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Introduction

Copyright © 2017 Exdion Solutions Pvt. Ltd.

As businesses across all industries realize the need to deliver more value to the customers

beyond just low price, they are making changes to their complete business model.

Vendors are increasingly seen as partners in value creation. Smarter companies are

moving away from cost based transactional relationships to an outcome based

partnership model. These companies realize the strategic value that partners bring in

areas like process efficiency, continual innovations through the adoption of

best-practices, technology and robotic process automation.

The premise of outcome-based pricing is that companies can hold their vendors to

greater accountability for business outcomes. Creating successful outcomes requires far

more than swapping out the language in contracts. Measurable gains are possible only

when both the buyer and vendor are willing to commit to a larger undertaking: namely,

making the organizational, cultural, and procedural changes necessary to support a far

more symbiotic and strategic relationship.

Outcome Based Models – Driving Change

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Copyright © 2017 Exdion Solutions Pvt. Ltd.www.exdion.comUSA | UK | INDIA

Outcome-Based Engagement Model

Outcome-based engagement model links fees to a metric directly applicable to the outcome of the business. Customer satisfaction, incremental revenues, and cost savings are some typical examples of the outcomes. Usually, the outcome-based “at-risk” component of the pricing signifies no more than 10 to 20 percent of the full fees.

The defining feature of the above-mentioned models is that they are decoupled from a fixed capacity of FTEs; also, the governance includes managing results and milestones, not service provider resources.

The service provider decides how it will deliver on the business requirements – and thus a degree of both control and risk shifts to the vendor.

Successful outcome-based pricing models require a well-planned strategy that elevates providers to trusted advisors. Above all, this means sharing control and accountability as well as risk.


Key Considerations for ‘Outcome Based’ Relationships

Contracts are usually written as a fixed component plus percentage of outcome to arrive at the end of the year/quarter. Both organizations need to invest significant time and energy in ensuring the contracts meet both organizations’ goals. Legalities are important but more critical are the understanding of the terms and conditions of performance between the parties and well-placed trust.

Contracting:


Focus on those components which directly influence business outcomes:

As noted above, outcome-based pricing works well for many business transactions,

where the vendor’s performance can directly influence the achievement of pre-defined

business benefits. This is not always the case for services as they are often too far removed

or where the vendor’s performance is only one of many components. Identifying those

services that can directly impact achievement of benefits is crucial to a successful

outcome-based model.

Objective performance measurement:

The business outcomes should be unambiguously defined in the contract, the objective

should allow effortless measurement. If any of these are absent, there is a much larger risk

of rigidities and disagreements arising between the parties during the deal’s lifecycle.

Performance measurement can be supported with well-defined metrics across all areas of

the operation. Being metric friendly enables easier conversations and fewer challenges in

the relationship. Mutually developed and agreed performance dashboards are critical to

monitor and review performance.

Better control in service delivery:

The stakeholder will typically assume much greater control over how the services are

provided including methodologies, tools, and locations so that they can acclimatize their

service delivery models relevant to the business outcomes. This renunciation of control

requires a mindset change at senior stakeholder and operational levels. This can be a

challenge for many such whose roles may undergo change or for those who are very close

to managing service delivery.

Understanding the business:

Vendors can normally assume risks only when they have a detailed understanding of the

clients business. That means having access to accurate, historical data about the

performance against the defined business outcomes, including costs and any factors that

have influenced the achievement of those outcomes in the past. This places even greater

importance on the due diligence that the vendor must carry out pre-contract. This works

best where the business and vendor have an existing relationship, history of track

records. Another possibility here is a comprehensive study being performed by the

vendor of the buyer’s business operations. Such studies are done as consulting projects

with findings and improvement opportunities being presented and discussed. Mature

companies may leverage powerful business process frameworks including Lean, Six

Sigma, DMAIC and SIPOC methodologies. Voice of Stakeholder and Customer surveys

are also conducted to understand current business challenges before agreeing on possible

outcomes.


A steering board should be formed comprising of CXO teams – leadership needs to be

continually involved to review functioning. The frameworks of the relationship should be

so built to allow for reasonable flexibility to enable course correction as required.

The vendor will need ongoing information about the strategy, business strategies and

product roadmap, and any other influences which may affect the defined business

outcomes.

Successful application of an outcome-based model requires practicality and rationality

from parties and their advisors, careful preparation and due persistence, open sharing of

risk and reward, and transparency and trust between the parties. Though each of these

achievement ideologies comes with their particular conventional challenges,

outcome-based models, implemented in the right circumstances, can be an operative way

of driving value and innovation from an outsourcing relationship.

It is important to integrate the client and vendor operational engines. The services should

be governed by well-defined and LIVE standard operating procedures that allow

improved communication and collaboration between teams.

Clear communication and escalation protocols would need to be agreed on. Mature

vendors have dedicated “Business Excellence” practices to periodically review process,

controls, possible automation and improvement opportunities. It is important for the

buyer organization to participate in such initiatives and effectively collaborate to bring

about proposed changes that are backed by clear business cases.

Driving successful outcomes through outcome-based pricing can only succeed when

both the business owner and the vendor view the relationship as strategic and are

committed to sharing control and accountability. Control empowers the vendor to have

the flexibility to innovate and make decisions that positively impact accomplishment of

business goals. Not every association will lend itself to a strategic partnership. There are

definite criteria you should consider before you decide to embrace outcome-based

pricing with a vendor:

Greater Transparency

Moving to a Strategic Vendor Relationship


Competency: Does the vendor have the delivery competency to help you realize your business outcomes?

Inclination: Is the vendor willing to pledge to a win-win relationship that aligns client and vendor goals and incentives?

Financial determination: Does the vendor have the financial forte to invest in innovation and change on a global scale?

Flexibility: Does the vendor have the needed scale and agility to support during disasters (technology breakdowns, natural calamities and other disruptions). Vendors, in general, are able to offer some level of flexibility but it is also important for the buyer to support as required during such situations. It is a good practice to evaluate vendors for adequate Business Continuity and Disaster Preparedness in their systems and processes.

Conventionally, contracting for services involved the creation of a complex master services agreement, with statements of work that controlled specific programs. These documents agreed hours of operation, headcount required, reports to be produced, and other requirements the conservative wisdom was that you needed to manage the inputs to the process to arrive at the correct output. This also led to the creation of “shadow management teams,” needed to uphold compliance with contractual terms but whose costs eventually abridged the savings.

Instead of inflexible management of inputs, the outcome-based contract outlines outcomes and measurement indicators. A robust governance model is required to limit exposure to inadvertent consequences, and the underlying economic model of shared value. When created correctly, the outcome-based contract provides a robust framework for a long term relationship.

Emphasis on Governance

Data Science to guide Transformation

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Mature vendors, as a part of their operating model, capture data at a good level of detail (transactional and business metrics). Such metrics form the basis of an analytics engine that delivers insights and models to enable right decisions and course corrections. Outcome-based models cannot be fruitful without a sufficient level of investment in data analytics. Insight from analytics allows the ability to intelligently control and tune processes to attain desired outcomes. You only get that insight from collecting the right data and analyzing it by means of proven techniques.


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For more information visit us at

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[email protected]

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Exdion comes with over 15 years of Insurance Process Management expertise. Exdion services clients ranging from Fortune 500 to small and medium sized healthcare businesses. Exdion is ISO 9001 certified for Quality and ISO 27001 and HIPAA certified for information security.

The company thrives on Business Excellence and leverages models such as Kaizen and Six Sigma along with technology enablers, to continually enhance value to customers. Exdion lays great emphasis on Accountability, Integrity, Innovation, Transparency and most importantly Customer Focus. Exdion continually strives to deliver transformational excellence through technology-centric process optimization and continual knowledge enhancement.

Exdion’s solutions include Transformation Consulting, Business Process Management, Analytics and Revenue Cycle Maturity frameworks that leverage CLOUD FIRST technologies.

About EXDION

ion contained here is correct at the time of publishing. No material from here may

For more information visit us at

or

[email protected]

www.exdion.com

Follow Us on

Exdion comes with over 15 years of Property and Casualty Insurance expertise.

Exdion services clients ranging from Fortune 500 to small and medium sized carriers andbrokers. Exdion is ISO 9001 certified for Quality and ISO 27001 and HIPAA certified forinformation security.

The company thrives on Business Excellence and leverages models such as Kaizen and SixSigma along with technology enablers, to continually enhance value to customers. Exdionlays great emphasis on Accountability, Integrity, Innovation, Transparency and most importantly Customer Focus. Exdion continually strives to deliver transformational excellence through technology-centric process optimization and continual knowledge enhancement. Exdion is also closely associated with “The Institutes” and 1 in 8 of its stafftoday are certified in various US and UK Insurance programs.

Exdion’s solutions include Transformation Consulting, Business Process Management, Analytics and Policy Lifecycle Maturity frameworks that leverage CLOUD FIRST technologies.

About EXDION

While an outcome-based model requires a great deal more time, effort, and commitment to define and execute, the potential benefits can far overshadow the disadvantages when it comes to helping organizations transform customer experience and business success.

Conclusion

It helps identify the key drivers of the outcome that you are trying to achieve and the extent to which customer service or other functions can influence that outcome. This acceptance is foundational to designing achievable improvement in outcomes and aligning expectations with your business goals.

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