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Outsourcing Pricing Models – FTE based or Transaction 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. )

What is FTE based pricing

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.

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 1

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 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. 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 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, 2

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 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 3

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 to learn more about how we could help you with your outsourcing initiatives. 4