the United States because among the buyers here there are a lot of long-tenured, very sophisticated clients that have been outsourcing for a long time and they’re using this as the next evolution of the model. Those buyers push the vendors pretty hard. That’s not to say you’re not seeing it in other markets, but that percentage of outcome-based pricing is probably highest in the United States.”

Denchant has observed two distinct buyer profiles. “One is the very, very experienced outsourcer that has had a lot of interaction with a lot of service providers and they’re very mature in their relationships and they’re trying to move to the next level,” he said. “Then there are novices who are very early into the game and they might have got some information from a consultant.” These are much riskier potential clients because they have less experience in defining metrics, he noted.

Menzigian agreed that it makes little sense for sellers to enter into outcome-based contracts with new buyers because this is “something that involves a closer working relationship and a sense of mutual gain. I don’t think it’s the kind of thing that you would be using in a brand new relationship, I think it’s something you grow into, so as the relationship matures you can open up discussions around ‘what are we going to tackle next and how can we make it effective?’” Menzigian continued: “If the relationship expands and you have a combination of transactional services and volume-based services and the contract becomes more complex then you’re entering the kind of environment where outcome-based pricing potentially becomes part of the conversation.”

As outcome-based pricing is still only an emerging trend, the major service providers typically find the number of buyers that are interested in adopting the model is much greater than the number that are really able to take advantage of it in the end, Menzigian noted. “There are many cases that we hear about where the clients go through the whole process to do outcome-based pricing, they negotiate prices and everything but they just can’t get to the point of signing the contract,” she said. This is because the model is not suited to all clients, and sellers must be very careful about who they do business with in order to minimize the risk that they are exposing themselves to.

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Risk Assessment

There is an inherent degree of risk within all outcome-based contracts, Dechant stated. This means service providers must do a lot of due diligence to understand the metrics and the objectives that they can be held accountable to. “If you’re not performing well then those contracts will mean that you only break even or you’re actually losing money. That’s not a sustainable model so it forces you as an operator to deliver and it forces you to do a lot more diligence on the front end,” Dechant explained.

“First you need to determine what kind of work it is. Is it sales work or care work?” he continued. “The next thing you need to understand is what the current operating levels are. Are you looking at the actual performance of today’s partners or are you looking at aspirational goals? Are you being held accountable toward unattainable goals? There’s a fine line between improvement and aspiration. (In an outcome-based model) you need a lot more two-way discussion and early diligence in order to understand the objectives.”

When it comes to due diligence, service providers must verify that their “client’s contact center or customer care operations are mature in the core areas. Then you can build on that and tie the contract and the payment to these more emerging outcome-orientated models,” Menzigian said.

As a service provider you’re looking for a client that you think is reasonably mature in how they work with relationships with their service providers, how they manage the process, the kinds of programs they have in place with their contact centers, because the service provider is looking for a match that gives them some confidence that the client truly understands what they’re getting themselves into and what it involves,” she explained. “The service providers are putting their compensation at risk. It takes two to tango and the client needs to be the kind that can fulfill its share of the obligations and has an environment that is likely to yield the kind of process changes needed in order to make the outcome-based pricing work.”

Simply put, if the arrangement does not have the potential to be mutually beneficial for both parties then it is not going to work out in the long term. “I tend to find that it has to have a combination of benefits, otherwise it doesn’t have longevity, so that’s why the pure outcome-based model is very difficult to make work and it doesn’t really happen very much, because all the risk is being taken by the service provider and not by the client,” Menzigian said. “So that’s why you typically find a hybrid kind of environment.”

Is This the Future?

“It’s important to mention that this is an area that’s gaining attention and the adoption is picking up but it’s certainly something that’s not mainstream right now,”  Menzigian stated. Nonetheless, she believes outcome-based pricing “will become more common because more and more client organizations are really interested in developing compelling analytics and creating closer partnerships with their outsourcing service providers. They understand that you have to look at the whole package of the business impact you’re trying to create and I think that outcome-based pricing is an extension of that thought process.”

For Dechant, the future of this model depends on how well service providers can adapt to it. Outcome-based pricing will become more common “as long as the providers are able to be successful,” he said. “But some aren’t. There’s going to be fallout, there’s going to be some contracts that really impact those outsourcers that are struggling financially and if you have a sizeable contract then that can go upside down and put a lot of strain on your business.”

Service providers need healthy partners who understand that they must be successful financially in order to enjoy a productive relationship with their clients, Dechant added. Do outcome-based contracts facilitate such a relationship? “I think the jury’s still out on that,” he said. “It’s still early, but if it ends up being just another way of getting further price decreases, even for your performing vendors, then the model is going to have to adjust itself. But at the end of the day, if the performing vendors are able to use this as a way to drive more profitability through results then it will continue to grow.”

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