By Adam Sak
The outsourcing industry is experiencing a game-changing technological advance that will challenge the status quo of transaction pricing models and fees. Service providers globally are realigning their workforce by rapidly removing expensive human resources (FTEs) and replacing them with robotic equivalents at a fraction of the cost. This adoption of Robotic Process Automation (RPA) by outsourcing service providers is driving a material reduction in the cost of service delivery, resulting in better margins.
What do these innovative and disruptive provider efficiencies mean for existing and future outsourcing customers? Certainly lower provider delivery costs should translate into lower fees for customers. Customers negotiating new service agreements with an RPA-adopting provider will be the first beneficiaries as they have the negotiating power to drive lower fees based on the new lower cost structure. Beyond the initial price reductions, new service agreements that cover service periods of three to five years should include guaranteed fee decreases year-over-year to reflect the anticipated continuing cost-reduction benefits of further adoption of robotics and artificial intelligence. Similarly, new contracts should reflect the reliability and speed of automated transaction processing and increased automated volume throughput by guaranteeing year-over-year improvement in relevant service levels.
What about customers with existing contracts? When can they expect to see fee reductions attributed to RPA efficiencies? The answer depends on the flexibility and foresight embodied in the existing outsourcing contract. If an agreement is approaching a renewal window, the customer should be able to seek fee reductions similar in scope to fees offered to new customers. However, realized savings on renewals may not initially equal new customer pricing − renewing customers likely do not have as much negotiating leverage because they have already invested in and are more dependent on the incumbent provider. Service providers often recognize, and use as negotiating leverage, the material cost and business risk to the customer of disengaging and transitioning service management to a new provider solely to achieve price reductions (as opposed to improving service).
Customers that are not at a renewal point may still achieve fee reductions with existing providers if their contracts contain a benchmarking provision. A benchmark typically compares the fees and service levels of a specific contract against a relevant comparison market comprised of similar service providers delivering similar services to a normalized base of customer transactions. If the benchmark results show with reliability that the existing fees fall outside a pre-defined band of normalized market-based fees, then the customer often has the ability to lower its fees, bringing such costs within a pre-defined pricing band (e.g., top quartile pricing), or to seek other relief, including termination. Even if a customer’s service provider is not implementing RPA, benchmarking may still entitle a customer to a fee reduction based on industry peers realizing lower delivery costs. If enough comparable industry players are benefitting from new disruptive technologies and processes, they can drive non-adopters to grant fee reductions to customers or face breach or termination remedies under a benchmarking scheme.
Robotic Process Automation is an undeniable disruptive force in the outsourcing industry. As providers adopt RPA and other artificial intelligence solutions, the customer market overall should benefit as lower provider delivery costs translate into lower customer fees.