How can you structure BPO contract pricing to fit your budget?

A good example of where the fixed-cost model can be effective is in software development projects with well-defined requirements. If a company decides to outsource the development of a mobile application with specific functionalities and clear requirements, it can opt for a fixed-cost contract, because financially, it can be more advantageous and offers better control. And of course, in this scenario, the scope, necessary resources and deadlines are agreed in advance.

I always go with the fixed price model. It allows you to complete a budget and know exactly what you will be paying for the number of associates you request. Always make sure that your BPO provider has back-up associates to fill the positions of people out sick or on leave, this way your employee count will always remain the same. Good BPO companies will always allow for additional employees to accommodate your workload. If you are working with a company that does not provide this, then you are with the wrong company.

BPO deals leverage the concept of a negotiated “Deadband Percentage”, i.e. range of deviation in actual qty above or below the initial forecasted volume. A key characteristic of this Deadband %; there is no additional cost to support changes in volume within the prescribed range. The best practice to address changes in scope of BPO services is to establish price points for each resource unit (e.g. Unit of Measure: an FTE in BPO). This creates the client’s initial baseline. Once established, it provides assurance to the clients’ expected volume. Leveraging the concept of (Additional Resource Credits & Reduced Resource Credits) to manage fluctuations; formulaic adjustments for delta above and below the baseline throughout the contract.

The Time and Material model is particularly beneficial in the following situations: (i) iterative development projects, (ii) research and development, (iii) systems maintenance and technical support, (iv) pilot or experimental projects, (v) short-term projects. Although this model offers adaptability and quality, it requires greater management of time and resources to avoid unexpected costs.

The benefits of "Performance based Pass-Through" vs a "Fixed Fee" agreement are significant. In my experience, the latter leverages a management fee of which some percentage (usually 50%) is at risk-based on performance. Other tangible benefits include: 1. Collaborative mutually aligned relationship to drive continuous improvement; profitability is predicted on performance. 2. Reduced costs through glide-path (Client YoY) and shared profit (BPO Provider) for any value above the agreed metric. 3. Guaranteed value for new scope/SOW e.g. first-generation volume beyond labor arbitrage. 4. Inflation protection for the client. Moreover, a pass-thru model (w/ a capped management fee) provides transparency on controllable costs/baseline.

In particular, I like to develop projects that adopt the Value-Based Model, as it can be an interesting methodology for BPO leaders who: (i) will lead projects that seek to optimize processes, (ii) manage customer relationships, (iii) implement innovative technologies, (iv) develop new products or (v) improve the customer experience. The main advantage lies in fostering a long-term strategic partnership, where client and BPO provider share risks and rewards.

I believe that incorporating clauses for periodic review of the contract and adjustment mechanisms will allow for adaptations over time. The contractual structure must therefore reflect not only operating costs, but also the real impacts on performance and financial results. In this way, the pricing strategy becomes an integral element of partnership and proper costing.

BPO providers can always accommodate your staffing requests and ensure that you are always covered at 100%, at no additional cost to you. Make sure they accommodate your requirements.