By Donna Fluss
The hosted/managed service business model is a compelling one. With the on-demand model, enterprises of all sizes have access to IVR and the other contact center technology they need to cost effectively provide an efficient and outstanding customer experience. The hosting/managed service model allows companies to acquire leading technology and applications without a large capital investment, start-up costs, or long-term commitment. It also is scalable and gives users ongoing technical support and access to upgrades at no additional cost.
Ease of provisioning, reduced maintenance, and the opportunity to “try-before-you-buy” make hosted solutions an attractive and low-risk alternative to on-premise solutions. Depending on the needs of the enterprise and how long they want to use a hosted solution, the benefits and return on investment (ROI) can be significant.
While there are many benefits from using hosting and managed service technology offerings, prospects should perform a financial lease (hosted/managed service) vs. purchase/license analysis to understand the impact of this acquisition model on their bottom line.
Chief financial officers (CFOs) often prefer the hosted/managed service acquisition approach, as it allows them to hold onto their company’s capital. This capital is considered a scarce resource, particularly in a recessionary economy, even knowing that after three to five years the cumulative cost to their company’s bottom line could be higher from a hosted/managed service model.
In general, if the cash outlay for the hosted solution remains consistent over a three- to five-year period, it will have cost the company more to host during this period than if they bought a license. However, this is not typical. During a three- to five-year period, enterprises owning IVR systems are often confronted with hardware and software upgrade fees, the opportunity to purchase innovation (that will improve their operating environment), the need to add additional capacity, and other unplanned expenses beyond basic maintenance.
Hosted/Managed Service Value Proposition: Below is a list of the top reasons why companies are investing in hosted/managed service IVR solutions:
1) Need to upgrade legacy systems, reduce maintenance costs of legacy solutions, or add to or improve self-service options
2) Expense reduction
- No capital investment
- Low or no up-front costs
- Fixed monthly operating expense
- Investment protection – no software or hardware upgrade costs to affect TCO
- Fewer IT resources required to maintain the hardware and, depending on the business model, the application
- Reduced administrative/overhead costs
- No need to buy or build to meet peak traffic – scalable without capital investment
- Fewer unexpected expenses – more manageable budgeting
3) Protection against technology obsolescence
4) Avoidance of long-term commitments/contracts, allowing the company to easily change solution providers, as needed
5) Avoiding capital write-offs
In addition to the benefits above, users of managed service offerings where the vendor takes care of the hardware, software, IVR script, and all other aspects of the implementation also realize the following benefits:
- Availability of IVR and vertical domain experts when you need them
- Experience and expertise available at reasonable prices
- Continuous optimization of the self-service application without substantial investment of in-house resources
- Improved customer service
- Enhanced customer experience
The hosted/managed service IVR providers have proven to be a practical group of vendors that appreciate the need to address many of the challenges and concerns associated with speech-enabled IVR implementations. Besides the classic benefits associated with any hosted and managed service IT implementation, the IVR competitors have innovated with highly flexible offerings, pricing models, and implementation strategies. Users of all sizes can find solutions that meet their needs. Specifically, many of the hosted/managed service IVR providers offer:
- Flexible and aggressive pricing models; some are based on per minute cost, others on completed transactions and still others on success rates
- Willingness to amortize up-front start-up costs instead of requiring customers to pay large set-up and implementation fees
- Rapid implementations, even for complex projects
- Payback in 3 to 9 months and sometimes as quickly as within the first month
What’s clear is that these vendors understand their customers and are willing to put together a package that addresses the specific needs of each. Of course, there are trade-offs. Customers who want to amortize their start-up costs over the life of the contract must be willing to pay a slightly higher transaction fee and commit to a time frame that allows the vendors to recoup their initial investment.
Return on Investment: A major reason why companies invest in hosted/managed service solutions is because they realize a very rapid and quantifiable return on investment without a large capital investment or major start-up costs. This is also the reason that hosting is popular even during tight economic times.
IVR solutions are rightfully considered mission-critical for contact centers. IVRs typically handle 40% to 80% of all calls received by an inbound customer service contact center. Since many of these departments handle millions of calls each month, it’s clear that the IVR is an essential production “workhorse.” As a result, when capacity is needed, this is not an investment that can be delayed, as it is much more costly to defer investments that could have diverted calls from live agents. (The typical cost of an IVR transaction is $0.05 to $0.40 vs. $3.50 and $6.00 for an inbound call handled by a live agent.)
Figure 1 shows the expected payback period provided by the seven leading vendors analyzed in-depth in this report. Vendors and users told DMG that customer payback can be as short as one month or as long as a year, although 3 to 9 months is most common. Payback depends upon many variables, in particular the size and complexity of the project, as well as the start-up and integration costs.
To win business, some of the hosted/managed service providers do not charge a start-up fee to cover the cost of application development and integration expenses; instead, they increase the cost per minute during the initial contract. However, to ensure that they recover their start-up fees, the initial contract is generally for 2 to 3 years. This also points out that there are flexible hosted/managed service vendors who work with their customers to identify the pricing model that works best for them.
|Figure 1: Hosted/Managed Service ROI by Vendor
|2 to 4 months
|3 to 9+ months
|3 to 12 months
|3 to 6 months
|Less than 9 months
|Within the first 6 months
|1 to 6 months
Source: DMG Consulting LLC, June 2009
Good News for Prospects: Because of increased competition in the hosted/managed service IVR market, vendors large and small are willing to negotiate most aspects of the relationship, including price and start-up costs. There are many strong and viable hosted/managed service offerings, but they are not all the same.
To make sure that their full range of needs will be met, prospects need to carefully assess many factors, including: technology, platform, scalability, integration capability, contingency/back-up capabilities, development environment and resources, reporting and analytics, functional capabilities, management tools, ongoing service and maintenance, optimization capabilities, customer references, vendor responsiveness, financial strength, and planned research and development (R&D) investments of the vendors they are considering. Price is important, but it should not be the primary deciding factor.
[From the October/November 2009 issue of AnswerStat magazine]