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Variable-price outsourcing

35 Comments · Business outsourcing

There are a variety of pricing approaches to BPO. By far the most common approach is the fixed-price contract where a vendor manages a buyer’s process and gets paid a fee based on meeting preestablished performance benchmarks.

Fixed-price contracts, however, can be imposing ton small-to medium-sized enterprises (SMEs) or for firms that are struggling to meet financial goals.

Making a commitment to a large fixed-price contact when the benefits lie far off in the future can be difficult, if not impossible, for many SMEs on struggling firms.

It there were no pricing alternatives, many firms would be unable to consider the outsourcing option.

To overcome this pricing barrier, outsourcing vendors have developed variable-pricing strategies that allow firms to pay only for the capacity they use and only for performance-related outcomes.

This approach is reminiscent of the application service provider (ASP) approach to software distribution that captivated investors in the late 1990s.

When AXA Financial sought to outsource its data center, the worldwide financial services and insurance conglomerate wanted an IT services partner that would provide variable-level pricing.

Like many financial services firms trying to weather the bear market, AXA, which employs 140,000 people worldwide and has 50 million client accounts, was looking to outsource its data center.

Rather than seek a traditional outsourcing arrangement with standard service level agreements and fixed-cost terms, AXA wanted to pay only for the capacity it actually used in a given period at time.

For instance, when Web traffic on transactions volume was high, AXA would pay ton more capacity.

When transaction volume was low, it would pay less. Potential vendors balked at this arrangement at the time because that was not how IT services companies historically structured their outsourcing deals.

Although IBM Global Services eventually won the $1 billon deal, it was only after a year at trying to negotiate a fixed-price contract.

AXA’s determination that it did not want a traditional outsourcing arrangement came early in the process.

The company-a France-based conglomerate at 60 companies that entered the United States with its acquisition at Equitable-felt those deals never worked out as promised. At the same time, AXA did not want to bear the cost of owning and maintaining its computing assets any longer.

With on-demand storage and computing, clients get more out at existing IT investments and pay only for the resources used.

Far instance, clients can change from ownership at multimillion-dollar storage systems that may only be 20 to 50 percent utilized to intelligent storage services that provide what they need, when they need it. In financial terms, this can mean a 15 to 50 percent cost improvement for used capacity.

BPO buyers increasingly are demanding variable-pricing approaches, and vendors are responding.

At the same time, pay-as-you-go pricing models have several drawbacks that managers must consider and monitor.

For example, counterproductive behavior could result it the pay-as-you-go charge-backs are mapped directly to business units.

Under such a pricing scheme, a cost-conscious manager in the BPO buyer firm might encourage staff to minimize use of the vendor’s services in an attempt to minimize their chargeback.

This could result in less productive employee behavior over the long term, including the possibility of missed opportunities or an overreliance on legacy systems.
 

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