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Outsourcing Fundamentals

Independent guide to Outsourcing: BPO strategy, Service Provider selection, contracting and implementation projects. Assessing and improving your current service.

Strategy > Commercials

Commercial Considerations Impacting Strategy

This page looks at commercial aspects of outsourcing and specifically those that have implications for the strategy. There is a much more extensive set of commercial considerations to be considered and negotiated as part of the solution development, but those shouldn't change the fundamental approach.

What are the factors impacting strategy and what are the choices?

  • Pricing approach: Will you pay for (calculate charges on the basis of) the resources available, the work activity or the outcomes? Alignment of client and supplier interests is generally better if payment is based on outcomes than activity, and activity than resources. However, the choice does depend on the nature of the service and in particular what is measurable. Do spend some time thinking about the deliverables and value of the services and how well these can determine charges. Providers need to be able to link their charges to their costs.
  • Managing volume fluctuation: The service provider will try and match resources to demand from day to day and month to month as efficiently as possible, but will want charges to cover the cost of resourcing for short term peak demand. The commercial arrangement should take into account your need for flexibility but also your ability to plan for and predict changes in demand.
  • Transformation: Moving to shared services always involves changes to the business process and the target is usually to improve efficiency. Commonly in outsourcing projects, there is a discussion about whether the process should be reengineered before outsourcing or outsourced first and allow or involve the service provider in making the changes. The underlying concern being that the service provider will make excessive profits in the latter case.
  • Ongoing service changes: Businesses evolve, some rapidly and others more gradually. It is important to consider how much the requirements are likely to change over the term of contract. As a default, changes can be taken care of through negotiation and according to a pre-defined process of change control. Some changes may be sufficiently certain to have them priced in to the deal or at least have specific agreement on how to deal with them.
  • Taxation: Most tax implications are dealt with between the respective company tax specialists. However, for multi-country deals there can be billing implications. It is worth checking how much value there is in having separate billing of services to countries.
  • Term: To some degree, the length of contract term is a direct cost question (see table). However, if having a shorter term is essential, then the strategy should focus on reducing the supplier one-off costs.
  • Termination: Most outsourced services last multiple terms, but termination at some point is likely. The strategy should take account of the alternatives at end of term: renewal, switching to an alternative supplier, or bringing the service back in-house. What would be the implications in each case?

Factors with significant cost Implications:

Lower CostFactorHigher Cost
Simple defined processes in line with market norms.Process ComplexityProcesses requiring specialised judgement unique to the client
Standards cover whole of serviceProcess ConsistencyThere are exceptions for different areas of the business
Broad scope of services requiring team in service centre with similar skillsScope and ScaleNarrow scope of services requiring specialist individuals
Little variation in volumes and variations are regular or can be forecastVolume variabilityLarge hour to hour and day to day variation of demand that cannot be predicted.
Able to use provider organisation, work management and service centre toolsService StructureThe structure of the services has to be designed specifically to fit the client
Provider is free to move staff to and from other client teams and use shared specialist skills and tools.Resource SharingDedicated team and isolated support tools
Service levels set at or below market norms. They allow use of providers normal work management.Service LevelsService Levels are above market and require specific process design and resourcing to accommodate.
Location of the services is at option of provider (including offshore)Location of ServicesServices must be delivered from within the country requiring the service, or from constrained list of countries
Service is delivered in a single language (English)Language requirementsMultiple languages are required. Native speaker language skills required. Contact centres staff must have good cultural knowledge.
Service can be delivered through multiple channels including a portal, email as well as telephony. Any documentation is electronic. Delivery ChannelsService must all be over the telephone or even face to face. Paper records are required.
Provider is not obliged to take transferred employeesIn scope EmployeesAll employees currently involved are to be transitioned.
7-10 year contractTerm3-5 year contract