Ask the Experts Blog Series: Pricing Models for Outsourced Service Providers

In our quarterly blog series, Ask the Experts, we ask COPC Inc. experts questions about specific areas for improving operational performance in call centers, customer experience operations, vendor management organizations and procurement.

In this edition of Ask the Experts, we chatted with Kathleen Jezierski, COPC Inc.’s chief operating officer and subject matter expert on vendor management, about pricing models for outsourced service providers (OSPs).

What are the most important considerations for brands when trying to determine which pricing model is best for their business?

There are five central considerations for determining which pricing model is best. These include:

• Business Objectives — What is the business trying to accomplish? Is the objective to provide a no frills, low cost service based on getting the lowest cost per transaction, or is it looking to provide best-in-class support?
• Volume — Picking the right pricing model can be heavily dependent upon volume. Whether volume is high or low has specific implications, and different models perform better or worse depending on volume.
• Risk Tolerance — Each pricing model carries specific risks and benefits. Understanding those risks, and weighing one’s tolerance for those risks, is a critical consideration for companies.
• Nature of the Business — Is the business dynamic (as are most) or stable in nature? In a dynamic environment, handle times can fluctuate, the call mix can change, marketing initiatives can drive volumes, etc. Stable environments are more predictable, with steady volumes and cyclical changes that can be planned for well in advance.
• Transaction Allocation — Particularly in an environment with multiple vendors, understanding how transaction types are allocated across those vendors is important. Is the allocation methodology fixed percentage (60%/40%), or is it dynamic based on factors like agent availability or occupancy? This can impact which model is the best fit.

What are some of the more common pricing model categories?

Three of the most common categories of pricing models include Output, Pay for Performance and Full-Time Employees (FTE). Here’s a description of each type of category:

• Output models — Contact center services are treated as a commodity, where companies pay their vendors a price for a specific unit of work. Types of pricing models in this category include a price per contact, per minute or per production hour. This is the most common model.
• Pay for Performance models —Pricing is based on performance metrics or is a flat rate to manage a specific set of customers or transactions. Specific pricing models of this variety include Commission-based models and Price Per Subscriber or Price Per Resolution.
• FTE models — A price is paid per person or per staff hour in this scenario. Examples include Fixed Staff and Price Per Production Hour.

The price established by the vendor for each model depends on fixed and variable costs, plus margin. Fixed costs include things like facilities, equipment, IT services and management. Variable costs include things like labor (including first and second line managers) and quality and training requirements. But, ultimately, price depends on the vendor’s cost per minute of providing the service, plus margin.

What are some of the benefits and risks associated with the various pricing models?

In isolation, specific pricing models can drive inefficiency, inaccuracy, overstaffing, customer dissatisfaction and/or dishonesty. And although each model has its own specific set of risks, these risks can often be mitigated by risk/reward plans and/or “gates,” such as minimum occupancy thresholds for which a company will pay.

Specific models also carry specific benefits and risks. Here are some examples by model type:

Output Model – Cost Per Production Hour:
Benefits — Eliminates negative impact of low occupancy, usually lower priced than FTE for non-phone
Risks — Buyer pays for incorrect forecasts, staffing and schedules; the vendor is incentivized
to overstaff

FTE Model – Price Per FTE:
Benefits — Fixed costs, virtually guaranteed profitability for the vendor
Risks — No incentive for efficiency, variable service levels that change with volume, can be expensive

Performance Model – Incentives:
Benefits — Objectives are aligned between the buyer and seller, can mitigate some of the risks associated with other payment models, payments tied to result can be good for both parties

Risks — Need to carefully consider what is being incentivized, seller has increased risk
for non-performance, effective price can be wildly inappropriate if the assumptions used in establishing the price point are incorrect or the situation changes.

What role does occupancy play in determining which pricing model is most appropriate?

Occupancy is the time agents are waiting and available for a transaction. If this time isn’t billable in some form, then the supplier loses money for every minute an agent spends waiting for the next transaction to occur.

Since suppliers base their pricing on the cost per hour of agents, they are often looking to the buyer to come up with some way to mitigate this risk for them. Therefore, both the supplier and buyer need to consider occupancy rates in determining which model or risk/reward plans work best, seeking a model that is fair to both the supplier and buyer.

Why is it important for brands to get it right when it comes to picking the right pricing model? What’s at stake for the company and the end user?

Examples of what can happen when the pricing model isn’t ideal are easy to spot. One recent example in the financial services industry saw agents creating accounts for additional services without the customer’s consent or knowledge, all because there were such strong financial incentives to do so. But this behavior isn’t relegated to commission-based models. Placing too much emphasis on any single metric, such as customer satisfaction (CSAT), can result in a similar outcome. There must be reliable checks and balances to ensure incentive programs aren’t being gamed or abused.

Selecting the right pricing model is no silver bullet, but it can help suppliers align to the objectives of the buyer. Without alignment between the two, processes and behaviors can become counterproductive, and customers can be adversely affected. Efficiency can (and often does) take a hit.

More importantly, companies can have a tough time living up to their brand promise, resulting in diminished customer loyalty, loss of integrity and lower revenues. In the end, getting the pricing model right isn’t about saving the buyer money, even though it often does. It’s about putting in place a model that provides the intended customer experience with the greatest amount of efficiency and the least amount of waste.

 

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Could your organization use some help when it comes to identifying the right pricing model for your business?  Or do you need help with other aspects of your vendor management program? If so, we would welcome the opportunity to talk with you. We assist organizations with everything from evaluating and selecting providers to performance improvement and sourcing strategies. For more details, contact Kathleen Jezierski at kjezierski@copc.com.

Do you have a topic you would like to see explored in the next edition of Ask the Experts? Submit your performance improvement questions or topic suggestions by emailing us at info@copc.com.