What You Need to Know

Before You Move to

Outcome-Based Contracts
Table of Contents
Introduction........................................................................................................................................................ 2

Shifting Away from a Procurement-Driven Process.......................................................................................... 3

Achieving Better Outcomes Using a New Contract Model................................................................................ 3

Moving to a Strategic Vendor Relationship....................................................................................................... 4

Putting an Emphasis on Governance................................................................................................................ 4

Using Analytics to Guide Transformation.......................................................................................................... 5

Creating an Outcome-Based Contract.............................................................................................................. 5

Conclusion......................................................................................................................................................... 8

Introduction
As customer service professionals encounter
mounting pressure to deliver a high quality, lower-
effort customer experience, they are increasingly
looking at their outsourcing contracts and
reassessing how their providers can help them
achieve better outcomes. The result is a marked
uptick in interest in moving to an outcome-based
pricing model. But is your organization willing to
change the way it thinks about outsourcing to ensure
that an outcome-based contract really delivers better
business results?
larger undertaking: namely, making the organizational,
cultural, and procedural changes necessary to support
a far more symbiotic and strategic company/provider
relationship.
Successful outcome-based pricing models require
executing a well-planned strategy that elevates
outsourcing providers to trusted advisors and
partners. Above all, this means sharing control and
accountability as you ask your vendors to take on
more risk.

The premise of outcome-based pricing is that This in-depth white paper provides guidance in what
companies can hold their vendors to greater to expect when you decide to move to outcome-
accountability for business outcomes. While this based pricing, preparing you for areas of thought and
can certainly be true and beneficial for all parties, discussion both internally and with your outsourcing
creating successful outcomes provider. Youll gain an
requires far more than swapping understanding of the steps you
out the language in outsourcing Outcome-Based Pricing: need to take when adopting
contracts. Achieving measurable Not Mainstream Yet this new type of relationship
gains in outcomes can only come Of the contact center contracts with your service provider.
when both the company wishing signed in the last two to three Throughout, youll find tips and
to outsource and the outsourcing years, 23 percent included some best practices for determining
vendor are willing to commit to a outcome-based pricing according the best model for your
to Everest Group research.1 company.

What You Need to Know Before You Move to Outcome-Based Contracts 2


Customer Experience Isnt a Commodity
Unlike office supplies and other business materials
approved by your procurement organization, your customers
are the lifeblood of your business. As such, the procurement
process and methods should take a long term value
approach and be inclusive, not prescriptive. Unit pricing is
best suited for commodities, not customer experience and
satisfaction.
Shifting Away from a Procurement-
Driven Process
Historically, outsourcing contracts were based on
an hourly or full-time equivalent pricing structure.
Over time, outsourcing relationships became more
sophisticated and were adjusted to transfer more risk
from the company to the outsourcer. This then led to
handle-minute and per-contact pricing. Although the
driver behind these changes was improving outcomes,
the actual contract implementation often did not serve
that purpose.
Large procurement organizations began to introduce
strict contractual terms that created a sense of
more risk for the vendor while limiting incentive and
opportunity for innovation. A potential unintended
consequence of this procurement-led model was that
some outsourcing vendors became focused on tactical
behaviors and short-term actions to meet the terms of
the agreement and maximize profit rather than acting
as true partners in business transformation.
The next shift in the continuum is to bring pricing
models back into alignment with the business and
customer experience goals of the company and
to balance the risk and rewards for the outsourcer
in meeting those goals. One way to achieve this
fundamental change is to move to a form of outcome-
based pricing.
What You Need to Know Before You Move to Outcome-Based Contracts
Achieving Better Outcomes Using
a New Contract Model
When planned and executed correctly, outcome-
based pricing models lead to a better customer
experience while rewarding outsourcing providers for
meeting specific objectives. Such models are mutually
beneficial by encouraging improved, business-aligned
results. A similar shift is underway in the US healthcare
system as regulatory changes are working to incent
healthcare providers for healthy outcomes instead of
paying them to perform tests and procedures.
The outcomes that companies typically want to
achieve will differ depending on what type of service
they are outsourcing. For example, when outsourcing
sales, revenue generation is the goal, with metrics
for outcomes that include: close rates, average order
spend, and revenue-generating units. For customer
care, the metrics more often focus on delivering a
quality customer experience, including: customer
effort, transactional Net Promoter Score (NPS),
and customer satisfaction. Other outcomes may
include churn, growth in a particular product line,
client satisfaction levels, and collection achievement.
Regardless of the outcome, to achieve success,
the outsourcing vendor must be able to control the
variables that influence the metric.
Ultimately, a properly planned and structured outcome-
based pricing model can help companies better
align goals and improve performance, deliver better
customer service, improve operational efficiency,
I think its something you grow into, so as the relationship
matures you can open up discussions around what are we
going to tackle next and how can we make it effective?
If the relationship expands and you have a combination
of transactional services and volume-based services and
the contract becomes more complex, then youre entering
the kind of environment where outcome-based pricing
potentially becomes part of the conversation.
Katrina Menzigian, Vice President of Research Relations,
Everest Group2
3
reduce costs, and increase revenue. However,
to achieve these results, there is an essential
prerequisite: building a collaborative and strategic
relationship with your outsourcing vendor.
Moving to a Strategic Vendor
Relationship
Driving successful outcomes through outcome-
based pricing can only succeed when both you and
your vendor view the relationship as strategic and
are committed to sharing control and accountability.
Fundamentally, as you increase the accountability you
wish your outsourcing partner to accept, you must be
willing to give up sufficient control. Control enables
your partner to have the flexibility to innovate and
make decisions that positively impact achievement of
your business goals.
Not every outsourcing relationship will lend itself to
a strategic partnership. There are certain criteria
you should consider before you decide to embrace
outcome-based pricing with a vendor:
Once youre satisfied that your partner is ready, willing,
able, and financially secure to undertake a strategic
partnership aligned with business outcomes, then
you need to turn the magnifying glass on your own
organization. Its time to assess the readiness of your
organization and the broader company to determine
whether:
You are willing to work together with your vendor,
share internal information and data, and invest
where required in the relationship?
You are willing to stop tracking some key
performance indicators to keep the focus strictly on
the outcome?
Your company is willing and able to accept
accountability for your part of the relationship?
You are prepared to lead the negotiations from a
business perspective instead of a procurement-led
process?
You are willing to create a strategic agreement that
is open and transparent?

Capabilities: Does the service provider have the

delivery competency to help you achieve your
business outcomes?
Willingness: Is the service provider willing to
commit to a win-win relationship that aligns client
and partner goals and incentives?
Financial stamina: Does the service provider have
the financial strength to invest in innovation and
change on a global scale?
Putting an Emphasis on
Governance
Traditionally, contracting for outsourced services
involved the construction of a complex master services
agreement, with statements of work that controlled
specific outsourced programs. These documents
prescribed hours of operation, headcount required,
reports to be produced, and other requirements.

1. Select the right vendor for a strategic, mutually beneficial partnership

Requirements for 2. Align core strategic goals and objectives

Creating a Successful, 3. Set expectations for accountability and control
Outcome-Based Model 4. Establish contracts that are flexible, rather than rigid and prescriptive
5. Ensure that the model incents your partner to share with agents and
makes a real change to the operations

What You Need to Know Before You Move to Outcome-Based Contracts 4

 The conventional 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 maintain
compliance with contractual terms but whose costs
ultimately reduced the savings achieved by the
company through the outsourcing arrangement.
An outcome-based model requires an entirely
different approach. Instead of prescriptive
management of inputs, the outcome-based contract
defines outcomes and measurement indicators, a
robust governance model, caps and collars to limit
exposure to unintended consequences, and the
underlying economic model of shared value. When
constructed correctly, the outcome-based contract
provides a robust framework for the relationship
while enabling the flexibility for parties to focus on
outcomes. The goal is to create a contract in which
both parties believe that value is being created and
profit is being earned and shared for a healthy, long-
term relationship.
Using Analytics to Guide
Transformation
Outcome-based models cannot be successful without
a sufficient level of investment in data analytics.
Insight from analytics gives you and your partner the
visibility you need to fine-tune processes to achieve
your desired outcomes. You only get that insight from
collecting the right data and analyzing it using proven
techniques.
Not only must you be willing to invest in analytics, you
must also be willing to share the data you collect and
the corresponding analysis with your partner. This
could include transactional NPS surveys, operational
performance analysis, customer data, and predictive
modeling.
Contracting differently requires companies to be
highly disciplined and trust their selected vendors to
meet desired business outcomes.
Accenture3
What You Need to Know Before You Move to Outcome-Based Contracts
The value of analytics in the strategic, outcome-based
relationship is more than delivering measurement of
outcomes. It helps identify the key drivers of the outcome
that you are trying to accomplish and extent to which
customer service or other functions can influence that
outcome. This understanding is foundational to designing
achievable improvement in outcomes and aligning
expectations with your business goals.
Creating an Outcome-Based
Contract
If youve assessed your current contracts, vendors, and
your own organization and decided that moving towards
an outcome-based pricing model would benefit your
company, then its time to start defining the model. Based
on our more than 30 years of experience, Convergys
recommends the following steps when moving to an
outcome-based pricing model with your outsourcing
partner.
Step One: Define the outcome, thinking in big,
bold terms
The first step is to work together with your partner to
define the big picture, assign a value to it, and then
determine how you and your partner can achieve your
macro-level goals and share in the achievement. The
core requirements for choosing your macro-level goal are
that it should be:
Achievable
Measurable
Long-term in nature
Examples of macro-level goals to begin the conversation
and alignment process could include:
Increase transactional NPS by 20 points over the next
three years while keeping costs flat
Decrease contact center costs by 30 percent over five
years while maintaining customer experience scores
Increase revenue generated by the contact center by
50 percent in the next two years
5
To support this process, it may be helpful to ask
yourself what the value of customer service is for
your organizationwhy do you provide customer
service? This might sound like a simple question,
but it is critical in enabling alignment throughout the
entire ecosystem. For instance, a subscription-based
business4 may conclude that the value of customer
care is twofold: resolve customer issues to minimize
customer churn and generate increased subscription
revenue from customers. On the other hand, a
technology provider may be focused on resolving
customer issues to minimize warranty costs and
increase the likelihood of future repeat purchases.
Understanding the core purpose for customer service
will help to define its long-term strategic value for
both your company and your outsourcing partner.
Step Two: Identify and assign control over
the variables
You should define boundaries of accountability and
control for all parties, ensuring that your partner can
control the business outcome youve agreed upon.
Moving to an outcome-based model will necessitate a
change in thinking when it comes to traditional input-
based metrics such as attrition or staffing. You must
decide how much control you are willing to concede
over variables such as policy, process, and terms
and conditions to facilitate improved outcomes. The
more controllable elements you are comfortable in
ceding to your partner, the greater the accountability
you should expect in return and the more risk you can
transfer in the pricing arrangement.
The continuum of control and accountability is
extremely important in determining how:
1. The contribution to achieving the goal will be
attributed between your company and your partner
2. The financial rewards for meeting the goal will be
apportioned
3. Ownership and accountability are split to ensure
actions are taken to achieve the goal
What You Need to Know Before You Move to Outcome-Based Contracts
Keep in mind that an important and consistent
finding in Convergys research is that the contact
center is responsible for only a portion of what are
often defined as the key drivers of success, such as
enterprise NPS. Our collective experience indicates
that customer service is generally responsible for
20 to 40 percent of the overall customer experience.
Consider this example: Convergys Analytics was hired
to help a leading global financial services provider
understand how to drive improvement in the overall
relationship or enterprise NPS. The data-driven study
concluded that customer service actions directly
impacted 25 percent of the relationship NPS. Working
in partnership with the client on key, controllable
drivers, the team made recommendations that
ultimately achieved a relationship NPS increase from
-4 to 53 percent over a four-year time period.
Step Three: Choose the right approach for
your needs
Outcome-based pricing has not yet reached the level
of maturity in the customer management business
where there are myriad proven case studies available
to be used as templates for your particular situation.
In many ways, the industry is still in somewhat of a
beta test phase where various approaches are being
considered and trialed to determine which deliver the
best results in which circumstances. Some of those
approaches include:
Segmentation Approach: In this approach,
you provide the outsourcer with a segment of
your customer base (as opposed to the entire
customer base) to test the outcome-based
model. Segments can be geography-based, by
product type or offering, or some other strategy.
This approach works well when: the work being
outsourced is stable and well managed, you
are willing to relinquish significant control of the
customer segment to achieve the desired outcome,
optimization expertise doesnt already exist in the
organization, and the technology needs for the
customer segment can be separated from the core
operation.
6
 Split Delivery Approach: This approach splits the Step Four: Focus on people to create real
outsourcing program into two core parts: service change
delivery and transformation. The service delivery Your outcome-based model should be defined to
component uses conventional pricing, while the create real change in the operation. Real change
transformation effort is a fixed fee with agreed- requires everyone in service delivery to understand
upon outcomes. The benefits of this approach are and commit to achieving the desired outcomes. Your
that the company can retain a consistent service contract should provide incentives not only to the
delivery model that can be operated in a multisite, outsourcing partner as a whole, but to the individuals
multivendor environment and still begin the interacting with customers. After all, its the agents
transformation journey based on defined outcomes. who are ultimately responsible for creating the
outcomes.
Outcome Measurement Approach: In this
approach, in addition to defining the macro-goal/
For long-term success, you should align your
outcome, you also identify and define core drivers
companys mutual interests, those of the outsourcer,
or indicators of the desired outcome. Achieving the
and those of the people performing the actual
outcome indicators helps to understand whether
work. One proven area of success for outcome-
the outcome is being achieved. The indicators
based pricing models is revenue generation, where
are tied to metrics such as 30-day repeat calls,
alignment around revenue is pushed all the way to the
transactional NPS, customer satisfaction, or a
individual agent. With the right metrics and incentives,
similar metric; however, it is the combination
you can create a culture that drives the behavior of
of these indicators that defines the progress in
each individual to the same outcomes as the overall
achieving the outcome and each indicator can be
contract. Each member of the team is then vested
weighted for importance. It is important to note
in the success of the program and, as such, delivers
that the analytics model that defines the outcome
more consistently and effectively for the organization.
indicators needs to be regularly reviewed and
updated to ensure that the outcome indicators are
driving the expected behavior outcomes. This is a
more sophisticated approach to the performance
scorecard used in many current outsourcing
relationships and provides a statistical link between
indicators and outcomes, making the process more
transparent.

It is important that the best outsourcing vendors are perceived as

true strategic partners to their clients, helping them innovate and
providing significant value-add to the client business and to the
client brand.

Stephen Loynd, Global Program Manager, Customer Contact,

Frost & Sullivan5

What You Need to Know Before You Move to Outcome-Based Contracts 7

Conclusion
While an outcome-based model requires a great deal more time, effort, and commitment to define and execute,
the potential benefits can far outweigh the disadvantages when it comes to helping your company transform the
customer experience and the business. Think of it as a marriage of equal partners, working to achieve the same
goals.

With more than 30 years proven success in designing, unifying, and of optimizing the customer experience,
Convergys has deep expertise in helping companies across nearly every industry achieve their desired
outcomes. Our entire operating model is designed to deliver continuous improvement and business
transformation. We can help you determine whether outcome-based pricing is right for your company and define
a strategic partnership that helps you improve the outcomes that are most important for your business.

In The Vested Way,6 a significant piece of work by Vitasek and

Mandrodt on the future of outsourcing, a successful outcome is
defined not in terms of a metric or a measurement, but as a core
goal that is valued by both companies and outsourcers.

1
Is Outcome-Based Pricing in BPO Here to Stay? Duncan Tucker, Nearshore Americas, October 29, 2014.

2
Ibid.

3
Want to Change the Game with Contact Center Vendors? Contract with them Differently, Accenture, 2014.

4
A subscription based business is defined as any business that invoices a customer on a systematic and regular basis, including broadband
providers, pay TV companies, wireless phone providers, etc.

5
Frost & Sullivan: Multichannel and Technology-Enabled Solutions Drive Growth in the North American Contact Center Outsourcing
Market, Frost & Sullivan press release, February 12, 2014.

6
The Vested Way, Kate Vitasek and Karl Mandrodt, Palgrave Macmillon, 2012.

Net Promoter, NPS, and Net Promoter Score are trademarks of Satmetrix Systems, Inc., Bain & Company, and Fred Reichheld.

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