The transaction-based pricing model is the result (and iteratively, the cause) of a series of improvements such as process simplification, application of technology, standardization and finally a combination of all these - leading to what we call platform BPO.
Transaction-based pricing offers significant advantages over the variations of Time and Material (T&M- based pricing, where service providers charge for manpower employed per unit of time.) and breeds efficiency since the service provider is paid for the quantity of work.
The math of transaction-based pricing is not merely about dividing an FTE cost by the production per year. Instead, it is a whole different way of looking at managing delivery. Typically, the service provider provides a base price for a specified volume band with a negotiated increase or decrease in price as usage fluctuates around the specified band.
While transaction-based pricing can provide significant benefits to both customers and service providers, there are also a few challenges:
- Complexity - designing a transaction-based pricing model is complex and requires a good understanding of these transactions and their cost structure by both customers and service providers.
- Predicting Volumes- predicting a reasonable level of accuracy, providing a minimum volume commitment for economies-of-scale and planning for volume variations is a complicated EXERCISE that only a few customers are able to perform in a systematic and consistent manner.
- Lack of Availability of Benchmarking Data- lack of availability of reliable external benchmarks, in addition to unreliable internal benchmarks, can hamper the customer's ability to ascertain the commercial competitiveness of a service provider's quotes.
- Loss of Control- since day-to-day resource decisions and productivity information are not apparent to the customer, there is the perception that transaction-based pricing leads to loss of control.
- Organization Change- transaction-based pricing leads to changes in quite a few areas like budgeting (tracking inconsistent monthly / quarterly service cost); corporate finance (ensuring that invoices reflect accurate charges and credits); functional departments (affecting business process change); all departments (inculcating demand forecasting practices).
As the needs of business and how business uses BPO evolves, it only makes sense that BPO pricing models should evolve as well. For standardized, demand-driven processing engagements, transaction pricing is emerging as a way to enable companies to manage outsourcing costs based on business volumes. Instead of becoming the new 'normal', transaction pricing is only the beginning of innovative pricing models that will be created to give outsourcing clients alternative, smarter ways to pay for the services they use.
By anyone's standards, that is a change for the better.
Read more about pros and cons of transaction –based pricing in the article, 'The Case for Transaction-Based Pricing.'