Outsourcing Center assembled a panel of industry experts to discuss the changes in outsourcing contracts and pricing models over the next two to five years. Their insights reveal buyers and providers will approach outsourcing initiatives differently than in the past.

Q. Outsourcing pricing models and contract vehicles have evolved over the past few years. How much change will we encounter in contracts and pricing models in the next few years?

Partha D. Sakar, Global CEO, Hinduja Global Solutions: Over the next five years, it’s likely that traditional outsourcing/sourcing models, services delineation, governance and, most importantly, the expectations of clients will look far different than what we’ve become accustomed to. In fact, we believe new words and concepts will arise in the global sourcing lexicon. These will reframe the discussion, reframe the client/provider relationship, and reframe the idea of what being a good and valuable partner truly means.

Abid Ali Neemuchwala, Global Head, TCS BPO Services: Service providers will have to become strategic partners, or they will fall by the wayside. Strategic partners will start delivering in truly flexible pay-per-use models, leveraging IT and PO synergies from best-in-class technology and processes bundled together. Coupled with this, strategic partners will increasingly need to provide business analytics and insights that buyers can leverage to grow their business.

Angela Hills, Executive Vice President, Pinstripe: We predict that flexible pricing models will become more standard and accepted over the next two years. With the new technologies that providers are developing on a consistent basis (such as the rapid change in the marketplace for social media and related technology tools), BPO providers won’t be able to predict pricing for 12 months out, and buyers will have to be open to considering flexible pricing models. The mindset will have to move from one of a fixed 12-month pricing model to one that is revisited twice a year or perhaps even once a quarter to ensure that clients remain nimble enough to meet changing market conditions.

Q: What is driving the change in pricing and contract models? Is it due more to economics or to the need for agility?

Joanne Olsen, SVP, Oracle Cloud Services: There will continue to be pressure on the providers for lower cost and more flexible pricing contracts as companies come out of the recession.

Gene Byrne, General Manager, F&A and SCM Solutions, North America, IBM: Long-term economics will drive decisions outsourcing buyers make over the next two years. However, buyers signing five- to seven-year agreements need to approach their outsourcing engagements with the consideration of continuous improvement over the term of the contract. The tendency to focus on short-term cost savings and labor arbitrage certainly helps satisfy the immediate need, but a balanced approach that includes an eye toward innovation will deliver considerable additional value over time.

Sharad Sheth, Director, BPO Capabilities and Enterprise Administration Services Leader, HP Enterprise Services: The change in models is due to market conditions that increasingly pressure companies to contain costs and protect capital. As service providers, we need to offer more buying options with greater visibility and control over expenses.

Q. Please describe an example of such an option.

Sheth, HP Enterprise Services: In applications, for example, pricing options for tiered levels of service give companies more control over costs. This flexible pricing enables them to choose higher service levels for critical applications and lower service levels for less-strategic applications. Prices for these scalable services are predictable. This also extends to infrastructure. A suite of managed services, for example, delivers modular, standard packages with predictable pricing and rapid implementation for a faster return on investment.

Joanne Olsen, SVP, Oracle Cloud Services: Another example is the on-demand model. It provides flexibility through annual options to terminate a contract without any termination penalties. This model usually also offers different service/pricing levels from which companies can choose. A service provider with this model can also offer flexibility for scaling up and down the scope of services (such as adding or subtracting compute or storage capacity) or moving between deployment models (such as to remote management of a data center).

Kevin Schatzle, President, Allied Digital Services: Ultimate flexibility in pricing will come with the cloud model. With op-ex monthly subscription-based models, companies can adjust services up or down to respond to their growth and shrinkage. This model also makes it easier to assign costs to the appropriate internal department. Virtualization, remote management tools, and Software as a Service (SaaS) licensing models will drive the change from cap-ex models to cloud-based delivery.

Q. What other possible changes in contracts and pricing will we likely see over the next few years?

Robert Pryor, Executive Vice President of Sales, Business Development and Marketing, Genpact: Organizations will continue demanding more flexibility in terms of resource and pricing variability as well as minimum resource planning and forecasting. They will also demand no/low minimum commitments and easy and low-cost exits from long-term agreements. In essence, service providers will need to address the demand for the pricing and other advantages of long-term arrangements with the ease and flexibility of short-term contracts.

Don Schulman, General Manager, Global F&A and SCM, IBM: In addition to cloud-based platforms and the move toward transaction-based pricing, industry benchmarking for standard pricing will enable additional transparency and add greater flexibility to BPO contracts overall.

Q. Benchmarking to be sure that an existing deal aligns with market offerings is an important activity. Are there enough benchmark data yet on outcome-based pricing and offerings?

Gene Byrne, General Manager, F&A and SCM, North America, IBM: A large portion of the early adopters of outsourcing are coming up for renewal in their existing contracts. These companies, along with new outsourcing buyers, need to spend the time to understand their current cost drivers and how far the outsourcing market has evolved.

These organizations need to recognize that the landscape has changed significantly over the last five years and that many of the drivers and objectives have evolved, especially due to the recent economic climate. Benchmarking at a granular level is now available and offers companies the opportunity to create an “art of the possible” road map towards top best practice adoption, ultimately enabling outcomes-based pricing. Buyers will do themselves an enormous disservice by not investigating recent market developments and the capabilities that now exist to sustain their business in the long term.

Q. Service providers have talked about outcome-based solutions and pricing for a couple of years, but there has been little evidence of success. What is different now that will allow this model to succeed?

Katrina Menzigian, VP, Research Relations, Everest Group: The source of service provider competitive differentiation going forward will be to link the outcomes of the outsourcing deal with the client’s overall business objectives. Companies are gaining sophistication in how they manage outsourcing and are increasingly aware of the “possible.”

Swami Swaminathan, CEO & MD, Infosys BPO: Although providers and clients are keen to move to outcome-based pricing and we will see more of this occurring in the next two years, we believe the journey will be slow. Clients will need to get comfortable that the outcomes are rightly baselined so that they pay the service provider for providing superior results rather than paying for their past inefficiencies.

Rajiv Raghunandan, Practice Head – HRO and Sales & Fulfillment, Infosys BPO: The outcome-based pricing model creates a direct relationship between cost and business results; however, it often implies giving the service provider a very large part of the ownership of the operation and associated technology. For clients not comfortable with doing this, the transaction-based model is preferable to create a linear relationship between cost and revenue.

Abid Ali Neemuchwala, Global Head, TCS BPO Services: Buyers and providers have wanted to mature from the traditional effort-based model to transaction-based pricing as a first step and eventually to an outcome-based model. Lack of baseline data and an ability to define the true cost of a transaction have constrained the adoption of the outcome-based model. The increasing use of the “Process-as-a-Service” model means that buyers and providers can transparently move to a pay-per-use transaction pricing or output-pricing model.

Ritesh Idnani, COO, Infosys BPO: Linked to the demand for outcome-based models is the demand for “skin in the game,” where providers and clients share ownership in success or failure.

Q. Moving forward, are there any changes regarding intellectual property that buyers need to be aware of?

Rajiv Raghunandan, Practice Head, HRO and Sales & Fulfillment, Infosys BPO: We believe that knowledge management and IP is a very important but often underplayed aspect of flexibility in an outsourcing contract. Typically over the duration of a contract, the inherent process knowledge primacy moves from the client to the service provider.

Some providers are now focusing on reverse knowledge transfer (through designated process specialists) periodically to ensure that a certain component of process knowledge continues to reside with clients, thus allowing greater flexibility. Similarly, providers can document the use of tools and macros to aid productivity in order to ensure that any tool or technique that is based on a client’s proprietary knowledge will continue to be the intellectual property of the client.

Q. What will be the impact on currently existing contracts from the adoption of more flexible pricing models during the next two years?

Yugal Joshi, Senior Analyst, Everest Group: Service providers realized years back that they lost pricing power. Today, there is hardly any pricing differential when it comes to delivering pure outsourcing services. Therefore, the flexible pricing model may make the environment even tougher for the providers. The buyers may ask for a change of pricing as they gradually become comfortable with the pay-per-use model. However, this development will take significantly more time; hence, in the next two years, there may not be any material impact on existing contracts.