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Can Companies Continue To Price Services Using FTE and Headcount?

By Graham Brown, Chief Sales and Marketing Officer, HGS Europe
 

How do most companies price the cost of the service they provide to another company? Let’s consider the contact centre as a classic example. When one company asks a service company for a proposal and quote, what are the fundamentals that they need to include in the calculation of that quote?

At present, most service companies use a cost-plus formula. In short, this means that they look at how many people are needed to perform the service and how much it will cost to train and locate them in an office. Then they factor in some margin so the business makes a profit once all costs are met. In many service companies the Full-Time Equivalent (FTE) is an indication of how many people are needed to offer that service and therefore costs can be quickly calculated by first working out how many FTEs are needed to deliver the project.

This used to work quite well for most outsourcing contracts. That’s because with this structure, the service company knows exactly what it costs to deliver the service and will either refuse to drop below their break-even rate or will do so only to start a relationship - believing that more work will follow. But how does this work now that many service companies are offering highly valued services? Isn’t there an incentive for service companies to always increase the number of FTEs in a project if that is how the project is valued?

In my view, there is a disconnect being created in the market, as many industries are experiencing a wave of digital transformation at present. As a result, the value created is not reflected in the very simple FTE pricing model. It’s easy to think of several areas in the customer service function where technologies are increasing and improving the customer experience without the need to increase the number of FTEs in a contact centre:

  • Chatbots provide a quick and easily scalable way to get simple questions answered via Messenger apps. In fact, the average contact handle with chat is 4:1—that’s four concurrent contacts per one agent.
  • Artificial intelligence (AI) and machine learning helps agents to answer customer questions correctly far more often on the first interaction.
  • Content creation can support self-service, with answers provided to most common support and frequently asked questions and ensuring that information can easily be found by a customer searching on Google.

These are just three areas of change that are having a dramatic impact on the interface between brands and customers. Increasingly, these are table stakes, as today’s customers expect that brands are exploring these innovations.

But what if your service company is entirely rewarded on the number of FTEs within their service contract? If you have a contact centre with 500 people and the service company earns based on the number of FTEs then why would that company explore how to use chatbots to automatically handle all simple questions? This is a major issue in many outsourcing contracts at present and not many people are talking about it - it is especially true in the contact centre environment because so many aspects of the customer experience are undergoing a wave of innovation and change.

I believe that many large service companies are going to face a rude awakening. Smaller, more agile service companies will be analysing the service they are providing and suggesting transformative ideas to the company paying for contact centre services. It may seem illogical for big service companies to be actively reducing their FTEs by exploring digital transformation, but I don’t think they have any choice. In fact, this is the definition of a good partner--one that prioritises client success.

The choice is simple: partners either explore how to transform their existing customer experience service model or other companies will come along and take the business from them - offering the type of omnichannel and automated service that modern customers expect.

What do you think about the way that outsourcing is still based on headcount and FTE? Do you think the present contracts are sustainable and if so, how can you resist the change sweeping this industry? Leave a comment here or get in touch via my LinkedIn profile.

 

 

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