The Deal Doctor: Transactional Action
“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!