Category Archives: Consulting

Consulting Industry Insights: Outcomes Based Pricing in Outsourcing

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.

etc.

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).

Conclusion

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.

 

Consulting Industry Insights: Cost Allocation for IT Services

KPMG recently came out with a paper about how cost allocation for IT services needs to change because of the growing popularity of the cloud. Cloud IT services have the advantage of usage based pricing, quick scale up and down, and transparency about usage and pricing.

Essentially, they’ve observed that because of the option of cloud services exists shared services organizations need to up their game and provide more transparency about how and what they’re charging for.

What are the Users Looking For?

The users are looking for:

1. Pricing and charge back methodology. They want to know how and what they’re being charged for.

2. Value. They want to make sure they aren’t being charged for anything they aren’t using or don’t need.

3. Flexibility. They want to be able to scale up and down if necessary.

What are the Levels of Service Cost Allocation Maturity?

Levels of Cost Allocation Maturity

They also came up with a model for the different levels of cost allocation maturity and how a provider can transition between the levels. Next, we’ll walk through each of these transitions to see how a provider can bring transparency to cost allocation.

Sub-Optimized (Level 1) to Rationalized (Level 2) 

There seem to be two steps:

1. The provider needs to set up a concrete strategy to move toward cost allocation transparency. This would be things like putting in the technology to remove services as appropriate, having cost data sufficiently segmented to allow transparent allocation.

2. Track costs and segment them by category, geography, project, group, etc.

Rationalized (Level 2) to Sub-Optimized (Level 3)

Division Allocation

The goal at this stage is to allocate costs based on usage for both direct and indirect costs and show the customer it’s being done that way.

To do this, you need to implement and track resource units (RU). A Resource Unit is something you can use to measure how much service is being delivered. In the case of help desk services, it might be something like the number of help desk users, or for desktop computing it may be the number of desktops.

Once you establish the RUs, use them to track service volume and allocate cost.

Optimized (Level 3) to Strategic (Level 4) 

To make the transition toward strategic cost allocation, you need to implement more communication between the provider and the user. This would include things like forecasting usage of resource units (so the user isn’t faced with sudden price increases) and performing periodic price comparisons with industry standards.

Strategic (Level 4) to Differentiated (Level 5)

To make the final transition to the highest level of cost allocation maturity an organization must:

1. Optimize its operations to lower taxes / tariffs.

2. Implement tiered offerings.

3. Implement automated processes and tools to assist with the cost allocation process.

Conclusion

For provider organizations to survive the challenge of the cloud, they must provide transparency to their cost allocation process.

In this article we have touched on how a provider organization can do just that. Ultimately the users want to know how much they’re being charged and why, that they aren’t being overcharged, and that they can scale up or down service quickly if necessary.

If the provider can offer that, they can likely retain customers despite the challenge of the cloud.

Consulting Industry Insights: Why is India Losing out on BPO Work to the Philippines?

If you’ve been following the outsourcing news as of late, you’ve no doubt heard the rumors that India is losing out on business process outsourcing (BPO) work to the Philippines and Eastern Europe.

The Economic Times reports that India may lose up to $30 billion in voice and call center work over the next decade.

There are several reasons India is losing out on call center work to the Philippines:

1. The Philippines has better infrastructure. As it turns out, much of the telecomm infrastructure was built by the US army during the occupation (unlike India, which is still working on improving their infrastructure).

2. The Philippines has more compatible culture. Filipino workers require less training because of greater similarity to US culture and less accented English.

3. Turnover is lower in the Philippines. At this point, a call center job in the Philippines is more valued than one in India because the wages for a call center job are relatively better.

On the bright side, India is dominant in the high end of BPO work such as application development, and has a much larger potential workforce. Time will tell how it all plays out.

Consulting Industry Insights: What are the Upcoming Trends in IT Outsourcing?

IT Outsourcing has been undergoing significant change as of late because of rapid developments in cloud services, automation, coordination, cost cutting, greater buyer experience, and developments in organizational/governance models.

Today’s article will be all about the various trends in IT outsourcing, what they mean, and how they’ll affect the consulting world.
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Consulting Industry Insights: Why Large Scale IT Projects Go Wrong

These days, most consulting projects end up recommending investing in some sort of IT system as a solution. Interestingly enough, recent research by McKinsey & The University of Oxford has shown that:

1. On average, large IT projects (>$15 million) run 45 percent over budget and 7 percent over time, while delivering 56 percent less value than predicted.

2. 17 percent of IT projects end up going 200-400% over budget, threatening the very existence of the companies they’re trying to help.

3. This effect happens across all industries.

Today’s article is about why so many IT system implementations end up failing and what companies can do about it.
Continue reading Consulting Industry Insights: Why Large Scale IT Projects Go Wrong

Consulting Industry Insights: Global Business Services

Many of the major players in the consulting industry (Accenture, KPMG, PwC, E&Y, and Deloitte) have introduced the Global Business Services (GBS) framework as part of their consulting pipeline, but what does the term mean and what do these projects involve?

Today’s article is about what Global Business Services are, the advantages they provide, the stages of GBS implementation and challenges involved in implementation.

Continue reading Consulting Industry Insights: Global Business Services