In trying to sell payment systems solutions, your competition is often pitching an outsourcing-based competitive bid. Here are some thoughts on selling in that environment...
We recently proposed a solution to a prospect; this same organization had recently solicited and reviewed a proposal from an outsourcing organization. Outsourcing proposals are typically presented on a ‘cost per transaction’ basis. This is a volume game. The more transactions a customer can promise, the lower the cost-per-transaction fee proposed by the outsourcer.
This point-of-sale presence of this organization extends coast-to-coast and processes approximately 1,200,000 non-cash payment customer interactions per day. At this level, they are in the very top-tier of transaction acquirers nationwide. Any outsourcer will have to offer them their very best rate to receive their business.
The proposal made to this company was to do processing for $0.01 (one cent per transaction), assuming a daily transaction volume average of 1,200,000. That equates to $12,000 a day, or $4,380,000 per year.
A more typical Day One transaction volume for one of your prospects may be, say, along the lines of 50,000 transactions per day. At that volume, the outsourcer’s rates would go up considerably. Conservatively, we can estimate a cost of $0.04 per transaction. This costs the customer $2,000 per day ($60,000 month, or $730,000 per year. [Note that the customer still maintains the responsibility for purchasing and operating all point-of-sale equipment.]
Since a customer of this size could operate on smaller hardware and less-complex central system software, you ought to be able to offer complete hardware and software support for all authorization, settlement and reporting features for at least 30% less than the outsourcer’s proposal.
Furthermore, there are other, less directly measurable reasons why outsourcing payment processing may result in nothing less than ceding a main source of competitive advantage to one’s peers. While outsourcing backoffice operations is wise, my position has always been that real-time operations can be a major source of competitive differentiation. Strategically, I've always felt it’s a good to keep your hand directly on that wheel. Once you outsource, your processor’s chief goal is to increase its revenue base by selling the same new features to you and each of your hundreds (perhaps thousands) of stable mates.
But don't take it from me: no less an authority than Jamie Dimon, CEO of Chase, believes that competitive advantage is derived directly from having IT in house.
The key issues in outsourcing can be seen of the questions we ask companies that currently outsource:
Lack of control and follow-up: Do you feel like you lost some control by outsourcing your payment solution needs? For example, how often does scheduled or unscheduled down time occur? Does response time ever degrade? Do you receive adequate follow-up and explanations when these things happen? Have you calculated how outages and poor response time impact your ROI? For example, a 15-minute outage can cost a nationwide retailer over $100K in lost transactions, increased labor costs (for issue follow-up), missed fraud, and damaged goodwill.
Maintaining Competitive Advantage: How easy and cost-effective is it for you to implement new marketing initiatives? Does your provider work on your schedule or theirs? Do they make changes and improvements cost-effective or cost-prohibitive? Have you calculated the opportunity costs of how these vendor-induced lead times impact the ROI of new product and service rollouts?
Becoming a Minnow: With large transaction processing outsourcing organizations continuing to merge and grow in size, do you feel like you’re becoming a smaller fish in an increasingly growing pond? Have you contemplated what these mergers may do to any leverage you have in pricing?
A caveat here that not all outsourcing is inherently bad. I was involved in a huge outsourcing project in conjunction with Alliance Data Systems and was very impressed at their ability to convert (and not disrupt) a very large-scale nationwide POS operation. And here's a good interview with Jamie Dimon's CIO, Austin Adams, who clarifies that neither he nor Dimon are inherently anti-outsourcing (some good stuff in there about when it makes sense, when it doesn't...the dude has a $7 billion a year tech budget, so you'd better believe he's got huge economies of scale going on with or without an outsourcer's leverage).
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