Most IT outsourcing and BPO relationships boil down to one of two models: staff augmentation or managed services. “Staff augmentation is where the client defines a specific skill and pays the provider based on the number of hours and days successfully worked,” explains Dave Borowski, senior associate of outsourcing advisory firm Pace Harmon. “There are service levels, but you still pay by the number of hours and bodies.”
According to Borowski, the differences between the two models tend to be more clearly defined in ITO relationships. “In ITO, it’s the difference between dedicated and leveraged resources, or results based and efforts based compensation,” he says. “With staff augmentation, there is a specific scope of work and labor hours that are deliverable as output, with an acceptance of client processes. In managed services, there are a number of applications to be managed and you are paid by the number of applications.”
“White Box” and “Black Box”
In contrast, most BPO deals feature a combination of what are commonly known as the “white box” model where services offer complete visibility (hence the name) and are defined by how the vendor performs the work, or “black box” services which offer less visibility and are defined by results of the work rather than how it is performed. However, Borowski says most current BPO deals lean closer to the white box model.
“The client defines a specific skill and pays the provider based on the number of hours and days successfully worked,” says Borowski. “There are service levels, but you still pay by the number of hours and bodies.”
In contrast, Borowski defines black box outsourcing as “true managed services,” where there is a convergence of the fee structure and how success is measured. “BPO vendors want to get more into true managed services,” says Borowski. “They want the client to tell them not how to do things but what needs to be done.”
A “natural reluctance” on the part of many companies to rely on a set of standardized processes is a key inhibitor to larger growth of this type of outsourcing, Borowski says. “A lot of companies think their processes are so specific, technology is so complex and data is so sensitive that they are reluctant [to use managed services],” he says, adding that many clients are also hesitant to give outsourcing vendors the kind of access to their internal systems and processes, which is needed for a successful managed services program.
Different Models for Different Functions
Depending on the specific function being outsourced, it may work better with the black box or white box outsourcing model. Borowski illustrates the difference using accounts payable (AP) and customer-facing services as examples.
“For accounts payable, you would generally pay a vendor based on successful transactions where the right amount of money is paid to the right recipient at the right time,” says Borowski. “You wouldn’t really care if the vendor reused shared services or whether they used your ERP system or a different platform. You’re not paying by the hours but by the results.”
Thus, Borowski says AP and many of the other more mature outsourced processes that feature consistent and predictable data are better suited to “black box” outsourcing. However, some processes, such as collection and customer service, are very specific to the culture of an individual company and how it interfaces with its customer base, and are better suited to “white box” outsourcing.
“A dedicated (outsourced) organization that embodies the philosophies and interactions of a specific company, where you have dedicated resources that live and breathe them day to day, is better suited for these type of processes,” says Borowski.
A Managed Future?
While Borowski hardly predicts the demise of “white box” BPO, he does expect that as time goes on, there will be gradual industry shift to more “black box” BPO services, led by small-to-mid-sized clients.
“Small-to-mid-sized companies who don’t have a significant investment in proprietary ERP systems are generally more willing to standardize processes [through managed services outsourcing],” he says. “They are more receptive to a lower cost, pay-as-you-go model and less likely to believe their processes and systems are so unique and novel that managed services won’t work.”
Borowski also says that as a company gains more experience buying services, it generally becomes more receptive to the managed services model. “If you are new to outsourcing, you haven’t gone through the process yet and the vendor hasn’t built up the trust and reliability yet,” he says. “In a more mature outsourcing relationship, you realize that the provider is pretty good at segmenting work and innovating and renovating processes for an optimal outcome. By looking across their clients, managed services providers can find innovative methods and technologies to create a positive benefit.”