As companies adopt more flexible approaches to business process service delivery, they are also moving to new outcome-based payment models that support how businesses need to operate today. (An installment in our multipart series on the shifts necessary for future-proofing your company.)
Future of Work Enabler: Flexible Commercial Models
1. Future of Work Enabler:
Flexible Commercial Models
As companies adopt more flexible approaches to business
process service delivery, they are also moving to new
outcome-based payment models that support how
businesses need to operate today.
This report is an installment in our multipart series that explores
the shifts necessary for future-proofing your company.
| FUTURE OF WORK
Making the Shift to the Next-Generation Enterprise
(a multipart series)
2. 2 FUTURE OF WORK September 2013
Executive Summary
Most companies today have worked with service providers that
deliver IT infrastructure, applications or noncore business process-
es. Businesses entering into their third or fourth contract renewal
now wish to extract more value from these arrangements; after
all, there is only so much work you can move offsite, and only so
much process reengineering you can do to improve operational ef-
ficiency. Additionally, the forces of globalization, virtualization and
new technologies — namely, social, mobile, analytics and cloud, or
the SMAC Stack™ — are enabling businesses to do more than just
incrementally improve their agility and reduce costs.
The cloud, in particular, is inspiring organizations across industries
to become more innovative when it comes to purchasing and con-
suming business services, especially services that deliver “core”
business processes, such as medical management in healthcare,
clinical trial management in pharma, digital asset management
in media and entertainment, and order management in manu-
facturing and retail. Whereas clients in the past had few options
beyond acquiring and building their own assets for such processes
and dedicating an internal IT group to manage these assets, the
cloud now permits them to be delivered remotely, in a setup often
referred to as business process as a service (BPaaS).
Rather than merely copying what the client already does, provid-
ers of BPaaS create a “gold copy” of the process, based on best
practices, and continue investing in updates and upgrades that
continuously drive performance improvements. In this way, BPaaS
can enable organizations to run better — by significantly reducing
the size of the IT function and in-house computing infrastructure
— and run differently, by introducing new ways of working and in-
novative business capabilities.
Moreover, BPaaS shifts the hosting of applications and processes,
as well as IT oversight, to the provider. The provider can scale in-
vestments and domain expertise to deliver services at lower cost,
using global talent and advanced algorithms to address standard
processes, adding customizations and reconfiguring the processes
to address unique client requirements.
3. As companies look to their providers to deliver BPaaS, they are also taking a fresh look at the
commercial structure of the deal itself to be a greater source of value. Traditional pricing struc-
tures that are based on full-time equivalents (FTEs) or time and materials are increasingly con-
sidered outmoded, as they tilt the balance of risk toward the buyer. Additionally, they encourage
vendors to set low unit prices at the outset and then raise the price for volume increases, change
requests and services beyond the original contract scope. What is more, traditional pricing is
focused on the wrong place — the anticipated labor and time applied to delivering the service
rather than the output, or business value, derived from the work performed.
Newer pricing models are premised on “outputs” rather than “inputs,” enabling the buyer to tie
the services received to actual business goals and value accrued. They are also built on a variabi-
lized cost structure that scales with demand, allowing the buyer to avoid surcharges for unantici-
pated decreases in service volume.
Adopting BPaaS and a flexible, outcomes-based approach to paying for business service deliv-
ery involves a range of considerations, such as the initial setup of the contract terms, accurate
volume forecasting, supplier knowledge and the risk of moving to a new model. However, there
are many benefits to adopting a flexible commercial model, as it supports how businesses need
to operate today – and in the immediate future.
Flexible commercial models are one of the eight enablers companies need to consider when
mapping their journey of reinvention for the new world of work, as described in our overview pa-
per, “Making the Shift to the Next-Generation Enterprise.” In this installment, we will look at the
many choices and considerations businesses must make when enabling new commercial models.
FUTURE OF WORK ENABLER: FLEXIBLE COMMERCIAL MODELS (A MULTIPART SERIES) 3
Figure 1
Mapping the Enablers to the 3 R’s
1
Community
Interaction
2
Innovation
3
Worker
Empowerment
4
Virtual
Collaboration
5
Customer
Empowerment
6
Commercial
Model Flexibility
7
Value Chain
Flexibility
8
Flexible Service
Delivery
RETHINK
the Business
Model
3 3 3 3 3
REINVENT
Business
Processes
3 3 3 3 3 3
REWIRE
Operations 3 3 3 3 3 3
Community Interaction Model
Innovation Model
Worker Empowerment
and Enablement
Customer Empowerment
and Enablement
Commercial Model
Flexibility
Value Chain
Virtual Collaboration
Flexible Service Delivery
Community Interaction Model
Innovation Model
Worker Empowerment
and Enablement
Customer Empowerment
and Enablement
Commercial Model
Flexibility
Value Chain
Virtual Collaboration
Flexible Service Delivery
Community Interaction Model
Innovation Model
Worker Empowerment
and Enablement
Customer Empowerment
and Enablement
Commercial Model
Flexibility
Value Chain
Virtual Collaboration
Flexible Service Delivery
Community Interaction Model
Innovation Model
Worker Empowerment
and Enablement
Customer Empowerment
and Enablement
Commercial Model
Flexibility
Value Chain
Virtual Collaboration
Flexible Service Delivery
Community Interaction Model
Innovation Model
Worker Empowerment
and Enablement
Customer Empowerment
and Enablement
Commercial Model
Flexibility
Value Chain
Virtual Collaboration
Flexible Service Delivery
Community Interaction Model
Innovation Model
Worker Empowerment
and Enablement
Customer Empowerment
and Enablement
Commercial Model
Flexibility
Value Chain
Virtual Collaboration
Flexible Service Delivery
Community Interaction Model
Innovation Model
Worker Empowerment
and Enablement
Customer Empowerment
and Enablement
Commercial Model
Flexibility
Value Chain
Community Interaction Model
Innovation Model
Worker Empowerment
and Enablement
Customer Empowerment
and Enablement
Commercial Model
Flexibility
Value Chain
Virtual Collaboration
4. 4 FUTURE OF WORK September 2013
Moving Toward a New Commercial Model
Moderate growth and relatively flat or declining performance at businesses
worldwide are prompting big changes in how companies view business process
service deals. In go-go times, it seems reasonable to enter into a commercial
arrangement based on input, in which the contract terms revolve around a set
number of FTEs or hours of service. However, when growth slows, it makes more
financial sense to tie contracts to output, such as the cost per claim in insurance,
cost per trade in financial services or customer onboarding time in media and
entertainment. With more flexible, output-based commercial models, there is a link
between the business volume flowing through the system and the costs incurred.
The transaction levels themselves drive how much the business pays for the given
service, shifting the cost risk onto the provider.
Flexible commercial models are also attractive to the growing number of businesses
that want to reduce capital expenditures and transition to more flexible Op-Ex
budgets. Additionally, as the services marketplace has matured over the years,
providers have gained rich stores of domain experience, knowledge and intellectual
property, based on their client work. Businesses increasingly expect their providers
to act as value-added assets that can “sell” their expertise back to them on a per-
transaction basis. Companies that take advantage of these capabilities can then
reinvest the savings into core processes that either differentiate or reinforce their
competitive advantage.
The attractiveness of output-based commercial models varies, depending on the
type of service being consumed. For instance, software as a service (SaaS) deals
often use input-based models, as they commonly involve project-based work and
have a lower cost commitment. IT infrastructure and BPaaS work, on the other
hand, involve fluctuating volumes based on business need and performance, and so
are geared toward output-based models.
BPaaS and output-based pricing models are also attractive for companies that
wish to implement social media and analytics capabilities for the first time. Without
legacy investments to defend, it is easier to justify a new approach to obtaining
these capabilities, and they are also easier to consume as a service than other
business functions, such as ERP.
The Reality of Flexible Commercial Models
A good example of using output-based pricing in a BPaaS setup is our work with
a global pharmaceuticals client, in which we manage the entire clinical data
management function on a per-transaction basis. In the past, we used a fixed team
and a preset amount of resources, no matter the work volume requirement. Now,
the client pays only for resources used, on a per-trial basis. In doing so, the pharma
has effectively passed the risk and responsibility of optimizing operations to us
and incurs costs only as its own business volume fluctuates. This arrangement has
become particularly important as the life sciences industry struggles to develop
new blockbuster drugs.
Businesses increasingly expect their providers
to act as value-added assets that can “sell” their
expertise back to them on a per-transaction basis.
5. FUTURE OF WORK ENABLER: FLEXIBLE COMMERCIAL MODELS (A MULTIPART SERIES) 5
Another example is the work we do with a large insurance provider. We purchased
the client’s technology and real estate assets and hired a team of its employees to
process a significant portion of its business and then sell it back as a service, on a
per-transaction basis. This provided the client with a lower total cost of ownership,
transferred employment risk to its partner and secured stronger career prospects
for employees. The client also realized a financial return on its historic investment
in assets, while creating a mechanism to ensure strong ongoing investment to
develop these assets and create a world-class infrastructure.
Challenges and Considerations
Moving from a traditional service provider setup to BPaaS and output-based pricing
involves many changes, challenges and considerations, namely the following:
• Understanding who controls what: In a traditional service provider scenario, it
is critical to build a strong client-provider relationship, as well as a solid contract,
particularly as the buyer gives up control in exchange for committed benefits.
But this is even more the case with BPaaS and output-based pricing models.
The client needs to be confident that the vendor will continue to invest in and
develop the platform to stay at the forefront of the market. Otherwise, the buyer
risks ending up with an outdated platform, making it difficult to bring work back
in-house.
• Redefining relationships: Moving to an output-based pricing model changes the
relationship between provider and client, and it takes time for each to rediscover
and acclimate to their new roles. Collaboration becomes more essential than ever,
not only for business effectiveness but also for business agility and regulatory
compliance. For instance, the more feedback buyers provide on outcome perfor-
mance, the better able providers will be to fine-tune their processes and infra-
structure.
Quick Take
Flexing Business Process Work
Adopting a flexible, outcomes-based approach to paying
for IT and business service delivery can deliver a wide
range of benefits, including:
• Increased pricing certainty: Clients are able to more
clearly identify total cost of ownership, as they are
effectively buying a whole solution.
• A shift in responsibility to the supplier for raising
productivity and reducing the total cost of service
delivery: Suppliers accept responsibility for provid-
ing the whole solution and for committing to price
reductions across the service they provide, including
people, process and technology.
• A focus on outcomes, increasing service quality
and supplier responsiveness: Contractually, the
focus on process outputs or business outcomes draws
the commercial interests of customer and supplier
closer together.
• Better linking of business needs with contract
terms: By focusing on outcomes, the contract closely
mirrors the needs of the business. For example, if
business volumes drop, total transaction charges will
similarly decline.
• Improved risk management: Clients are no longer
exposed to project implementation risks or the need
to invest in upgrades or new technologies.
6. 6 FUTURE OF WORK September 2013
• Adopting new roles across the organization: Different commercial terms
require new forms of governance, better accountability and the need for different
communication streams within the organization, as well. In particular, the IT, pro-
curement, finance and program management functions need to develop new
capabilities, without undermining the economics of moving to an output-based
BPaaS model. For instance, CIOs need to be able to engage in a fluid discussion
with the CFO and COO about how these new approaches impact cash flow and
financial reporting models.
• Moving from “inputs” to “outputs”: Defining transactions or units of work
requires a high degree of collaboration, both inside the organization and with
the provider. Outputs need to be rigorously specified and defined, with no room
for ambiguity. This entails retaining traditional service level agreements (SLA) to
define responsiveness and time limits, while paying more attention to creating
operational level agreements (OLA) that measure value in a new way.
An example is a pharmaceuticals company whose goal is to get safer drugs to
market faster; it would need to define specific outputs that pertain to speed of
drug development and safety of the drug.
Even organizations with a long history of working with service providers will not
have experience in specifying outputs to this level of detail. Businesses need to
establish a governance team that assumes responsibility for administering these
metrics, tracking them, instituting a reward/penalty structure and periodically
reviewing and aligning these new measures.
• Accurately forecasting volumes: Companies also need to institute a way to
accurately predict transaction volumes, both to stay within the parameters of
the commercial model and to give suppliers sufficient lead time to absorb volume
variations. It’s all well and good to variabilize costs, but it does require predicting
volumes to a reasonable level of accuracy. If the target is 100 transactions, the
vendor will normally allow a latitude of between 90 and 110 and price between
80 and 120. They will still do the work, but it will be more expensive on a per-unit
basis. Making these predictions requires sufficient visibility into the processes, as
they need to be made not weeks but months in advance.
• Balancing standardization and customization: Moving to a platform owned and
developed by a third party will necessarily drive standardization, which is usually
desirable but can also be painful to achieve. Businesses need to be fully confident
that the service provider will make continuous investments in the platform and
can manage a multi-tenanted platform. There is a risk — especially for smaller
companies—thatoneortwodominantcompanieswillinfluencethewayinwhichthe
platform develops and where investments are targeted. Not only does the service
provider need to ensure that it is invested in each client’s business model, but it
also needs to develop the platform in line with emerging and evolving trends and
technologies.
CIOs need to be able to engage in a fluid
discussion with the CFO and COO about
how these new approaches impact cash
flow and financial reporting models.
7. Words to the Wise
Output-based pricing models are an emerging approach, with few precedents or
industry benchmarks to follow. Compared with input-type data — the hourly salary
of a claims administrator or Java programmer, for instance — it is much more
difficult to obtain output-based data, such as the cost to process a complex claim.
But their relative immaturity is not a good reason for waiting too long to take
advantage of BPaaS and output-based pricing models. Early movers can wield more
influence over the provider’s platform and dictate how processes can be optimized
to their needs, simply by virtue of being the first customers. Once more companies
move to the platform, there will be far less opportunity for differentiation. A con-
servative approach would be to run a flexible commercial model in parallel with a
traditional input-based approach for a year or so and track the progress between
the two. This would reveal the benefits and risks of the output-based approach.
Short-term thinking may seem to be the best way forward in today’s uncertain
economic climate, but organizations shouldn’t be so easily swayed. While it’s
tempting to fall back on familiar patterns of procurement and managing vital
business processes, doing so is a recipe for stagnation. It is only by embracing
more flexible commercial models that organizations will be equipped to contend
with today’s business challenges, while gathering the wherewithal to contend with
tomorrow’s operational requirements.
About the Author
Martin Kochman is Cognizant’s Vice President of Business Process Services. He has held multiple
senior consulting and executive management roles and has extensive experience in customer rela-
tionship management, shared services operations and global transformational sourcing programs.
Martin has designed, built and managed centers in the UK, India and Eastern Europe, and has
operated multiclient, multivendor, multilingual contact center operations. He also has negotiated and
implemented many innovative outcome-based commercial contracts, including asset monetization
and sale and lease-back arrangements. He can be reached at Martin.Kochman@cognizant.com.
FUTURE OF WORK ENABLER: FLEXIBLE COMMERCIAL MODELS (A MULTIPART SERIES) 7