White Paper Trasactio Based Pricig i BPO: I Tue with Chagig Times With rapid growth of Busiess Process Outsourcig (BPO) i the past two decades, there is a eed for ew pricig models that meet the chagig expectatios of customers. Iitially, most of the BPO value propositio was built o simple mapower replacemet, which led to widespread use of FTE based pricig model. Icreasigly, customers have started lookig for beefits beyod cost savigs ad service improvemets. This has led to emergece of pricig models like trasactio based pricig ad outcome based pricig. This white paper focuses o discussig trasactio based pricig model with the aim to make the reader aware of its suitability i meetig preset-day BPO objectives ad its superiority over FTE based pricig model. The white paper covers what, why ad how aspects of trasactio based pricig icludig how it works i practice, which busiess processes are suitable for this type of pricig, what challeges are posed by it ad how it is superior to FTE based pricig model.
About the Authors Raj Agrawal Raj heads the Platform Solutios Uit at TCS. I his career spaig over 19 years i TCS, Raj has played multiple leadership roles i the past as CRM Practice Head ad Eterprise Solutios Practice Head. I his curret role as Busiess Uit Head of Platform Solutios i TCS, Raj holds overall resposibility icludig P&L resposibility for the uit. Raj is a Bachelor of Techology i Electrical Egieerig from Idia s premier techology istitute, the Idia Istitute of Techology, Kapur. Sudhir Varma Sudhir has bee with TCS for more tha 12 years. He has bee ivolved i multiple busiess strategy, CRM ad IT cosultig ad implemetatio assigmets for Fortue 1000 cliets. I his curret role, Sudhir maages the Pricig fuctio i the Platform Solutios uit which icludes creatig trasactio based pricig models for offerigs ad participatig i determiatio ad decisio of pricig ad commercial terms for bid resposes. Sudhir has a Masters degree i Maagemet ad a Bachelors degree i Egieerig. Jay Ludhwai Jay has bee with TCS for 2 years. I his curret role as pricig executive with Platform Solutios uit, he is ivolved i creatig trasactio based pricig models for offerigs ad participatig i determiatio of pricig ad commercial terms for bid resposes. Jay has a Masters degree i Maagemet ad a Bachelors degree i Maagemet. 2
Table of Cotets 1. Backgroud 4 2. Pricig Models for BPO Services 5 3. What is Trasactio Based Pricig? 5 4. Is Trasactio Based Pricig Suitable for Ay Busiess Process? 7 5. Trasactio Based Pricig v/s FTE Based Pricig 9 6. Beefits of Trasactio Based Pricig 13 7. Challeges i Adoptig Trasactio Based Pricig 14 8. Suggestios to Overcome the Challeges 14 9. Coclusio 15 3
Backgroud Busiess Process Outsourcig (BPO) has grow rapidly i the past two decades. This has brought with it icreased level of maturity i the way BPO pricig gets structured. Iitially, the BPO pricig was built o simple mapower replacemet which led to a pricig model that compared directly with what it replaced - the cost to the compay per employee. I third-party outsourcig, this meat pricig o the basis of Full-Time-Equivalet (FTE) or FTE pricig. Gradually, as outsourcig matured, customers started lookig for beefits that wet beyod cost savigs ad service improvemets to providig broader busiess value ad impact. This led to emergece of pricig models like trasactio based pricig ad outcome based pricig. These pricig models are more represetative of this chage i BPO objectives as they lik price to either customer s usage of service, as i the case of trasactio based pricig model; or to meetig a miimum success criteria or a busiess outcome, as i the case of outcome based pricig model. This white paper focuses o trasactio based pricig model for BPO services. It aims to make the reader aware of its suitability i meetig preset-day BPO objectives ad its superiority over FTE based pricig model. The white paper provides a i-depth discussio of the followig aspects related to trasactio based pricig: What differet pricig models are used i BPO? What is trasactio based pricig ad how does it work? How trasactio based pricig compares with FTE pricig? Which busiess processes are suitable for trasactio based pricig? What are the beefits of trasactio based pricig? What are the challeges i adoptig trasactio based pricig? How ca these challeges be overcome? Trasactio based pricig is also called by various other ames like output based pricig or utility based pricig or variable pricig or pay-as-you-go pricig or pay-as-you-drik pricig or pay-per-use pricig. For the sake of cosistet uderstadig, we would use the term trasactio based pricig i this whitepaper. 4
Pricig Models for BPO Services The various pricig models that are beig used i BPO fall ito ay oe or a combiatio of the followig three types of pricig models: Iput Based Pricig Model This refers to a pricig model where paymet to service provider is based o a estimated amout of iput provided. I most cases, this iput is mapower. FTE-based pricig model is the most commoly used iput based pricig model. The price is quoted as a average FTE rate per hour alog with the umber of FTEs required. Pros Simple to uderstad ad implemet Ca be effectively used to compare price across vedors Cos Does ot create icetives for service provider to pursue efficiecy Not closely related to customer s busiess eeds or outcome Commoly Used Whe Trasactio volumes are ukow Trasactio volumes are ot closely tied to service provider s cost drivers Output caot be defied or isolated to service provider Trasactio Based Pricig Model This refers to a pricig model where paymet to service provider is based o the umber of trasactios processed by him. Typically, a base price is provided for a specified volume bad, with a egotiated icrease or decrease i price as usage fluctuates aroud the specified bad. Pros Closely tied to customer s busiess cycle Ehaces visibility ito cosumptio patter Ecourages productivity & efficiecy improvemet Cos May ot be directly tied to customer s busiess outcome Commoly Used Whe Output ca be defied Trasactio volumes are kow ad predictable Trasactio volumes are tied to service provider s cost drivers 5
Outcome Based Pricig Model This refers to a pricig model where service provider is paid based o the busiess result achieved by the customer through service provider s cotributio, such as a percetage of icreased profits or reduced operatig expeses. The mechaisms for payig the service provider vary, but geerally paymet is made i oe lump sum whe the result is achieved; or over a short period of time, so that the provider ca recoup its ivestmet i a timely maer. Pros Closely tied to customer s busiess outcome Properly aligs customer s ad service provider s iterest to ecourage partership, iovatio ad cotiuous improvemet Cos Difficult to isolate service provider s cotributio ad quatify its impact o outcome Service provider s ability to achieve outcome may be restricted by customer s people, processes, systems, etc. Commoly Used Whe Desired outcome ad accoutability ca be defied ad captured Iovatio is critical A compariso of these pricig models o outcome, risk ad relatioship maturity axes is depicted i the figure below: More Iput-based Model Output-based Model Outcome-based Model Parter Supplier Risk/Reward Trasactiobased Gai Sharig Relatioship Maturity Less FTE-based Vedor Ucertai/Udefied Volume/Outcome Certai/Defied 6
What is Trasactio Based Pricig? Before discussig trasactio based pricig, it is importat to uderstad the followig terms:- Trasactio - is a sequece of steps with defied iput ad output, which achieves a busiess purpose. I other words, it is aother ame for busiess process or sub-process. Examples of trasactio iclude payroll processig, ivoice processig, etc. Trasactio Uit - is a uit of measure with which a trasactio ca be objectively measured. Examples of trasactio uit are per payslip for payroll processig trasactio, per ivoice for ivoice processig trasactio, per purchase order for purchase order processig trasactio. Trasactio based pricig refers to a type of pricig where a deal is priced o the basis of umber of trasactios that service provider processes for a customer. More the umber of trasactios processed by service provider, more is the paymet ad vice versa. It is similar to the way paymet is made by cosumers to electricity compaies - amout paid varies depedig upo cosumer s usage of electricity, measured i uits. Sice, i trasactio based pricig, service provider is paid o the basis of umber of trasactios processed, it is importat to determie the mechaism by which trasactios ca be distictly determied ad objectively measured. This is typically achieved via trasactio uit. Determiig the right trasactio uit, therefore, is importat i trasactio based pricig. Trasactio uit is usually determied by idetifyig the uit that best represets the uderlyig trasactio - i terms of operatioal processig ad the costs related with processig that trasactio. I trasactio based pricig, what ad how may resources are ivolved ad how much time is take to process the trasactio while also meetig quality ad service level agreemet (SLA) requiremets, are the variables that are typically maaged by service provider. This essetially meas that variability ad risk associated with customer s busiess activity is trasferred to service provider. Service provider maages this risk by utilizig resources efficietly across multiple customers ad by chargig a appropriate risk premium i the trasactio price. I additio, service provider is motivated to maximize output or umber of trasactios processed with same or lesser iput, which typically leads to iovatio ad better use of techology resultig i lesser cost for customer i the ultimate aalysis. Trasactio price is typically quoted as price per trasactio uit. For example, for payroll processig, the trasactio price may be quoted as x dollars per payslip ; or for ivoice processig, the trasactio price may be quoted as y dollars per ivoice. However, sice busiess activity does ot remai at a costat level throughout, there eeds to be a mechaism which ca determie how the trasactio price varies for differet levels of busiess activity. To address this, trasactio price is geerally metioed as applicable for a specified trasactio volume rage. Such a volume rage is kow as dead bad which is typically derived by aalyzig historical trasactio volumes data. For variatios i trasactio volumes beyod the dead bad, a egotiated icrease or decrease i price becomes applicable. Usually ARC/RRC (Additioal Resource Charge/Reduced Resource Credit) framework is used to arrive at the price outside the dead bad. A simplified explaatio of the ARC/RRC mechaism is provided with the help of a example below: 7
Example: Let us assume that: Trasactio Price is $4 per uit Base Volume is 20,000 uits For variatio withi +/- 10% of the base volume, there is o chage i price For variatios > 10% ad < 20% from the base volume, the ARC/RRC price is $3.5 With this, let us see how the effective price payable by the customer chages with chage i volume. The effective price is calculated usig the followig formula: Effective Price = [(Base Volume X Trasactio Price) + (Icremetal Volume X ARC/RRC Price)] / Total Volume Moth Volume Trasactio Price Calculatio Effective Trasactio Price Moth 1 20,000 (20,000 X $4)/20,000 $4 Moth 2 22,000 (22,000 X $4)/22,000 $4 Moth 3 18,000 (18,000 X $4)/18,000 $4 Moth 4 24,000 (20,000 X $4 + 4000 X $3.5)/24,000 $3.92 Moth 5 16,000 (20,000 X $4-4000 X $3.5)/16,000 $4.13 Moth 6 23,000 (20,000 X $4 + 3000 X $3.5)/23,000 $3.94 As ca be see i the graph below, for moths 1, 2 & 3 whe volume is withi +/-10% of the base volume, effective price per uit remais $4. I moths 4, 5 ad 6, whe volume variatio is more tha +/- 10% from the base volume, trasactio price is applicable for the base volume ad ARC/RRC price is applicable for volume above/below the base volume. Hece, effective price for moths 4, 5 ad 6 is differet from the trasactio price of $4 per uit - it is more whe volumes are less ad less whe volumes are more. 30,000 Volume Uits 28,000 26,000 24,000 22,000 20,000 18,000 16,000 14,000 12,000 10,000 Volume withi Bad Reduced Volume Excess Volume 1 2 3 4 5 6 Moth } } } ARC ($ 3.50) Dead-bad Rage ($ 4.00) RRC ($ 3.50) 8
Is Trasactio Based Pricig Suitable for Ay Busiess Process? From customer s perspective, trasactio based pricig is favored for busiess processes which ca be clearly defied, measured i discrete uits, have a well defied ad measurable service level requiremet (which remais stable eve if umber of trasactios or users fluctuate), have fairly accurate baselies ad experiece fluctuatios i cosumptio. From service provider s perspective, the ability to deliver profitably i trasactio based pricig sceario is tied to achievig volume ad scale. Therefore, this type of pricig is usually favored for busiess processes that are stadardized, trasactio-itesive ad demad-drive. I practice, therefore, trasactio based pricig is suitable for busiess processes or trasactios that have the followig characteristics: Well Defied Measurable Demad Variability Characteristics of Busiess Process Volume Drive Stadardized Well Defied: Trasactio should be such that both service provider ad customer uderstad what it costitutes ad what is excluded from it. Measurable: Trasactio should be such that it ca be easily measured for operatios processig ad performace ad is auditable by service provider ad customer for accurate ad timely coutig of trasactios that serve as the basis for billig. Volume Drive: Trasactio should be of short duratio ad is carried out repeatedly i sufficietly large volumes. Stadardized: Trasactio should be ameable to high level of stadardizatio - stadard iputs, rulebased processig ad stadard output - so that service provider is able to drive ecoomies-of-scale via automatio ad delivery of similar services to multiple customers. 9
Demad Variability: Trasactios where volumes vary i a short spa of time are more suited to be priced via trasactio pricig mechaism tha via ay iput-based mechaism. A idicative list of busiess processes (with commoly used trasactio uits) that possess the abovemetioed characteristics ad are, therefore, ameable to trasactio based pricig, is provided below: Fuctio / Vertical Huma Resource Maagemet Busiess Process Payroll Processig Recruitmet Travel Plaig Expese Maagemet Trasactio Uit payslip recruit booked trip expese report Fiace & Accoutig Geeral Accoutig Accouts Payable Accouts Receivables Fixed Assets joural or chart of accout etry ivoice ivoice, % of collectio fixed asset lie item Mortgage Lead Geeratio Loa Processig Loa Servicig Collectio lead loa applicatio loa % of collectio, ivoice Isurace Policy Issuace Claims processig Billig/paymet processig Collectio policy issued/uderwritte, quote claim ivoice % of collectio Trasactio Based Pricig v/s FTE Based Pricig Havig discussed trasactio based pricig, let us see how it compares with FTE based pricig. The example below discusses the price that customer is required to pay uder both the pricig models. While doig so, it also highlights the key differeces betwee these models ad their implicatios o operatioal, busiess ad fiacial frots - for customers ad service providers. Example: The customer has outsourced Accouts Payables process to a service provider. Based o the data available for the past few moths, ivoice volume expected to be processed per moth is ~25,000. 10
FTE Pricig: The service provider has quoted $12.5 per hour per FTE ad has estimated approximately 50 FTEs to perform the work. Assumig that service provider bills customer for 8 hours per day ad for 20 days i a moth, the customer would pay a amout equal to $100,000 every moth. From customer s perspective, the low hourly rate makes it a compellig optio. However, the capacity to process ivoices would remai at 25,000 per moth. If the volume is less tha 25,000 ivoices, as i moths 3, 4 ad 5 i the figure below, customer will still have to pay this amout to the service provider. I case, it is more tha 25,000 ivoices, as i moths 2 ad 6, customer would either face dimiished service levels or would have to provide sufficiet time to service provider to scale up the resources. This ivariably leads to ufavorable impact o customer s busiess. 140000 120000 Staffig Level Lost Opportuities Wastage Billig (USD) 100000 80000 60000 40000 20000 0 1 2 3 4 5 6 Moth Also, customers ormally expect service providers to improve productivity ad efficiecy beyod year-oyear productivity improvemets that service providers typically agree for i cotracts. This is because customers expect service providers to brig i the much eeded automatio to facilitate faster processig of tasks ad pass o productivity ad efficiecy related gais. But, from service provider s perspective, there is o real icetive to improve productivity ad efficiecy beyod what is agreed i the cotract. This is because ay such efficiecy improvemet would mea reduced requiremet of FTEs ad sice the pricig model is based o the umber of FTEs, this would mea reduced reveue for service provider. 11
Trasactio Pricig: Service provider has quoted $4 as the trasactio price for each ivoice processed. Ivoice volume expected to be processed per moth is ~25,000 ad there is o chage i price for volume variatio withi +/- 30% of ivoice volume. From customer s perspective, this is a attractive optio because all the risk related to icrease or decrease i volume of trasactios is bore by service provider. For the moths whe trasactio volume is more tha 25,000, the service provider would put i extra resources to meet the service levels. For the moths whe trasactio volume is less tha 25,000, the service provider utilizes extra resources for aother customer. The customer, therefore, pays service provider oly for the trasactios processed i a give moth. 140000 120000 Staffig Level Billig (USD) 100000 80000 60000 40000 20000 0 1 2 3 4 5 6 Moth Let us see the cost that the customer icurs i differet moths for the above two optios: Moth Ivoice Volume Customer s Cost i $ (FTE Pricig) Customer s Cost i $ (Trasactio Pricig) 1 25,000 100,000 100,000 2 29,000 100,000 116,000 3 17,500 100,000 70,000 4 18,000 100,000 72,000 5 20,000 100,000 80,000 6 27,000 100,000 108,000 Total 136,500 600,000 546,000 12
The additioal cost that customer icurs i trasactio pricig model i moths 2 ad 6, should be weighed agaist opportuity loss or dimiished service levels that customer would face i FTE pricig optio. Ivariably, the cost of opportuity loss or dimiished service level would more tha outweigh the additioal cost that customer pays i trasactio pricig model. Therefore, i the overall aalysis as depicted below, trasactio based pricig turs out to be more cost effective as it leads to additioal savigs - as a result of improved efficiecy of operatios ad avoidace of opportuity loss - beyod labor arbitrage gais. y% } x% cost additioal savigs savigs due due to } to trasactio labour pricig arbitrage Cost Ihouse Costs Costs - FTE Pricig Costs - Trasactio Pricig Beefits of Trasactio Based Pricig The precedig discussio brigs to the fore some of the beefits of trasactio based pricig vis-à-vis FTE based pricig. Apart from these, some of the other sigificat beefits that this pricig model provides to customers as well as service providers are discussed below: From customer s perspective, the beefits of trasactio based pricig are: More flexible ad scalable pricig model as paymet is for cosumptio oly Effective moitorig of costs due to ehaced visibility ito cosumptio patter Lower per uit cost due to improved efficiecy Makes it easy to compare ad select service providers by comparig their per trasactio price alog with SLAs 13
From service provider s perspective, the beefits of trasactio based pricig are: Improve profit margi by chargig more for value created ad higher risk owed Better cotrol of service delivery as people ramp up/dow ad re-allocatio becomes easy Offer commercial differetiatio (higher savigs) due to stadardizatio ad iovatios that result i higher output for lesser iput Challeges i Adoptig Trasactio Based Pricig While, there are sigificat beefits from trasactio based pricig for customers ad service providers both, there are a few challeges, discussed below, that oe eeds to be aware of: Complexity: Desigig trasactio based pricig model is complex ad requires a good uderstadig of trasactios ad their cost structure by both customers ad service providers - right trasactio, scope, uit of measure, cost determiatio, etc. Predictig Volumes: Predictig future trasactio volumes with reasoable level of accuracy, providig miimum volume commitmet for ecoomies-of-scale ad plaig for volume variatios is a complicated exercise that oly a few customers are able to perform i a systematic ad cosistet maer. Lack of Availability of Bechmarkig Data: Lack of availability of reliable exteral bechmarks, i additio to ureliable iteral bechmarks, hamper customers ability to ascertai commercial competitiveess of service provider quotes. Lack of Stadardizatio: Lack of commo techology ad operatioal busiess processes withi customer orgaizatio limits service providers ability to achieve stadardizatio ad associated cost effectiveess. Loss of Cotrol: Sice day-to-day resource decisios ad productivity iformatio are ot apparet to the customer, there is a perceptio that trasactio based pricig leads to loss of cotrol. Orgaizatio Chage: Trasactio based pricig leads to chages i quite a few areas like budgetig (trackig icosistet mothly/quarterly service cost); corporate fiace (esurig that ivoices reflect accurate charges ad credits); fuctioal departmets (effectig busiess process chage); all departmets (iculcatig demad forecastig practices). Suggestios to Overcome the Challeges While some challeges are real, others are more a matter of perceptio. However, both ca be addressed by esurig a collaborative effort from service provider as well as customer. Some suggestios i this directio are idicated below: 14
Choose the right trasactio uit for pricig the deal oe that aligs both parties iterests. For example, i case of isurace, if the trasactio uit is o. of policies issued, the the iterest of service provider ad customer are aliged - more the umber of policies issued, more is the paymet to service provider ad more is the premium collected by the customer. As agaist this, if the trasactio uit is o. of leads, the the iterest of the customer ad service provider are ot ecessarily aliged as more umber of leads would defiitely traslate ito more paymet for service provider but may ot traslate ito more policies issued ad thereby, premium, for customer. Establish a mutually agreeable mechaism to address volume fluctuatios. A few such mechaisms could be: Defie a ARC/RRC framework to hadle volume variatios beyod the base volume Adjust the baselie volume periodically usig average volume experieced i the past few moths thus allowig both parties to share the risk of volume ucertaity ad allowig service provider sufficiet lead time to absorb volume fluctuatios Agree for less striget service levels for service provider if actual volumes materially exceed those forecasted Agree o defiig ad measurig SLAs durig the iitial phases of the egagemet ad use this data for base liig them for the remaiig term of the egagemet Pla for a comprehesive chage maagemet effort which icludes top maagemet support, sydicatio of key stakeholders ad ed-user educatio programs Exercise high level of trasparecy i sharig data ad details betwee the parties to develop a eviromet of trust Coclusio It is essetial to decide which pricig model should be used i structurig BPO deals. Customer will always look for capital ivestmet avoidace, miimum risk, high quality of service at a low price, maximum price flexibility ad trasparecy. O the other had, service provider will look for miimum operatioal ad fiacial risk, cosistet ad predictable profit ad reveue growth, logest cotract term possible ad commercial viability. A effective pricig model would be oe that helps i aligig the iterests of customer ad service provider. It should help i arrivig at a price that is competitive yet profitable, flexible, simple ad easy to apply, represetative of busiess realities ad maximizes beefits for both the parties. Give the right busiess processes ad proper desig, trasactio based pricig offers sigificat beefits to customers. It is iheretly flexible, as cost to customer over a period of time, ca fluctuate without ay eed to re-egotiate commercial terms. It also ecourages iovatio by service provider because, the more efficietly he ca provide service per uit, the more profitable providig those services becomes. Hece, it eables aligmet betwee customer ad service provider by esurig that both parties act i the iterest of the partership. 15
As BPO eviromet matures ad icreasigly shifts to maaged services, BPO services would get budled ad trasactio based pricig model would fid more favor with customers tha FTE based pricig model. With better uderstadig of how trasactio pricig works ad appreciatio of how it beefits both parties, some of the challeges i trasactio based pricig ca be resolved by esurig closer cooperatio betwee customer ad service provider ad effective chage maagemet. Other challeges would reduce cosiderably as players gai maturity ad experiece from icreased adoptio of this pricig model. Wider adoptio of trasactio based pricig would ultimately lead to overall cost reductio, greater efficiecies due to stadardizatio ad improvemet i service levels. It, therefore, becomes imperative for customers ad service providers to adopt trasactio based pricig i right earest. Charles Darwi oce said It is ot the strogest of the species that survives, or the most itelliget. It is the oe that is most adaptable to chage. The time to chage BPO pricig model from FTE based pricig to trasactio based pricig, is ow. 16
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