New Centers. In some cases, the enterprise customer wants to set up a new service delivery center or service architecture or infrastructure. It may enlist the assistance of a service provider in the design of the operations, procurement of the necessary equipment, real estate and technology, and in the recruitment, hiring and training of the personnel for the new service delivery center.
BOT vs. BOOT. To address such situations, outsourcing planners have learned from project financing the structures for “build-operate-transfer” (“BOT”) and “build-own-operate-transfer” (“BOOT”) models. They are essentially identical.
- Common Elements: In each case, the enterprise customer gets access to technology, expertise, knowledge and operating capital. In each model, the service provider assembles the people, the processes and the technology and then provides services as an outsourcer under the classic outsourcing model. At the agreed time, the service provider transfers the service delivery operation (including infrastructure) to the enterprise customer.
- BOOT: In the BOOT model, the enterprise customer also gets the benefit of the service provider’s financing of the capital expenses necessary to start a new service center or service delivery platform. In a pure BOOT, the service provider owns and finances the infrastructure in addition to managing it for a fee.
- BOT: In the BOT model, the enterprise customer provides the financing for the new infrastructure. In a pure BOT, the service provider does not own the infrastructure but is a concessionaire entitled to manage it for a fee that covers its operating expenses.
Time Lapse Scenario. Thus, where the enterprise customer wants help in building its own captive, the BOT or BOOT model provides a legal structure for the supplier to build and, for a time, manage the entire service delivery center before assigning it to the customer. This model reflects traditional project financing for building transportation infrastructure – such as highways, airports, bridges, tunnels and ports – for governments. In the public sector, BOT relationships are sometime called “public-private partnerships.” [LINK TO THAT PAGE = SEE BELOW]
Accounting. An essential element of BOT is its cost accounting. The cost structure for BOT involves amortization of capital investment. The pricing structure will reflect this amortization if the service provider owns any physical assets, license agreements or real property used for service delivery.
Advantages. The BOT and BOOT models offer several advantages to the enterprise customer. It saves:
- time because the service provider is presumably more expert at assembling the infrastructure and obtaining local regulatory consents;
- money (and maybe market share) because the benefits of the new infrastructure can be enjoyed sooner;
- effort because the service provider is performing the effort, presumably at lower salaries.
Disadvantages. The BOT and BOOT models have certain drawbacks for the enterprise customer.
- Additional costs are incurred to pay a profit to the service provider for the value of its know-how and time in assembling the service delivery infrastructure.
- Tie-in effects arise, since the enterprise customer commits to work with the particular service provider (as in any class outsourcing model) and cannot escape for low switching costs until the service provider’s investment is amortized or recaptured.
- Inflexibility results from the enterprise customer’s commitment to purchase the infrastructure, whether up front, by imputed self-amortizing “mortgage” payments or at the end. This ties up the enterprise customer’s capital and credit, unless the enterprise customer can structure the financial risk so that the service provider retains ownership until the customer exercises, in effect, a call option to acquire the service center infrastructure.
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