Outsourcing Pricing Models – FTE based or Transaction based ?
What is FTE based
Summary
Some of the key reasons
why companies engage
in outsourcing is for cost
management and
improving efficency in
managing IT and
Operations ( although
the latter is still
debatable!). How you
price the services from
offshore vendors is a key
factor in determining
how your internal
business case and return
on investment will look.
In significantly high
number of deals the
pricing is primarily FTE
based pricing with the
options to move to a
Transaction based or
outcome based pricing
as the relationship
matures. (We have seen a
number of deals build a
framework for gain
sharing/ risk rewards
pricing model. In practice
very limited set of deals have
truly implement the gain
sharing model successfully. )
This article is a quick
look at the differences
between FTE Pricing
Model and Transaction
based pricing model and
what should you be
thinking of from a
pricing deal perspective
as you get into a
partnership/deal with
an outsourcing vendor.
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pricing
This is the model where
you pay time & material
for the vendor
resources. In typical
offshore contracts this is
further broken down
into multiple level of
expertise of the
resources , complexity of
tasks performed, years
of experience required ,
any specialization if
needed,
onshore/offshore
presence. Typically
these are fully loaded
cost with standard
operating environment
such as computers,
telephones bundled into
the price points.
Caution: You have to
agree on things which
are covered and what
are not covered in the
FTE Pricing to avoid any
surprises. e.g. travel
costs, visa costs, training
Outsourcing Pricing Models – FTE based or Transaction based ?
cost, BCP cost ( Coming
soon: What are the
hidden cost components
of an offshoring deal).
What is Transaction
Based Pricing Model
In this pricing model
you typically pay the
service provider for
transactions or per unit
of work performed vs
paying for FTE
headcount. So you
would not be paying for
10 resources required to
say do a task but for the
actual number of tasks
performed. In this
pricing model you
should not have to
worry about how many
people are doing the job.
Many Service providers
look at a transaction
base pricing offering
where they are able to
create process
efficiencies, use
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technology platforms if
needed for BPO
operations and reduce
their overall cost of
operations so they can
offer a per transaction
cost at lower price
points to the clients
without sacrificing their
margins.
Why is Transaction
Based Pricing hard
to start out with
There are a number of
factors which make
starting out with
transaction based
pricing model hard both
for the customer and the
vendor.
For service providers
which claim expertise in
certain domains and
processes, pricing
transaction based
delivery models are still
hard. This is due to the
fact that the driver for a
service provider to move
to a transaction based
pricing is when it can
lower it’s cost of
operations by either
reducing the number of
people required, using a
shared /platform
technology to provide
the services and by
making the process
more efficient. This
comes over a period of
time as the service
provider understands
the end to end system,
Outsourcing Pricing Models – FTE based or Transaction based ?
processes. For multi
vendor scenario this gets
tougher if different parts
of the end to end IT,
Operations are with
different vendors.
For Customers looking
to start with transaction
based pricing , they have
the risk of trusting their
entire process ,
application, data with a
third party provider
which is hard to do at
the beginning of a
relationship. This also
assumes that a number
of these processes have
very strong internal
metrics, benchmarks
which the companies
can move over to service
providers to measure
the effectiveness and
hence the cost of the
transaction. Without the
baseline metrics of
knowing how much it
cost you to perform this
internally , it is hard to
get into an agreement
with a third party
service provider and
expect them to perform
‘better’. This will result
in failed expectation
match.
When and Should you
go to Transaction Based
Pricing
Over a period of time as
you mature the
relationship transaction
based pricing should
allow companies to get
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to the ‘promised land’ of
productivity and process
efficiencies which all the
service providers claim
as their secret sauce
during their sales pitch.
How ever companies
need to be realistic
about how soon and
when to switch to
transaction based
pricing if they decide to
do. There are three
things we recommend to
consider as a baseline
when moving to
transaction based
pricing:
1. Complexity of the
Process
2. Repetitive nature
of the
transactions
being processed
( Nature of IT
support for ITO)
3. Clearly defined
measurement
metrics
availability of the
process
Transaction based
pricing tries to capture
cost savings, efficiency
improvements and
productivity gains which
only come into play as
the relationship with
your provide matures.
As you start your
outsourcing and
offshoring relationship,
FTE based pricing help
you take baby steps and
Outsourcing Pricing Models – FTE based or Transaction based ?
refine your outsourcing
model as you progress.

Mohit Sharma is the CEO of Corrystone Global Partners.

Corrystone is a specialized outsourcing advisory firm
providing consulting, staffing and training services to mid size
firms and government agencies. We work with mid size firms
and government agencies which are exploring low cost options
for IT, Business Process work and are looking at ways to
optimize cost and manage operational risk. Contact us at
info@corrystone.com to learn more about how we could help you
with your outsourcing initiatives.

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