Do You Think About "Gain-Share"?

Gain-share drives back office business transformation but many mature BPO engagements fail to exploit potential

Once processes in BPO engagements reach a steady state, business visibility can reveal areas for process improvement that impact the buyer’s bottom line. Providers have core competencies in back office functions - and data on their portfolio of clients - to identify areas for process improvement based upon best practices and industry standards. But do the contracts motivate providers with a financial incentive to do so? In many recent engagements, yes; in engagements going back two years or more, largely no.

Short-sighted vision hampers long-term benefits in many mature engagements

The financial incentive is known as gain-sharing, essentially a form of profit sharing from an initiative. According to HfS Research (HfS), close to half of all new F&A BPO deals in 2010 incorporated gain-share provisions (as shown in its April 2011 report, The F&A BPO Market Landscape in 2011 – see below:

More mature contracts suffer, as the potential for transformation and need for incentives were not considered when the deal was originally negotiated, according to Tony Filippone, research vice president for HfS Research. "It’s a significant problem. The core of the problem is that neither party at the time they negotiated predicted the changes they would need years in the future. Both parties need to determine the right incentive, and it’s not a straightforward agreement."

Buyers lack awareness of potential benefits from transformation and are reluctant to invest in it

Many buyers in mature engagements do not understand the upside of transforming business processes and may be oblivious to best practices. They can be very skeptical about it according to Ed Cross, MD -Xchanging Procurement Services. "I think that a lot of senior managers in business often do not believe the savings that are described. I think people put less focus into actually delivering savings and cost reduction backward into the business, to the bottom line. There has to be some form of mechanism for identifying and feeding savings directly into the business P&L."

Businesses in mature engagements can have a mindset that has yet to transition to a wider view of how an optimal partnership with a provider can be implemented, points out Prabhu Srinivasan, COO, Intelenet Global Services, part of Serco Group plc. "Contracts used to be primarily focused on just delivering operating metrics. It is just the way some industries progress. I think the market is still trying to understand how the business incentive program can work. Where the challenge lies is in identifying a measurement system that is real."

Filippone submits that buyers are reluctant to invest in speculating on transformation in back office processes. "These are generally non-core processes and buyers are not interested in paying a lot more unless the value can be shown. Buyers want contract terms that guarantee outcomes, but buyers that put the risk on their service providers are not sharing responsibility. Both organizations need to be better partners."

Focusing on the value proposition of back office transformation

Dedicating time in meetings to discover issues and propose solutions with the involvement of upper management to produce a win/win scenario is key to moving an engagement forward in transformation. Explaining what can be accomplished and how, with specificity, enhances the appeal of the proposition.

"I think you have to have a top down approach to make it a success," Cross submits. "I think that the mindset of executive management has to be absolutely focused on success. Without that, I think you'll find that the stakeholders won’t support the project."

"I think this problem with incentives is no different than the problem with indirect savings, hitting the bottom line," he continues. "You have to talk to your customer about what is possible. You have to start thinking in terms of providing benchmarks around best practices and what other companies do."

"What we try and do every three months is have a call just on business improvement ideas," Srinivasan says. "To achieve ultimate success in an engagement, it is important to have this type of review – not to discuss operating metrics or KPIs, but real business process improvement."

Through due diligence and industry benchmarks, he can subsequently present a value proposition to a client’s upper management. Essentially, in the case of a bank, he told a buyer, "Here is the industry benchmark I’m seeing for mortgage fund disbursement. You take 30 days. Here is how I can bring in my experience to bring the turnaround time down to 20 days. I will invest the costs for doing the business improvement but can you share the gain 50/50?" The endeavor was immensely successful and benefited both parties.

"The challenge for service providers is showing tangible business value and then understanding the client position," Filippone suggests. "Will buyers pay more for better services? Service providers need to be creative in terms of getting in front of executives and making their value proposition clear. The question for strategic buyers is: how do you leverage the investments and innovations of your service providers? Buyers who crack that code will be more successful."