By Preetam Kaushik
The vast offshore outsourcing industry is based on cheap technical labor and lower overall operating costs. India is a prime example of this phenomenon, with more than $100 billion USD annual revenue expected during 2013, registering an annual increase of 12 to 14%.
Traditional BPO billing is for the number of hours worked and number of people employed on a project. The method is suitable for most outsourcing work as projects have a lot of variable factors and changes. The client too is not sure of the volume of their business and how their revenue will grow, so opting for the time and labor method is the best. The established time and labor billing process is opaque where the component costs are concerned. The client can be billed for additional resources although no new people have been added to the project.
Most experts feel the outsourcing industry is overstaffed as it has been billing on the time and labor method. The costs are invariably fixed, not clearly defined, and the client has little or no monitoring of them. As pricing is not result-oriented, if a program is a dud, the client still ends up paying for it.
A New Way
The new outcome-based BPO billing model, however, links costs to results. It charges the client for the results achieved or targets met. If the project does not give the desired results like rejection rate in a factory or cost of processing a loan, then the payment made is also correspondingly reduced. Does the end user or customer benefit?
Outsourcing companies now have to cut down on one of the major cost components, i.e., people or labor. Secondly, time taken to start and complete project running have to be reduced. With the removal of time billing, work is completed faster. It is in the best interest of the vendor to prune their internal costs down so that they are competitive and can retain their customers.
The global revenue share on outcome-based BPO billings is expected to be only 22.5% as forecast by Ray Wang, principal analyst at Constellation Research. The client is more interested in the end result, and pricing is not necessarily the deciding factor. A simple working system is always preferred. What will count is the unbundling of database administration costs from the cost of server services, to quote Sanda Partners founder Adam Strichman. In the present economic scenario and as clients become savvier and demanding where costs and results are concerned, a new billing method has to come into place. The client wants the best ROI.
This story was first appeared on NSAM sister publication BPO Outcomes.