Outcomes based pricing is a bit of a trend right now. The Affordable Care Act has created incentives for health care providers to move toward measuring outcomes.
What’s interesting is that this trend is starting to pop up in other industries. Today’s article is going to be about how outcomes based pricing is changing the way outsourcing providers charge for their services.
Traditional Pricing Methods
Traditionally, providers have charged for their services based on the number of full time equivalents (FTEs). That’s just a fancy way of saying the number of employees that they need to allocate for whatever the client needs. For example, in a deal that outsources call center operations to India, pricing would be determined by the number of people needed to staff and manage the call centers.
It’s simple, straightforward, and the cost savings are easy to determine.
The only problem, is, of course, that pricing based on the number of FTEs may not lead to the level of service that the client wants. Yes, you do get a certain number of people working the phones for your call center in India but, frankly, they may or may not do a great job. Many of those call center facilities are not great places to work, there’s high turnover, and the level of service may not be to what the client desires.
That isn’t a knock against Indian call centers, by the way. It’s just a matter of incentives – there’s no real incentive for them to improve if they are being compensated on the number of FTEs. Their only incentive is to keep their staff count high.
Outcomes Based Pricing
Outcomes based pricing would be pricing based on how effectively a provider meets their client’s need.
The best metaphor I can come up with for this has to do with writing. Imagine you’re a publisher trying to draw up a contract with an author for him to write a technical manual. You could either pay him based on the number of words (FTEs) or how effectively he gets across his point (outcomes).
By the way, if you were wondering why technical manuals are usually so long and complicated, it’s probably because the incentives are not lined up toward rewarding the author based on outcomes.
Anyway, in the case of the call center outcomes based pricing would be something like paying the provider based on:
1. Lowering the number of calls required to solve an individual issue.
2. Lowering the percentage of calls requiring in person maintenance.
3. Increasing customer satisfaction.
Essentially, something that can be measured and compared to a standard.
The advantages of outcomes based pricing are that it incentives creativity on the provider’s side and gives them a greater chance to realize a higher upside if they can solve their client’s problems.
Of course, the disadvantages are that the client can set unrealistic objectives that the provider can’t possibly meet (destroying the relationship), and that it creates less transparency (the client is less aware of what they’re paying for).
Outcomes based pricing is a growing trend in many industries and seems to be growing in the outsourcing industry as well. In theory, it should be a win-win for both the provider and the client but the process needs to be managed properly for that to occur.
Either way, it’s an exciting time in the outsourcing industry.