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Contact Center Outsourcers! Prepare RFP Responses that Win Projects…with Activity-based Analysis

            By Brian Hinton, President, Primary Matters, Inc.

            September 2005

The new millennium has signaled a boom for contact center outsourcers.  The need to “touch” customers often and efficiently is a key success metric for most businesses.  Businesses contact current customers for up-sell/cross-sell opportunities and to survey for customer satisfaction.  Outbound calls are made to leads for new sales.  Inbound contacts come from prospects interested in information or buying.  Inbound contacts come from customers needing support which becomes an opportunity for up-sell/cross-sell.  Contacts don’t always come from external customers.  Employees contact the IT organization for help-desk support.     

Setting up an organization to respond accurately, efficiently and productively to these contacts is complex and costly, so the need for contact center outsourcers is growing rapidly.  Unfortunately, as with any market, the growing demand is accompanied by a growing supply and outsourcing projects are extremely competitive. 

Intense competition for projects forces the successful bidding range to an extremely narrow margin of opportunity.  Bid too high and the project is lost.  Bid too low and the project is not profitable.  How can an outsourcer place a successful bid when the project is new and the details are vague?

You could compare the current prospect’s project with contracts already won and the work is being performed in your center.  Are you sure that your existing contracts are profitable?  Do you consider fixed costs when determining profitability?  Do you include fixed costs in your bids?  How about the cost of tools used to accomplish the work?  Are all the license fees and cost of IT support for the contact center included in your bids?  Do you consider the productivity of your personnel when bidding?  What if you have to hire more people?  Will they be as productive as your current employees…able to handle as many contacts per hour?  How about your turnover?  Do you know what it costs when people leave and you have to hire and train new employees?  Are those costs covered in your bid? 

It is no surprise what often happens.  Businesses accept “Fixed” headcount bids from outsourcers as neither side is comfortable with projections.  The prospect has to be sure the work is covered at an appropriate service level.  Outsourcers need to ensure they make a profit.  Both sides agree on a “Fixed” headcount that the outsourcer will provide based on an estimate from the prospect of the work to be performed.  Fixed headcount contracts do not ensure efficiency for the prospect, nor profit for the outsourcer.

From the prospect’s perspective, it is almost always more expensive to commit to a fixed headcount than to base the requirement on work projections.  From the outsourcer’s perspective, committing to a fixed headcount that is too high, leaves people under-employed and results in high turnover.  This is very costly, reducing margins.  Committing to a fixed headcount that is too low puts you in constant friction with your client...you want to increase headcount and your client wants you to perform to service level within the dollars/headcount bid.  Too high or too low, a fixed contract puts the outsourcer and client at odds.  This is a “lose-lose” situation.”  How do we turn it into a “win-win?” 

Win with Activity-based Analysis

 There are four elements involved in preparing a successful bid:

1. Understanding the prospect’s required work,
2. Quantifying the productivity of your people performing the work,
3. Quantifying the cost of your people performing the work and the costs of the systems (and other fixed costs) they will use, and
4. Translating your understanding of internal costs to an RFP response.

Figure 1 shows an approach to activity-based analysis that will help you understand why this is the most effective method to accomplish the elements of successful bidding. 

First you must define work that is required to meet your prospect’s mission.  In this context, defining the work includes an understanding of the process steps required and what the monthly volume of those process steps will be.  The RFP should include some details around the work and the volume of work.  You can certainly ask for more details if the RFP does not contain sufficient information, especially if the prospect is outsourcing work they already accomplish internally. You can also use other similar contracts that have already been awarded to you to help estimate the specific work steps that will be required.  The bottom line is that you need to define the categories of work that are required, as well as the specific action steps within each category that your people will have to take in order to meet the prospects requirements.  You must also estimate how long each specific action step will take on average and the volume of the work.

The next step is to assign resources to perform the work that you have defined.    A “resource” is a very powerful concept and the key to value in activity-based analysis.  The resource is a combination of the person performing the work, and the tools (software, hardware and facilities) that person uses to accomplish his/her tasks.  Just as the work is defined, in creating Resources the people and the tools are defined.  Annual cost and productivity are defined for the people and total cost of ownership and capacity are defined for the tools used.  By assigning the resource to perform clearly defined work, demand is created for that resource…meaning demand for people and demand for the tools they will need.      

By defining the work to be accomplished and the resource that will perform the work, you produce a complete understanding of the headcount, tools and budget you will have to commit to accomplish the work requested in the RFP.  This view of resource requirements is broken out by work step so you have an unprecedented view of your cost structure…meaning the resource requirements driven by each work or process step.

Understanding your resource requirement and your cost structure enables flexibility and accuracy in your bid response.  First of all, in case the prospect requires a fixed headcount bid (because they aren't using activity-based analysis!), you are able to respond with qualifications that will ensure a successful relationship after the contract is awarded.  You will be able to relate the fixed headcount to the work required…specifically the volume of work.   You will understand the cost and productivity of your people so your bid response can ensure the per-person bid is profitable…including the costs of the tools used and your organizational fixed costs.  You will be able to state a range of volume for which the current bid is applicable and scale the bid along with volume so all contingencies are covered in the bid …not debated after contract award.

However, the ideal result would be to respond with a variable headcount (or hourly) bid based on transactions handled or hours worked.  Activity-based analysis used in preparing your bid response reveals your cost per transaction (variable and with fixed costs allocated).  The analysis will also reveal your cost per person hour (variable and fully-allocated).  This detailed understanding of your cost structure in performing your prospect’s required work allows you to respond very specifically to your prospect’s needs. It enables you the flexibility to adjust to your prospect’s requirements, ensuring profitability. 

One of the biggest challenges of bidding (especially as dynamic bidding becomes more popular) is knowing how far to go before pulling out of the bidding process.  A benefit of activity-based analysis is the ability to vary assumptions about the productivity and cost of your people, the capacity and cost of the tools used,, the volume of work, or the length of time it takes to perform the work.  This enables you to test the sensitivity of the profitability of your bid before the contract is awarded.  This prepares you for dynamic bidding knowing how far you can reduce your bid and still stay reasonably profitable.      

An Activity-based Analysis Example

A large non-profit agency was looking for an outsourcer to provide their member services.  This involved responding to inbound member and non-member calls and emails on typical membership issues.  Contacts from non-members would result in an outbound mailing with membership information.  Let’s use activity-based analysis to produce the data required for a credible RFP response.

The following table lists the assumptions used in our activity-based analysis.

    
An activity-based planning tool includes a productivity algorithm which uses the Member Rep assumptions to establish the productivity of the Member Rep.  These same assumptions are also used to create a true annual cost for the Reps.  Figure 1 illustrates the information revealed within an activity-based tool once the personnel templates have been populated with the assumptions.

This report reveals the true, annual cost of your employees including training and hiring.  It also includes the true productivity of your employees as a function of productivity shrinkage and agent efficiency.

The modeled work and the productivity of your employees work together within an activity-based analysis tool to produce resource projections.  These are the resources (headcount, systems and budget) that are required to fulfill the work defined in the RFP.  Figure 2 shows the headcount required based on the work assumptions detailed above.  Notice that the headcount required to support the project defined in the RFP includes the ratio-based personnel and the additional allocated fixed personnel.  The personnel required to operate the systems used by the Member Reps are also included.  The headcount for these Operations Personnel is only the portion which is justifiably allocated to this project based on the work modeled for this project.  These linkages and relationships built into activity-based analysis logic is a real value of activity-based planning tools.

It is also important to understand the portion of your systems costs that will be allocated to this project.  Figure 3 shows the total Systems costs that will be allocated to this project.  The activity-based planning tool ensures that Systems costs are generated based on the work required (and projected headcount) by the project.  The allocation of the Systems costs is down to the contact level so you will know the true total cost per contact.  The systems costs are part of the variable cost in activity-based analysis.

So what do all of these great resource projections mean?  How does this help us arrive at cost projections to ensure a credible, flexible RFP response?  Figure 4 shows an Activity Detail Report which is the first step toward understanding the costs driven by this RFP.  Based on the resource projections that are a result of the modeled work, your activity-based analysis tool will produce the cost of each modeled work process step and the cost of the overall Activity.  Based on our assumptions, the cost of handling an inbound call is $3.72.  The cost of the call with fixed costs allocated is $4.67. 

It is a simple step to translate this cost per call to an hourly cost.  The table below shows the data and formula required to translate to an hourly rate.

Using Activity-based analysis, you now have complete visibility of the variable and fully-allocated cost per call and email; the total headcount requirement; the headcount requirement for each activity and process step; the cost per hour; your overhead as a percent of variable cost; visibility, by labor category and by system, of allocated overhead; and the monthly, quarterly and annual total cost for the project.

Based on the assumptions listed in Figure 1, the response to this RFP would be based on hiring 52 Member Reps.  An hourly rate to the client of $26.09 would ensure a 15% profit margin over all fixed and variable costs.  Any fixed fees included in the response could reduce the hourly rate.  The total cost of providing this service to the prospect annually is $2.392 Million.  The annual revenue would be $2.81 Million.       

This information is valuable by itself, but the value of activity-based analysis is magnified by the ability to vary your original assumptions to do sensitivity analysis around changes in volume projections, allocated fixed costs (including an upfront fee to reduce the impact of the fixed costs in the cost-per-call), service level, and the length of time it will take to complete a process step.  During the bidding process, you will know how far you can go in lowering your bid.  You will be able to build qualifications into your bid ensuring that rates change as projections change.  You will be able to knowledgeably and credibly bid for a fixed-headcount contract with qualifications around volume projections.  You will be able to know exactly how to alter your bid as service levels change.  You will be able to clearly express the assumptions about work process upon which the bid is based.  The level of information and understanding you have around your cost and resources required will enable you to react to any bidding situation and develop a productive relationship with your client.

Conclusion

Activity-based analysis is the most effective method for outsourcers to use in preparing bid responses that result in profitable contracts.  You will be prepared to react flexibly to fixed bids eliminating the traps that fixed outsourcer contracts invariably create.  You will be prepared to offer detailed variable bids based on transactions or hourly rates.  You will be prepared for dynamic bidding knowing how each variance in bid impacts your profitability.  Using activity-based analysis to prepare your RFP responses ensures a productive long-term relationship with your clients where everyone’s needs are met and everyone wins.  

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