Is Transaction-based Pricing the Next Big Thing in the FAO world?

Are you being pulled between the more prevalent Full-time Equivalent (FTE) based pricing model and the newer transaction-based pricing model for your Financial Accounting Offshoring (FAO) needs?



The commonly used and less complex FTE-based pricing does offer you the advantages of easy implementation, tracking and benchmarking, but then the question is, would that be enough? The answer is an emphatic NO! With increased buyer sophistication and high competition, the wheels in the FAO market are slowly but surely turning in favour of more evolved pricing models like transaction-based pricing. I was reading a recent whitepaper by Everest Research Institute titled, Transaction-based pricing: Nirvana for FAO?, which echoed my thoughts and recent experiences with pricing:



Factors Leading to the Transaction-based Pricing Model:



* Increased buyer sophistication: In the current economic scenario, flexibility and variability in pricing are the key factors. ‘Paying only for what has been executed’ is surely on the wish list of every buyer. It does not have to remain only a wish, as transaction-based pricing allows a client to do exactly that. There is a closer link between business activities and costs with transaction-based pricing.

* Increased supplier competition: The FAO market is fast-evolving into a buyer’s market, and suppliers are constantly trying innovations to get the leading edge. They are now offering many add-on tools to maintain higher margins, which FTE-based pricing does not necessarily support. A transaction-based pricing model which is more comprehensive is thus the need-of-the-hour.



Factors to Consider before Adopting the Transaction-based Pricing Model:



* Standardized processes: Processes which are outsourced should be standard procedures. Processes that have a clear-cut beginning and end, and contain repeated transactions will be more adaptable to this pricing model. For example, an accounts payable process, which has many repeatable transactions is more suited than a process like high-end analytics.

* Stable and measurable transactions: Transactions that are easy to monitor and measure are ideal. Also, the buyer needs to ensure a minimum volume of transactions to the supplier. One of the prerequisites of transaction-based pricing is availability of baseline volume data.

* Buyer-supplier relationship should be clear and established: Transaction rates should be fixed with a mutual understanding between buyers and suppliers to ensure maximum benefit of the deal. A structured implementation plan in accordance with both the parties needs to be created.



How Do You Put a Transaction-based Pricing Model to Work?



Once you have decided to go ahead with transaction-based pricing, here’s how you can put it to work:



* Understand the processes before you develop goals and an implementation plan for the same

* Develop separate resource units to achieve your goal and set the management resources for the unit. Also, develop a measurement criteria for each unit

* Define baseline volumes for each unit

* Provide processes for the required changes in volume and tariffs in the future

* Create a detailed plan, including dependencies from supplier; internal business units and other appropriate stakeholders for parallel run of transaction-based pricing regime



A successful implementation of the transaction-based pricing model needs a focus on value creation. Don’t embark on it before you have the buy-in of your senior management. The final implementation should always be in a phased manner starting out with FTE-based pricing and gradually moving toward transaction-based pricing.



Transaction-based pricing, with all its advantages, is not the final answer. Even with the rising interest in this model, it is not applicable in all situations and needs to be adopted judiciously. Collaborate with your BPO service provider to understand whether it works for your organization before you take the plunge.