Having sold more than $980 million in outsourcing deals in my career and having played a key role in structuring more than $22 billion in outsourcing deals across every industry and virtually every process, it seems the more things change, the more they remain the same.
I won’t add to the dizzying array of endless terms Business Process Outsourcing (BPO) companies develop to differentiate their offerings, but in this article I’d like to discuss some of the commonalities across all of them.
Introducing Value-Based Pricing
I started my career selling large ITO deals. But there was a certain sense that if we did not fix the core process that IT was supporting, we could be doing the wrong thing exceptionally well, or maybe just your mess for less.
My employer was one of the pioneers of the BPO industry long before Forrester Research coined the term “outsourcing,” which has been in place for the last 30+ years, and long before India appeared on the scene back in the early 2000s. In the early 1990s, this company was instrumental in helping Cadillac win the Malcolm Baldridge Award for Quality through its BPO agreement, wherein they managed the Cadillac Roadside Assistance Program.
With their win and success at the City of Chicago Parking Enforcement Authority, they ushered in the era of Value-Based Pricing, a sort of gain-sharing on steroids. To this day, this BPO contract is a textbook example of how to structure the mythical “win-win” contract for amazing results.
The initial RFP was for newer, faster mainframes. The solution was an entirely new approach that netted the city hundreds of millions in unrealized ticket revenues, and for them, they were paid handsomely but appropriately for their role in developing and delivering the innovative solution. Kudos to the City of Chicago. They found the Holy Grail: Outsource for the result and let the provider figure out the best solution.
But that assumes one knows what the real problem is that needs to be solved. Usually, RFPs are about contracting for activities. These activities are reduced to the most basic component parts and auctioned like commodities. This is a process known as “contract leveling” in which the buyer assumes the suppliers are basically all the same and cannot add value other than expense reduction, so they have them do the pricing limbo dance. In quality circles, this is referred to as a “sub-optimized process.”
I was SVP of Sales for the Outsourcing Division of the company that developed the RPO market as we know it today. My second day on the job, we received an RFP from the Card Services Division of a leading financial institution that wanted to reduce their cost of recruiting.
Instead of having three suppliers of recruiting/staffing services on annual contracts to keep their call centers staffed, they wanted to award one contract to one supplier for three years with a declining tier structure on the cost per hire in exchange for the increased aggregated volume.
Had we bid to the specs of the RFP, we would not have been helping them to address the REAL problem, which was attrition. Their call center attrition rate was 120% annually.
As they structured the RFP, the chosen BPO supplier would have been paid no matter how many employees had to be hired, just less per head (so the supplier would make it up with volume). Metaphorically, the supplier would just have been pouring cheaper wine into a leaking wine cask.
I proposed a different approach. At their current level of attrition, they would need to hire six people every five years to keep the seats filled. We would instead contract to fix the attrition problem (which would also lower a lot of other related costs). We proposed to set the attrition at three butts in the seat every five years. If we could do better than that, we pocketed the difference. If more than three were required in a given year, we were at risk to eat the cost differential. By sharing both the risk and reward, and focusing on solving the real problem, we avoided the “your mess for less” scenario.
Outsourcing for Results
Outsourcing for results, not merely outsourcing the process, is not as simple as it may seem. Many factors conspire to undermine the effort. Buyers need to be fully open and trusting with the bidders. Suppliers need to be willing to incur meaningful financial risk and share the pain with the buyer if problems arise.
Compensation plans are a major inhibitor. Procurement is often compensated by how much cost they can drive out of the supplier compared to the current state. Yet, a value-based contract has many other parts to it that goes beyond a simple side-by-side comparison.
Reduce Operational Costs
Conversely, the people managing an existing customer process are compensated, as a cost center, to drive down costs. The supplier’s account manager is also measured by his ability to keep costs down while meeting SLAs to increase profitability. Senior executives are often compensated on more broad metrics, and for this reason, this is typically where such deals need to be orchestrated for that very reason.
As the godfather of quality W. Edwards Deming postulated, “People will do what they are compensated to do.” If you want to achieve the ultimate win-win scenario with your suppliers, drive out cost and increase value, then outsourcing for breakthrough results is not a process that should be delegated too far down.