Changes in Outsourcing Today May Impact HRO Tomorrow

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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