HomeRemote WorkUnderstanding profit margins in the BPO industry

Understanding profit margins in the BPO industry

Over the past few decades, BPOs (Business Process Outsourcers) have become an increasingly important part of the global economy. By outsourcing activities like customer service, back-office administration, and accounting, businesses can make cost savings, improve performance, and focus on their core business.

In return, BPOs earn a profit on the services they provide, just like any other business. Precisely how those margins are determined depends on the type of service being outsourced, the kind of outsourcer, and the commercial model agreed between client and BPO.

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We must first examine pricing models to get to grips with BPO profit margins. Since these can vary dramatically, it’s crucial to pick the correct pricing model to ensure your company remains competitive and profitable.

So, what pricing models do BPOs use? There are four primary types of BPO pricing models:

Per-hour or per-agent rate: This is the most straightforward, most transparent approach to pricing. Clients are charged based on how many work hours are completed for them. BPOs that operate using this model depend on a productive and efficient workforce to succeed.

Fixed-fee or project-based pricing: For this model, BPOs will charge a predetermined fee for a project, regardless of how long it takes them. Highly efficient BPOs work well under this model since they can guarantee a streamlined process. However, unexpected incidents or setbacks can massively hinder profitability.

Transaction-based pricing: This is where BPOs charge clients based on the number of actions executed. BPOs who can handle significant amounts of transactions – for example, data-entry tasks and contact centers – with speed and quality perform best here, but unpredictable volumes can cause problems.

Performance-based pricing: This approach is results-driven and is based on BPOs successfully hitting Key Performance Indicators (KPIs). BPOs using this model can flourish with a skilled workforce, but it does carry risks when earnings are wholly tied to performance.

Choosing the suitable pricing model for your BPO partnership is vital in driving business growth. With a considered and well-managed approach, your outsourced function can flourish even in a highly competitive market.

Establishing BPO profit margins

Let’s say you’re running a BPO. Setting and balancing profit margins can be challenging, but it’s vital in ensuring both client satisfaction and sustainable business development for BPOs. In selecting the pricing model and margin, both client and BPO must analyze several factors – including service costs, service value, and the broader market – in order to come to an arrangement that suits both.

The first step in setting profit margins is to assess the service costs of your BPO. Factors like salaries, taxes, operations, and overhead costs will all determine how much it will cost to run the operation. This will obviously be hugely influenced by where your BPO is located. The choice here is between onshore, offshore, or nearshore operations, although in some cases it is possible to make use of a combination of these.

Next, you need to understand the value of the services being provided. Any pricing model needs to be based on the size and skill of the workforce employed, ensuring that they are compensated fairly while remaining competitive. Maintaining staff welfare may incur additional costs, but the impact of this on quality of service and retention enables a BPO to value its services more highly.

Lastly, establishing the correct pricing model requires a comprehensive market analysis. Assessing what’s out there helps clients establish what’s fair to pay for the services they need and BPOs to remain competitive and attract new business. This doesn’t necessarily mean undercutting the competition but rather staying up to date with industry trends so you can safely adapt to any market shifts and unforeseen events.

A breakdown of BPO profit margins

The BPO business model can be a little complex, so the following illustrations aim to simplify the matter. What does a reasonable profit margin for a BPO look like? For a fuller discussion of this, listen to Time Doctor’s very own Liam Martin talk to Derek Gallimore from Outsource Accelerator about in this podcast:

The seat lease BPO model is a popular one, which basically means the BPO employs, pays and looks after staff, but they are managed day-to-day by the client as if they are their own employees. 

Let’s say a BPO staff member takes home a salary of $1,000. Government fees and taxes equate to around 25% of this, bringing the cost up to $1,250. None of this money thus far goes to the BPO.

On top of this, BPOs then typically charge a service fee of around $500 – $1000 per month, which forms part of a BPO’s gross profit. But when service fees are all accounted for – such as staff welfare, high-tech equipment, IT support, internal infrastructure, property costs, etc. – the operational profit margin comes to around 20-30% of the service charge. If the total fees were $2000, for instance, BPOs would only take around $200 for profit margins.

Many BPOs operate a “WeWork on Steroids” model, which increases their direct costs but adds value to their services. Staff members get a dedicated desk and a fully equipped work environment. The BPO management team looks after employee well-being. Using this model, BPOs can justify the added value of their services.

It has been argued, particularly if the BPO is located offshore, that this can entail the exploitation of the local workforce by both the BPO and the client. However, in business, it is generally accepted that employers make money from their employees. Take the example of, say, a New York accounting or consulting firm. The employees of that company will often be charged out at three times their salary. As we have seen in the example above, a BPO operating staff leasing model – even offshore – only makes an average of 20% margin on its service fee and no margin on staff salaries.

Managing profit margins in BPOs

As a BPO, once you’ve established your pricing model, you need to know how to manage and optimize your margins effectively. Continuous analysis of your profit margins will not only help identify areas that can be improved but will also provide you with performance data insights over a period of time.

Tracking your profit margins can offer an indication of financial health and your BPO’s ability to withstand unplanned economic slumps. Monitoring your direct and indirect costs is crucial in being able to leverage your profit margins for business growth. BPOs must balance direct costs like wages and equipment fees with indirect costs, such as admin and sales expenses, to maintain stable profit margins and drive business growth.

Through continual profit margin evaluation, BPOs can determine the value of their service and ensure their prices remain consistent with their worth. Outsourcing companies can also manage the factors that influence their profit margins. As we have seen, examples of these include:

● Scale and scope of the services offered

● BPO location

● Management style

● Business approach

● Pricing model

● Advertising strategies

● Longevity and age of the BPO

Alongside repeated analysis of profit margins, BPOs must factor in the external competition to ensure their price point is appropriate. With this, BPOs can outmaneuver their competitors and solidify their position in the industry, fostering healthy business growth and broadening their profit margins.

The client’s perspective on BPO profit margins

From the point of view of a BPO client – or potential client – it can be tempting to think they can handle everything in-house, maintaining control of all aspects of their business and, most importantly, keeping all the profits for their own company rather than paying outsourcing fees. However, it usually turns out to be more profitable to work with a BPO than manage an entirely in-house operation.

BPOs aren’t just there to deal with a company’s excess baggage; they also provide an unparalleled cultural service and help their clients to grow and scale. Entrepreneurs often fail to realize the full value of BPOs, particularly in cultural aspects like dealing with foreign infrastructure and bureaucracy.

BPOs are also invaluable in recruitment since they assume most of that cost and responsibility. They can scale their staff up and down to suit their clients’ business growth, all while dealing with the trials and tribulations that come with hiring and firing.

Balancing profitability and service quality in BPOs

In the end, BPOs must strike a balance between profitability and service quality if they want to remain successful and competitive. While both are significant objectives, neither must be sacrificed for the other.

BPOs must pick a pricing model, establish their profit margins, and then continuously track their margins to stay successful and drive consistent growth. Assessing the market and competition is a must, but the strategy should rarely be to simply undercut the competitors. Instead, BPOs must foster an attractive work environment to enhance their value as a service.

The BPO industry is expected to maintain steady growth over the next few years, despite adverse political policies and global economic crises. BPOs are expected to become more profitable thanks to AI and automation technologies, as the enhanced efficiency they bring can help BPOs deliver performance improvements for clients and increase profit margins.