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April 02, 2020

BPO Contracts: Your rate card may be great – but are you still paying for too much?

By Maureen Piche  – Principal, Strategy and Business Transformation

If you’ve been part of a Business Process Outsourcing (BPO) Managed Services contract negotiation, you understand that it is distinctly different than typical supplier procurement agreements. While many organizations focus on getting the best rate card, they may be missing out on significant savings.

Attention to detail

Managed Services implies just that – your outsourcing partner is managing the delivery of services on your behalf.  This means that instead of managing the operational execution of in-scope process, you are now overseeing and managing contracted outcomes and service levels performed by your partner.  BPO agreements, if constructed properly, are very complex and cover all aspects of the partnership including expected outcomes, minimum service commitments, transformation, pricing, etc.  However, many companies leave a lot of these important details out and focus almost exclusively on rates and (sometimes) service level agreements (SLA’s), particularly for first generation contracts and even in some second-generation renewals.

Total process cost

Consider this scenario: your organization has a competitive rate card and is receiving excellent service. Would you know if your service provider is making an effective use of your resources or using more resources than necessary? A more appropriate comparator in evaluating the competitiveness of your agreement is the total process cost at an expected service level coupled with contract terms that meet your changing business needs. This is more than a simple P times Q rate card exercise. Calculating the total process cost captures every cost associated with the provision of that service including internal labor, external outsourcing costs, and associated technology costs. By benchmarking the total process cost, including SLAs, improvements in efficiency metrics, and achievement of transformation objectives will provide a more comprehensive view of the total competitiveness of your outsourcing program.

Is the best rate card really the best deal?

Let’s look at a real example.  As compared to market rates (by role and by region), a company had a very competitive BPO rate card and several SLAs were routinely missed. Through a structured benchmark, it was revealed that the service provider had staffed under-qualified (and lower paid) resources at 30% more FTEs (full time equivalents) than originally contracted for certain processes.  The need for additional staff was not only a result of using under-qualified resources but also significant technology gaps and underachievement in process standardization that together were driving productivity inefficiencies.

Collateral issues included the burden on the retained, internal resources who were spending inordinate amounts of time training, coaching, and handling escalations from the under-qualified service provider team. Capturing these additional efforts in the total process cost only further underscored the fact that this company was overpaying for this scope of work.

The bottom line

The net result of this benchmarking exercise revealed the provider’s labor pricing was competitive but inefficient and ineffective. It was determined that significant savings (~20% total contract costs) could be achieved with increased productivity and technology coupled with proper staffing and resourcing. This was overwhelmingly compelling data and facts with which to renegotiate the contract.

Bottom line:  BPO contracts are not just about getting the best rate card. Efficiency and Transformation Matter.