Pricing models for Outsourcing and BPOs

Outsourcing in current times is more value adding exercise done to enhance competitive advantage by focusing on the areas of core competency rather than just a cost saving practice, as it used to be. Its role as a business-value-creator is established across the world in terms of long-term gains like increased customer satisfaction and decreased customer churn along with short term cost cutting. Along with changes in outsourcing objectives and practices, the pricing models also keep changing in the outsourcing industry.

A transaction based pricing model is based totally on the number of transactions. It draws theory from the concept of economics of scale from resource sharing and usage based pricing. In this pricing model the client typically pays the service provider for individual transactions or per unit of work performed by the resources deployed. In such a model, SMEs benefit drastically from resource sharing with overall lower cost of outsourcing. An average base level of transaction is defined in the SOW, the fluctuation from which impacts the per-transaction base level pricing, in this model.

Similarly, an FTE based pricing model is one where the client pays for the time & material invested directly by the service provider. Often in outsourcing contracts, this is further broken down into multiple categories dependent on the expertise of the resources deployed, complexity of tasks performed (which impacts turn-around time of task completion), degree of domain experience and onshore/offshore presence. Typically these are fully loaded costs with often standardized SOWs including factors like number and level of resources deployed; infrastructure and external dependencies bundled into the price points.

While another variation of pricing models that can under serious contemplation is the Risk/Reward sharing pricing models, where the benefits and the losses of the services outsourced are shared amongst the partners. This is a move towards greater collaboration between separate partners in a value chain. However, for such a pricing model to be really successful there has to be significant maturity in the process level which can then be mapped to quantifiable benefits. As of now, since the services rendered by BPOs/KPOs are yet to reach the required level of maturity, these pricing models are yet to be adopted as industry standards.

Next comes the big question: When to choose which pricing model? Typically transaction-based pricing models would be more suitable for Small or Medium sized organizations where transaction count would not be significantly high. In such organization, keeping a dedicated division (with active resources) would be more cost-intensive than sourcing it to third party service providers. Thus in such scenarios, a transaction based costing would be more beneficial. Similarly, if the transaction volume is on the higher side, a FTE based pricing model (and outsourcing SOW) would be more cost effective and thus more suitable for the organization. Also, if the transaction levels are subject to high degree of fluctuation, a transaction based model (and thus the SOW) is more suitable and beneficial for both the parties involved in the deal.
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Author: Kar

Dr. Kar works in the interface of digital transformation and data science. Professionally a professor in one of the top B-Schools of Asia and an alumni of XLRI, he has extensive experience in teaching, training, consultancy and research in reputed institutes. He is a regular contributor of Business Fundas and a frequent author in research platforms. He is widely cited as a researcher. Note: The articles authored in this blog are his personal views and does not reflect that of his affiliations.