Other Outcomes

Going Beyond TCO in BPO Contract Assessment

By Dan Berthiaume
While total cost of ownership (TCO), a summary of all tangible costs associated with a BPO contract, is still a near universal tool used by BPO buyers when assessing a potential contract, BPO buyers are beginning to look beyond TCO into intangible, non-linear factors associated with outsourcing relationships. In a panel entitled “Buyer Super Panel: Costs, Contracts and Benchmarks” held during the Nearshore Nexus 2012 Conference held April 19 in New York City, Mark Peacock, CIO of Pegasus Solutions, and Esteban Herrera, COO and advisor, HfS Research, discussed the continuing evolution of BPO contract assessment.

TCO Remains ‘Table Stakes’
Herrera opened by saying TCO is very much alive and well as a standard measurement employed by BPO buyers. “How much will this cost me is still table stakes (for BPO buyers),” said Herrera. “Transformation is the next frontier.”

Herrera said buyers understand TCO better than other parameters that can be used to analyze the ROI of BPO contracts. “No CFO says, ‘I want to see non-linear revenue,’” he commented.

However, Herrera did note some changes in the world of BPO contracts. “There is a downward rate of pressure on new contracts and an upward pressure rate on contracts renewals,” he said. “Outcome-based pricing is gaining strength. Contract lengths are shorter. Three (years) is the new seven.”

Benchmarking Has Flaws
When it comes to setting performance benchmarks in BPO contracts, Herrera, who said he has extensive experience in setting contract benchmarks as a previous BPO practitioner, said the practice is overvalued. “Benchmarking can always be debunked by someone determined to do so,” he said. “It is overnegotiated and underutilized.”

According to Herrera, benchmarking almost never accounts for the actual total cost of a BPO contract. “It never tells the whole story,” he said. “Usually a relationship is already beyond repair when a benchmark is invoked.”

Nearshore Value Goes Beyond TCO
Peacock and Herrera both explained how nearshore BPO (outsourcing North American business processes to relatively close Latin American destinations rather than to “farshore” destinations in Europe, Asia/Pacific Rim, or Africa/Middle East) offers value that goes beyond simple TCO.

“Latin America has a TCO about 8% higher than outsourcing to traditional farshore destinations such as India, the Philippines or China, based on tangibles” he said. “But the intangibles of Latin American BPO probably will or already have erased the 8% advantage.”

Herrera said these intangibles include scale, the availability of talent, security, and business continuity. Peacock, whose company provides nearshore voice services to the hotel/travel industry, said when you “peel back” the TCO of outsourcing to India and China, there are added costs relating to complexity and coordination of services.

“There is a hidden cost of going fully offshore,” said Peacock. “Staying in your time zone (with nearshore) takes complexity and implicit cost out of the operation. You can quickly get a trainer or product person to a nearshore location. It’s a three-hour flight, not a 13-hour flight. You can stay welded to the process. The 8% uplift is easy to overcome.”

Staying out of the ‘Graveyard’
Another advantage of nearshore BPO that goes beyond TCO calculation is avoiding dealing with third shift employees. “I know very few really normal, bright people who want to spend their lives working the graveyard shift,” Peacock said. “Nearshore keeps you out of the graveyard.”

Peacock and Herrera both advised companies to consider a “follow the sun” outsourcing model that includes both nearshore and farshore elements, to avoid relying on third shifters and also to obtain the benefits of both models. They said dividing a BPO strategy like this especially makes sense for larger deployments.

“On a global scale, with more than 200 FTEs (full-time equivalents) it makes sense to have more than one BPO location,” stated Herrera. “With more than 500 FTEs it makes sense to have more than two.”

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