Tuesday, July 8, 2014

Pretenders Beware

There’s a new warning flag flying in the ITO/BPO industry.  If you’re a Client of one of the prominent services providers, I bet you’re hearing the term “transactional pricing” a bit more often than you have in the past.  Let me help to decode this term for you.
Starting with our “point of departure”, it’s quite common for companies to define their outsourcing arrangements as being “staff augmentation” or “offshore labor”.  Both of these terms refer to the convention of “paying for effort” or some similar means of contracting with a third-party to perform a well-defined task using less-expensive resources.

Effort-based contracting isn’t the only type of outsourced arrangement, but it’s more common that most people know.  In fact, for many functional executives in HR, IT, Finance, or Customer Care roles, this is the only form of outsourcing they know.  And, they love it.  It provides the ability to reap the benefits of less-expensive labor without the burden of actually industrializing the work processes. 
If any of this is news to you, there’s a nice description of what you get through out-tasking here.  You can look at your existing “outsourcing” contracts through the lens offered by that definition and determine whether your service provider is truly delivering an outsourced service.

Effort-based contacts often operate through Service Level Agreements (SLAs), so don’t let that fact obscure whether or not the contract is yielding a defined service.  Out-tasking SLAs often relate to time required to fill positions or process transactions that are Client-defined.
With that as context, there seems to be an ever-increasing hum around the shift to outcome-based arrangements as the “point of arrival”.  Sounds good, right?  Outcomes are things that we can measure in terms of value, as opposed to effort-based costs. 

Well, here are a few observations from the real world that might surprise you:

1)     The push for outcome-based contracting comes almost exclusively from the service providers.  Clients who are using out-tasking tend not to initiate the shift to a different form of buying.  Providers, on the other hand, see this as a way to improve their profitability and cement their relationships.  When I ask why Clients aren’t biting on the shift, I am told of two reasons:

a.     Lack of confidence that the incumbent provider can/will bring anything different than the same services under a different packaging; and

b.    Lack of Client management comfort with buying Services that would be implied by contracting for transactional Services.

2)     Transactional Pricing is NOT the end game that Clients are seeking.  Those companies that can see their way towards adopting true subscription-based services (see below), aren’t falling for the offer to convert effort-based work merely through pricing changes.

3)     Subscription-based Services are defining the expectations of progressive buyers.  There are a few straight-forward questions being asked of ITO/BPO service providers who are asking for the opportunity to be paid for outcomes:

a.     How many “subscribers” do you have for this Service?  (This implies that the Service is serving a market, and is not a bespoke solution)

b.    Can I subscribe/unsubscribe to the Service without undue penalty?

c.     Are all aspects of the Service delivery on the provider’s balance sheet (e.g., systems, software, etc.)?

d.    Are there well-defined interfaces between this Service and other enterprise functions/processes?

e.     What is the business case for converting from my legacy mode of operation?

f.     What is the volume-sensitive pricing schedule for this Service?
The sophistication of enterprise buyers – through functional leadership and Supply Chain professionals – to contract via subscription-based models is accelerating dramatically.  Questions like the ones I’ve outlined above are being asked of incumbent providers of effort-based work.  And, they don’t think foremost of their incumbent out-tasking providers for this sort of relationship.
It’s not acceptable for an incumbent service provider to merely offer “transactional pricing” in response to these new expectations. 

So, beware of the term “transactional pricing” as this is hardly sufficient to win in the “as a service” economy.

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