Which is best for your business?
Strategic Sourcing Advisors helps companies determine their best procurement and site location strategies. Our matching process removes the guesswork from outsourcing and helps you find the right contact center outsourcing partner.
“You get what you pay for” is a time-honored axiom which speaks to a fundamental notion: incentives drive actions. This is often pointedly accurate in the case of contracting for contact center services. One of the most important elements of any contact center services agreement is the pricing model. Yet it is critical to recognize that the pricing model will influence much more than just cost.
For many years the primary pricing model in the contact center industry was based on FTE, or Full-Time Equivalent, cost structures; in essence, this is a fee based on headcount utilized. As the contact center industry has evolved, additional pricing models have emerged that are often more effective for achieving desired results, and may also support a productive working relationship between the contact center service provider and their client. For example, using a pricing model that provides incentives to the provider based on achieving defined criteria such as customer satisfaction or revenue per contact may actually improve your company’s bottom line when applied appropriately.
The pricing model established with a contact center provider should be based on the unique needs of your business, yet also consider the maturity of your relationship with the provider. If the outsourcing model is relatively new for your business, it may be advisable to use a straightforward pricing model based on expected volume where there is shared risk between the provider and customer. With greater experience and/or a mature relationship with the provider, you may find that alternative pricing models provide the opportunity to achieve better outcomes.
Following are several pricing model options to consider as you develop your pricing strategy for outsourced contact center services:
The Cost-Plus Model
The provider is paid for actual costs incurred in delivering the service, plus a predetermined percentage or fixed amount per period. For instance, the supplier will charge for all actual costs of labor (including agents and dedicated management) and overhead (including indirect/shared management components such as HR and IT, facilities, etc.), and add a 10% profit margin. An example of this pricing model is an FTE-based or cost per headcount model.
Recognize that with this model “provider cost” can often be a rather opaque figure, and it is advisable to seek quotes from multiple providers for the same book of business for comparative purposes. Also, be aware that the provider could have little incentive to manage staffing costs and utilization rates with this model, as the customer bears all cost-related risk.
Per Unit Pricing
The customer pays based on the number of service units used. You agree on a standard rate regardless of the volume of service units used. An example of this pricing model is a set fee for each call or incident handled by the contact center. Alternatively, you may want to consider unit pricing based on resource utilization that is adjusted for volumes above or below established thresholds – effectively providing the potential for volume pricing.
With this model, the provider is responsible for staffing and productivity risks while the customer must provide an accurate forecast of volume. Unit pricing is ideal for incidents where there is a large volume of calls with predictable average minutes per incident.
A variation of the per incident unit pricing model is per-minute pricing. The per-minute model is very similar to per-incident with one notable exception – which party assumes financial risk for call variation. With per-minute, the provider is compensated for all labor time and does not have an explicit incentive to improve productivity, like reducing average call handle time.
With a per incident model, provider profit margins are at risk if calls run longer than anticipated. Per incident encourages providers to handle calls quickly but this can have an adverse impact on call resolution rates and customer satisfaction. Per-minute pricing in its purest form gives the provider little incentive to improve productivity. One way to overcome this is to use a per-minute unit pricing model that has tiered pricing to encourage efficiency – similar to the threshold pricing discussed above, but with the thresholds based on minutes not incident volumes.
With a fixed price model, the service provider charges the same periodic fee regardless of the volume of services consumed. Use of this pricing model is uncommon, due to typical work volume fluctuations. Further, this model does little to encourage strategic alignment of the provider to client goals.
With incentive-based pricing, payment incentives are used to encourage the provider to deliver services that achieve higher levels of performance. Penalties may also be incorporated into this model as an additional incentive to maintain minimum performance levels. This model encourages the service provider to achieve results that are fully aligned with the client’s goals. For example, paying a bonus to the service provider when defined targets for Revenue per Call or First Contact Resolution are achieved.
The provider receives a portion of the benefits (i.e. savings or additional revenue) generated for the client in excess of an established threshold. This is a variation of the Incentive-based pricing model, where the provider is paid a percentage of the “gain” (as opposed to a fixed bonus payment) in lieu of or in addition to the baseline pricing structure. As with Incentive-based pricing, this model encourages the service provider to achieve results that are directly aligned with the client’s goals.
The managed service model is a highly collaborative outsourcing business model where both the client and service provider have an economic interest in one another’s success. This model can take a variety of forms, but at its core is a model where the service provider is responsible for service delivery as well as the management of that service, subject to the performance parameters established by the client. This model in its fullest sense is the most mature and decentralized outsource service and pricing model and requires significant maturity and trust between the client and service provider.
Choosing the Right Model
The Pricing model is not only important to the service provider to determine how they will be paid for their services. It is also critical to the client to incentivize the service provider to deliver results that are closely aligned to the client’s service objectives. This alignment is most important to ensure that outsourced services support the strategic goals of the client organization. For example, cost reduction as an organizational goal for the client may be achieved in many ways: reduced call volumes, higher first call resolution, reduced average handle times, and fewer call-backs.
Yet most of these metrics can create tension with other metrics (e.g. improved first call resolution may result in longer call handle times). As such, the client and service provider need to consider the potential for these outcomes and work together to pursue the best way to achieve the desired objective, in this case cost reduction, by employing the right means and methods.
When considering different pricing models, start by defining the desired outcomes, then assess your organization’s maturity level and expertise, as well as that of your provider, to align the pricing model with your goals and how you will measure their achievement.
It is also important to avoid perverse incentives. You may want to drive lower costs through outsourcing, but if you focus on finding the lowest cost provider you may fall short of your goals. For example, agent retention correlates to higher resolution rates. Seeking the lowest cost provider may mean you’re buying poor agent hiring, training, and/or management practices that lead to high agent attrition, which in turn could result in damaged brand perception, lower repeat sales, higher returns, etc.
In summary, when considering which pricing model may be best for you, start by making an informed assessment of your organization’s outsourced service management maturity. Consider the capabilities of your selected service provider as well. Determine the most important desired outcomes for your contact center service, and how the right pricing structure and incentives can help you achieve those outcomes most effectively with your service provider.
Depending on your objectives, you can select a pricing model that aligns with your overall goals. And recognize that as circumstances and objectives change over time, your pricing model may need to change to assure that alignment continues.
About Strategic Sourcing Advisors (SSA)
SSA helps buyers of contact center services find the right providers and locations for their specific needs – at no cost or obligation. Our team of former Microsoft leaders have decades of experience buying contact center services and we understand the difficulty of finding a great outsource partner in an ever-changing market.
We’ve managed over $700 million of annual global contact center business, working with many of the best providers in the industry. The SSA team of contact center buyers are uniquely positioned to help you navigate the outsourcing industry and make the right choice. This has been our business for over 20 years. Put our experience to work for you.
CEO, Strategic Sourcing Advisors