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Evolving
A Commercial
model

whitepaper

The intense competition today has increased the demand for innovation from both large and small
companies alike. Organizations currently find it extremely difficult to meet this demand through their
existing ecosystems. With the outsourcing industry attaining maturity and the extensive change in business
dynamics, these organizations are looking for strategic partners who can not only provide sustained
financial and operational benefits, but also bring in a culture of innovation.

Therefore, the need of the hour is that service providers start thinking differently and moving away from
traditional, effort-led growth models to focusing on outcome-based pricing models instead, which are
not linear to employee headcount as a condition for growth. In this whitepaper, we illustrate some of the
alternate pricing models that could help a company reduce its dependence on high cost T&M pricing
models by replacing them with SLA-based models for managed services, with outcome or subscriber-based
pricing (value based pricing).

These are some of the more commonly used pricing models prevalent in the market today:

Commonly Used in BPO/BPM

FTE Pricing (Input Transaction Pricing Gain sharing

Based Pricing) (Output Based
pricing) (Output Based pricing)

• Proposed to start with • Transaction based
this model pricing is mostly
• Suitable when the adopted for functions
volumes are stable and where there is an
can be easily forecasted inherent fluctuation in
the volumes
• Payout volumes
fixed with dedicated • Transaction Resource
units to be defined,
resources aligned
measurement
• Fractional FTEs
methodologies
requirements will be
determined and agreed
rationalized
upon
• Could have a mix of
dedicated vs. a non-
dedicated resource
model
This model is adopted when two parties agree
to share savings that result from any of the
following:
• The improvements that are in addition to the
Supplier’s targets or performance standards
described elsewhere in the Agreement;
or
• Improvements that are in addition to the
Supplier’s obligation to keep pace with
relevant market trends and best practices;
or
• Improvements that require significant
investment from the Supplier that is over and
above that necessary to perform the Services
in accordance with the Agreement.
 Commonly Used in Technology Contracts

User based Business linked Asset Monetization Fixed Term

pricing pricing Project Pricing

This is a license • Part of the partner’s In this model, the vendor • A pre-agreed
based model where revenue is linked buys an asset (technology lump sum (fixed)
the development & to the business based business platforms fee is charged for
operational costs performance of the including Client’s software and completion of a
of the application client. software components) of a defined activity.
& IT facilities are • This necessitates customer and invests in the • Suitable for
calculated and the identification productization of the same. areas where the
amortized across a of metrics like While existing customers requirement is of
subscription period financial evaluation continue to enjoy the asset temporary nature
(for example, three based on Return through a license back model and scope of work
years) and then on Investment (with little or no maintenance can be clearly
divided between all (ROI), Internal Rate overheads), they also earn defined without
users of the service. of Return (IRR), royalty (in exchange of any blind spots.
Net Present Value marketing support) for any
(NPV), etc. external sale made by the
vendor. While the platforms
• Advanced
are chosen such that the
scorecard
competitive advantage doesn’t
techniques
get diluted, the customer
may take the
gets an additional benefit of
concept further by
recovering a part of the sunk
associating metrics
cost.
with the value
generated from
investments and
services.

This whitepaper also shares a high-level framework on how the movement from FTE pricing to the value based
pricing model should be executed.

To identify the suitability and the extent to which one or more of the following models can be applied at your
organization, we suggest conducting a Due-Diligence exercise, to enable a service provider familiarize with the
portfolio of applications (and related details) to leverage/develop best practices, processes, frameworks, and
experience to arrive at an optimal, high-value, cost-effective solution.

A comparison of the 3 most commonly used pricing models on Outcome, Risk and
Relationship maturity are depicted in the figure below:

Input Output Outcome

basedModel based Model based Model
More

Gain Sharing
Supplier Risk/Reward

Transaction
based

FTE based
Less

Uncertain/
Undefined
Volume/Outcome

Vendor Relationship Maturity Partner

1. Full Time Equivalent- (FTE) based Model
Model Description - This is a pricing model where the payment to a service provider is based on an
estimated amount of input provided. In most cases, this input is “manpower”. The FTE-based pricing model is
the most commonly used input-based pricing model where the price is quoted as an average FTE rate per hour
along with the number of FTEs required.

Relevance to Customer
• Simple to understand and implement
• Useful when there is high volatility in the volumes
• Can be effectively used to compare price across vendors
• Lesser legal and negotiation hassles
• Access to ready infrastructure and support services

Key Cost Drivers

One Time Cost Infrastructure, Transition

Competitivebut fair and Technology Costs
Ongoing Costs
Drivers

• Average entry - level

ives
inc ared

Predictable an

compensation
ent
Sh

flexible

• Team leader span

The pricing
model • Operation manager span
• Cost of Experience Hires
Direct FTE Cost
Pr

d

• Attrition
ice utc

• Bench
o
to om
bu es

y to • Direct support
sin

Eas
ple/ e
es

i m • Training Costs
us
s

S


• T&E Costs

• Seat utilization
Infrastructure Cost • Total Rent per square feet
• Area per seat

• Bandwidth required per seat

IT and Telecom Cost
• Bandwidth cost per KBPS

G&A Cost • G&A Costs (Admin, Finance,

etc)

FTE and project-based engagement models offer flexibility

• The client’s request for fixed FTEs (or headcount) is provided by HCL via a mix of onsite and offshore
presence

• The offshore team is typically operational with dedicated project management

• Works on a “production” model to execute repeatable analytical tasks

• Nature of work varies over time with dedicated resources

• Team composition and skills are defined by the client – mix of onsite / offshore

• HCL matches skills requested within the system, and hires, if required; Resources are treated as an extension
of the client’s team

• Annualized resource costs are typically ~30% less than U.S.-based onsite shops
FTE-based pricing works best for:
• Cash Applications and AR, Purchasing, Customer Service, and Sales Accounting

2. Transaction-based Pricing
Model Description - In this model, the client is charged on the basis of units of service outputs. These
unit-based services can range from resolving an incident ticket to processing an order in BT systems for order
processing. The output can also be measured as per call, per ticket, per device, per database instance, per test
case, etc. to give greater operating leverage and flexibility.

In the application management of a large homogenous portfolio, this concept may extend to charging a
customer according to the number of applications being used. In this approach, applications are scored across
multiple parameters like size, complexity, and criticality and fitted in clusters based on the final score. With each
cluster linked to a price for steady state support, the client is offered a predictive cost toward application on-
boarding and off-loading.

Relevance to Customer - Given a considerable scale and huge portfolio of operations, HCL is willing to
explore the option for per-call/transaction-based pricing for customer services offered to customers. This model
has the following benefits:

• Closely tied to a customer’s business cycle

• Enhances visibility into consumption patterns

• Encourages productivity and efficiency

With the adoption of this model, customers can enjoy faster on-boarding /off-boarding and thus gain greater
control and commercial predictability, which is so critical in a large application portfolio where there could be
frequent and unplanned decommissioning and merging of applications.
 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).Transaction based pricing breeds efficiency as the service
provider is paid for quantity of work. 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 specific band.
Transaction
Pricing • Closely tied to the customer’s business cycle
model • Enhances visibility into consumption pattern
• Encourages productivity and efficiency
• Unit Transaction Pricing based on
• Baseline FTEs
• Volume metrics
• FTE allocation by unit of measure
• Cycle time assumption
• Unit Transaction Pricing approach

• FTEs allocated to sub-process/pricing unit of measure

• HCL charges allocated to volume in order to determine unit price
• Unit Transaction price based on offshore resources only (Onsite resources will
be charged separately)

Essentials for a Function/ Business Transaction

Successful UTP Model Vertical Process Unit

Human • Payroll Processing • Payslip

Resource • Recruitment • Recruit
Management • Travel Planning • Booked trip
• Expense Management • Expense report

• General Accounting • Journal or chart of account

M entry
ell d ea Finance & • Accounts Payable
W fine su • Invoice
e ra Accounting • Accounts Receivables
D ble • Invoice, % collection
• Fixed Assets
• Fixed asset line item
Characteristics
of Business • Lead Generation • Lead
Dem ility

Driv e
Varia

Process
m
en

Mortgage • Loan Processing • Loan application

Volu
and

• Loan Servicing • Loan

b

• Collection • % of collection, invoice

Standardized • Policy Issuance • Policy issued/ underwritten,
• Claims Processing quote
Insurance • Billing / Payment • Claim
Processing • Invoice
• Collection • % of collection
3. Subscriber/Outcome-based Pricing
Model Description - This refers to a pricing model where the service provider is paid based on the business
result achieved by the customer through the service provider’s contribution - such as a percentage of increased
profits or reduced operating expenses. The mechanisms for paying the service provider vary, but generally,
the payment is made in one lump sum when the result is achieved; or over a short period of time, so that the
provider can recoup its investment in a timely manner.

In this model, the vendor’s revenue from its clients can be directly linked to the business impact that it is able
to create and sustain for its clients. This model is particularly relevant in the areas of product development, and
BPO and infrastructure services.

HCL is open to exploring options for risk-reward sharing with a customer. HCL suggests a period of observation
for 6 months, which will help HCL arrive at the right outcome-based pricing proposition.

In this model the vendor payment structure is tied to the overall strategic goals of
the client in some way.
E.g.: Service provider could be paid based on the business result achieved by
the customer through service provider’s contribution, such as a percentage of
Outcome increased profits or reduced operating expenses.
Based Pricing
• Closely tied to customer’s business outcome
model
• Aligns customer’s and service provider’s interest while encouraging partnership
and continuous improvement
• Works only in a mature relationship where it is possible to isolate service provider’s
contribution and quantify the impact on outcome
• Major dependency on skilled resources, standardized & innovative processes &
systems

Essentials for a successful

outcome based pricing model

Outline clear quantified outcome

red re Ma
lat tu
e nu cess ion re
T ro sh Focus on the process of achieving that
p ip
outcome
Characteristics Identify & monitor impact on all
ncy

of Business contributing factors

comoverna
&g

Steps to OBP
Endmitmence

pare

Process
Governance flexibility & commitment at
urin t

all levels and at both ends

Tran
g
n

End-to-end “Value Creation” would be the focus at

visibility each stage
4. HCL’s High Level Proposal to move from a FTE Model
to an Outcome/Subscriber-based Model
A high level description of the methodology to move from a FTE/T&M model to an outcome/subscriber-based
pricing model is given below.

Transition and stabilize Transaction pricing as a

process improvements & Subscriber based pricing
on a FTE model technology gain focus as the relationship matures

Current state with Client in the Leverage capabilities developed A mature relationship that allows
current relationship over time on both sides synergies between both teams to
meet mutual goals

Gradual evolution of a pricing structure from FTE based to per subscriber based approach

Initial Start Phase -1 Phase -2

FTE based pricing Transaction pricing Subscriber based pricing

• BAU operations • Bring in process improvement • Quantify and state

• Standardize processes
across locations & remove
personal preferences
• Develop necessary workflow,
tools, data & MIS
• Validate & baseline historical
data
• Build domain expertise
and plug leakage and remove expectations
‘NVA’ • End-to-end process re-
• Up and cross-skilling engineering
• Standardize and simplify • Major systems
processes and systems enhancements,
• Align HCL and Client goals implementation
• Client and HCL both gain • A robust governance
end-to-end visibility structure
• Share best practices from • Looking beyond technology
both teams for building efficiency
• Build a “Gain/Loss-share”
model

To start such an activity, HCL proposes a POC (Proof of concept) for any of the outsourced processes. The
process can be chosen based on the amount of data that is available for analysis.

While moving from FTE to transaction-based pricing, the service provider is completely responsible for bringing
in operational efficiencies and managing key end-to-end operational KPIs, such as:

• FTE productivity

• Occupancy

• AHT

• TAT

• Cycle time

• Service level

• Transfer calls

• Repeat call%

• Overall programme productivity

Phase -1
In the first 6 months, HCL deploys a core team to collate the data that is required for a decision to move to a
transaction-based pricing model. HCL mines the analytics and market intelligence and invests in industry SMEs,
Work Force Management and reporting teams who map the current process to ensure that the right data is
collated to enable movement to the new pricing model. The data is regularly tracked to identify trends and gather
more insights before the proposal is made.

Some of the data points and trends which are an integral part of the overall analysis include:

• Identifying types of transactions

• Bifurcation between online and offline data

• Sources of data

• Productivity drivers

• Occupancy drivers

• AHT drivers

• FTE cost

• Volume projections

• Identifying leakage

Phase -2
During the subsequent phase (months 7 to 12), HCL will implement a strong analytical engine that will help it
collate the information required for moving from a transaction-based to a subscriber-based model.

HCL will put a core team together, consisting of data analytics professionals, SMEs, MIS and WFM experts to
collate and analyze highly refined data that is broken down to the minutest level. This will be required to make
a decision for moving to the new pricing model. HCL will also solicit support from client SMEs, operations, and
other business support teams, in order to ensure that the right information is collated.

Examples of some of the analysis, data points and trends which will be part of the overall analysis performed
during this phase, include:

• Current subscriber base

• Cost per customer
• Total revenue
• ARPU analysis
• Customer profiling and segmentation
• Average calls made by the subscriber for the product
• Customer repeat calls reasons
• New product launches
• Efficiencies of new product launches
• Why and how much of customer churn
• Number of new customer acquisition
• Number of old and new customers joining back
• Client’s internal customer growth projections
• How customers move between channels and the reasons for such movement
• Efficient monitoring of all channels of communication

From its inception, HCL has been a frontrunner in innovation - from its award winning Workforce Management
philosophy, to pioneering unique service offerings. HCL continuously tries to germinate innovative solutions that
add more business value for its customers. The Outcome-based Pricing Model - which is powered by a culture
of taking relationships beyond the contract - is a result of thinking out-of-the-box in order to move away from
traditional effort-led models to outcome-based business models that are not linear to employee headcount as a
condition for growth.
To know more,Contact us at bpobusinessmarketing@hcl.com