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Outsource magazine: thought-leadership and outsourcing strategy | September 20, 2017

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The Deal Doctor: Transactional Action

The Deal Doctor: Transactional Action
Paul Morrison

This article originally appeared in Outsource magazine Issue #31 Spring 2013.


“We are being pressured to introduce transactional pricing for our Finance BPO deal. Is this a good idea?” Concerned Contract Manager, Stockholm.

Transactional charging is bread and butter for many types of outsourcing such as data centres, recruitment or payroll. But others such as F&A stubbornly cling to more “basic” mechanisms, particularly pricing based on FTEs.

The rationale for upgrading to transactional pricing is clear. It focusses on the units of output that really matter, such as the number of invoices or payments, and helps to focus behaviour within your organisation (to cut back on excessive usage of a particular service). So transactional pricing can give transparency and put the spotlight on the volume of service consumed. But there are challenges. Firstly, defining the transactional metrics in sufficient detail can be very complex. In the case of finance, the idea of “charging by invoice” is clear – but which invoice types, and how the charge should be allocated between them (and what is a fair price to pay) may be less clear.

Some processes are simply not suited to transactional pricing, and in the case of Finance, whilst AP/P2P may be a relatively easy candidate, all organisations struggle when it comes to pinning down R2R for transactional pricing. A lot here depends on the level and quality of process, productivity and volume information that is available to both you and your supplier.

Next, transactional pricing may ultimately not provide more relevant information than an FTE model. If your Finance operation is highly globalised and labour-intensive, the most important cost driver actually may be the number of FTEs in each of your key locations. If you lose sight of this, a bland blended cost-per-unit may get in the way of extracting other benefits, such as labour arbitrage.

Transactional pricing offers extra sophistication for many outsourcing buyers. But pricing is a complex, nuanced business. Look before you leap!

 

 

Comments

  1. Some wise words there Paul, thanks for sharing. I would also highlight growing interest in the “next generation” of transactional pricing – differentiated transactional pricing, whereby the service provider offers different costs for different transaction channels – ePayslips cost less than posted paper payslips; on-contract purchase orders cost less than off-contract etc. Whilst not suitable in all cases, differentiated transactional prices make under-lying costs visible and can help influence changes in behaviour that may be needed to achieve cost reductions in the client organisation. Such approaches to pricing can help drive service innovation – requiring changes from both supplier and customers – that simple FTE models often do not incentivise. And are we not always saying that BPO needs to deliver on the so far unfulfilled innovation promise? As labour arbitrage opportunities steadily reduce, as cost pressures and the demand for innovation increase I suspect we will see more transactional pricing – let’s hope it is applied in the right areas, in the right ways and to the right services.

    All the best,

    Colin Whalen
    Director, LintonWharfe.

  2. Paul Morrison

    Thanks a lot Colin, very good point about differentiated transactional pricing. Good point too about the ‘quick win’ of arbitrage, and how innovation is in part the search for new sources of value…

    Cheers, Paul

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