Nagendra P. Bandaru
These days, all of us live a digital life. We drive, guided by our talking sat-nav systems, our smartphones let us video conference at any time across the planet and our wearable health monitors tell us how many calories we have gained today!
Fast-evolving technology landscapes, dynamic economic environments and increasing customer demands are changing the world like no one ever imagined. This has created the need for modern day businesses to rethink the way they operate. They are no longer looking for only cost savings and service improvements. They need a lot more to stay ahead of the competition and satisfy the digital-savvy customer. Recognizing these needs is leading to the emergence of new and robust pricing models to meet changing customer expectations.
For long, businesses wanting to outsource their non-core processes followed the traditional Fixed Price Model or the Time and Materials (TnM) Rate Card Model of outsourcing. Here, these companies would pay service providers for back office operations like, managing servers, developing applications, monitoring networks, etc. at a fixed price or for the time or costs incurred. In such contracts, the payment to a service provider was estimated on an average FTE rate-per-hour, irrespective of the outcome of the project. Companies were mostly concerned about service providers meeting their operational KPIs (Key Performance Indicators) determined by the service levels, cycle times or the time taken to manage a transaction. The project requirements were well-documented and, typically, did not change during the course of the project implementation. In short, the responsibility of delivering quality customer experience continued to lay with the organization itself and not the service provider.
However, much has changed in the last ten years. With the number of service providers increasing exponentially, innovation in services grew alongside. Today, price is no longer the deciding factor for outsourcing processes. Enterprises are expecting more value in terms of lower risks, better benefits and overall output. And, service providers are being billed proportionate to the actual outcome delivered by them – such as support incidents addressed, defects fixed, test cases completed, etc. This enables enterprises to seek ROI on every dollar that they spend. They now look to their service providers to deliver business outcomes.
In response, service providers are going beyond managing processes to establishing innovative, non-linear and agile business models. One that has gained tremendous traction over the years, the Outcome Driven Pricing Model, focuses on business outcomes instead of activities or tasks accomplished. In this Model, Service Level Agreements (SLAs) and KPIs become table stakes. Companies choose to variabilize fixed costs of outsourcing and, as a result, the onus of managing costs for higher margins lies squarely with the service provider, and not the enterprise. This new pricing model forced service providers to bring in innovation to help enterprises achieve growth targets for their businesses. This means that service providers now have their skin in the game and are taking on bigger risks to guarantee clear outcomes and not just an output to the organisation.
In pursuit of market success and customer satisfaction, enterprises are also exploring a hybrid model that combines Fixed Price with the Outcome Driven Model. What this means is that while service providers are paid per FTE or per transaction, a large portion of their revenue is also linked to the outcome of the business. Enterprises have the benefit of managing their processes through service providers at the lowest cost possible. However, this put tremendous pressure on service providers to reduce their investment cost in the business, which led to investments in digital technologies as an important lever to increase efficiency. Service providers tapped into their domain experience to develop innovative digital solutions that cut costs effectively, resulting in a win-win situation for both them and the companies they serviced. One of the first steps was to automate straight-through-processes (STP) from initiation to completion of a transaction. This not only saved costs but also made processes more agile.
Deep domain knowledge and process expertise became critical to the success of the new model. Service providers are now expected to offer the right solutions that increase efficiency, reduce operational expense, and ensure faster time to market with high return on investment (ROI). This called for standardized yet highly configurable services, which allows businesses to even out transactional and legacy systems globally, while shedding the burden of backend operational processes and steering the focus to value creation.