Current “Lift and Shift” Model
When it comes to business process outsourcing, including document processing, the overwhelming business model used is still “lift and shift” where the primary pricing model is based upon the number of staff transitioned from the enterprise to the Business Process Outsourcer (BPO). There are a number of reasons for this.
While the lower cost benefit of a “lift and shift” model is tangible, what is not so good is that an FTE-based pricing model provides no incentives for the BPO to adopt automation in order to become more efficient. If the basis for fees is on the number of staff employed to perform a service, any automation that reduces the need for manual labor effectively reduces the BPO’s revenue – even if that revenue drives higher profitability.
Another problem preventing providers from implementing alternative pricing models is the challenge of workforce quality. If a client wishes to move to a model where the focus is on delivering improved output quality or efficiency, the ability to meet those objectives puts a significant strain on workforce training and management.
Trending Away from “Lift and Shift”
A recent Everest Group webinar entitled, “Working with an Outdated Pricing Model?” highlighted this divergence of interests between BPOs and their clients. However, change is on the way, and the future lies in what is called “output-based” or “outcome-based pricing.”
Output-based pricing ties the actual delivery of a service to the number of transactions that it supports. Instead of paying a fixed FTE-based price to deliver a service such as sorting and identifying documentation, the price is based upon the number of documents sorted and identified. Outcome-based pricing is admittedly more complex since the price function is based upon a mutually agreed upon outcome such as the ability to achieve a percentage rate of savings for a given process.
Incentives for Increased Efficiency
The big impact for both of these price models is the underlying incentive for the BPO to utilize automation. Unlike FTE-based approaches, automation enhances the ability to deliver a service without impacting total revenue since the price model is not derived on the specific number of FTEs managed.
Win-win for BPO and Client
In the example of a document sorting service based upon output, the BPO would be incentivized to use automation to improve throughput as well as lower the costs of delivery. This is a win-win because the BPO client benefits from the ability to only pay for what they are getting, instead of paying a flat fee regardless of transaction volume – in the best case, they do not need to pay for underutilized capacity.
Additionally, if there are spikes in volume, the BPO is better able to handle the additional workload while the clients are not penalized as they are with the FTE model. Clients simply pay more for the additional output. Automation can also be the key to address workforce quality since much of the manual labor can be automated. This allows service providers to focus their training and retention on a smaller number of higher-compensated and higher-value staff.
Shrink to Grow Approach
Ultimately, as one Everest Group analyst put it, BPOs must take on a “shrink to grow” mentality as their clients are insisting on more-flexible, more transactional pricing with automation at the center.
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