Posted tagged ‘fixed pricing’

Changes in Outsourcing Today May Impact HRO Tomorrow

July 20, 2012

Linda Merritt, HRO Research Analyst, NelsonHall

Being ever watchful on behalf of our HRO community, I periodically look beyond HRO into the larger outsourcing industry to see what emerging trends could impact HRO. Today’s perspective is from NelsonHall’s own Sarah Burnett and her Targeting the U.K. Central Government BPO Market report.

In HRO, pricing options beyond the ubiquitous per employee per year or month (PEPY or PEPM) have been pushed now and then by both clients and vendors. Under great cost reduction mandates, the central government sector in the U.K. is currently looking at alternative pricing options to ensure outsourcing delivers the required return while transferring more risk to the service provider.

 Traditional fixed pricing such as PEPY /PEPM is still the most common model for U.K central government contracts, but its use is slowly decreasing. Pricing based on fixed fees with an incentive for performance above requirements and delivery of planned enhancements is part of the mix, but it’s not really growing.

Two other models are increasing, although from small initial bases. The first is customer-usage pricing where the vendor directly charges the end users, whether internal or external, and actual usage must cover the vendors cost. This seems similar to the encroachment we are seeing in SaaS-based services. If you pay by the sip for the system, why not pay an associated by the sip fee for any surrounding BPO support? The usage fee may work well for discrete transactions like processing a drivers license application, but would not work as well for more complex HRO services.

The second is outcome-based pricing where the BPO service provider takes on more of the risk in creating business results. Fees would be fully or partially based on the vendor’s ability to increase the success of the associated program. In the U.K., the largest experiment is with the DWP’s Work Programme. The purpose is to increase the success rate of the welfare-to-work program using a network of private, public, and volunteer organizations. Over the first three years, guaranteed fees will decline and vendors will increasingly be paid for participants that get and sustain employment.

Some HRO vendors propose outcome-based pricing incentives themselves, but it is more difficult than it may look. HRO processes flow across organization lines in the client’s business and the service provider may not have enough direct control / authority or process scope to ensure improved business outcomes are due largely to its efforts.

Whether a client is in the public or the private sector, some trends will migrate from one type of client to another. Be ready to discuss pricing model alternatives and the pros and cons of each related to the HRO services being offered. Expect to see an increase in the variety of pricing elements in a contract as one all-encompassing price per participant may no longer best serve the needs of either providers or clients.

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Avoid Getting Stung: Pre-Contract Due Diligence on RPO Providers’ Financial Stability and Pricing Methodologies

August 13, 2009

As I’ve noted in previous blogs, RPO can lower the cost of recruitment by 24 percent on average and reduce time-to-hire by an average of 43 percent. Beauty! But what if your provider goes bust or eliminates its RPO offering due to lack of financial stability and you get caught mid-contract up the proverbial creek without a paddle?

Without naming names, at least a couple of providers have ceased delivering RPO services, primarily due to multiple large contracts based on pay-per-hire pricing schemas. This is a solid provider pricing strategy when business is booming and hundreds, even thousands, of positions are being hired for each client. But when recessionary times hit and hiring demand drops to a slow to null crawl, the provider is stuck holding the bag with fixed costs for technology and resources, which may force them out of the RPO business line. Granted, one of the benefits of outsourcing is to be able to scale up quickly as well as down to meet demand, but scale to zero, without being burned? My words to the wise buyer here are to carefully vet the financial stability and long-term commitment to delivering RPO services prior to signing a contract.

Which brings us to RPO pricing methodologies. Our 2009 “Targeting RPO” market analysis found that 84 percent are paid per hire, of which 72 percent have a monthly fixed cost, sometimes known as a program management fee. This 84 percent is broken down as follows:

•  64 percent are in conjunction with monthly program management fees

•  8 percent are 100 percent variable (only paid when there is a hire)

•  8 percent are in conjunction with the number of provider FTEs supporting the contract

•  4 percent are per hire only, but with a guaranteed minimum number of hires

Further, risk/reward is used by 56 percent of vendors for SLA performance (but only in approximately 25 percent of contracts as clients don’t want to pay when providers exceed targets), pricing by number of FTE support is a relatively new pricing method, and gain-sharing is not common, but could be a move to benefitting both sides when client costs are reduced below those anticipated in the contract.

But there are, of course, risks associated with any pricing model. Looking specifically at variable and fixed costs:

Variable – If the contract states 100 percent variable and volumes are low, or if demand drops too sharply, providers risk recovering fixed costs, e.g. technology investments, core team, etc., which could up-end their ability to continue providing RPO services

Fixed – If fixed costs are too high, clients risk paying too much for low volumes or if demand drops steeply

We’re beginning to see an emerging trend whereby both clients and providers agree to a more variable cost structure. But to reduce risk, providers should gain some assurance of a minimum level of volumes clients are willing to pay for, or a minimal level of dedicated FTE support the client requires. And buyers can mitigate risk by committing to some minimum volume of hires or some minimum fixed level of support, with lower cost-per-hire fees, and still reduce costs from what they could internally provide.

Gary Bragar, Lead HRO Analyst, NelsonHall