Transaction-based pricing as the next big paradigm shift

The traditional FTE-based pricing model has been the gold standard in the outsourcing industry.  It is by far the most commonly used model since it is less complex. FTE-based pricing offers you the advantages of easy implementation, tracking and benchmarking. But the question that arises is is it going to stay that way forever? With increased buyer-sophistication and high competition, the accounting outsourcing industry is slowly but steadily moving towards more evolved pricing models like transaction-based pricing.  While there are many parameters that are moving the market in that direction, what do you need to do to get your service provider to use that model?

  • Standardized processes: Processes that are outsourced should be standard procedures. Processes that have a clear-cut start and finish, and are repetitive transactions are more amenable to this model.
  • Measurable transactions: Transactions that are easy to monitor and measure are most ideal. One of the prerequisites of transaction-based pricing is the availability of a baseline volume data and the availability of a minimum number of transactions, which will make the service provider support this model.
  • Relationships and expectations should be clear and established: Transaction prices should be fixed so as to ensure maximum benefits of the deal for both parties.

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 set goals or set an implementation plan
  • Develop separate units for this goal and develop a measurement criteria for each unit
  • Define baseline volumes for each unit
  • Provide processes for the required changes in volume and tariffs that are bound to occur in the future
  • Create a detailed plan (which includes dependencies from the supplier, internal business units and other appropriate stakeholders) to be run parallel with the transaction-based pricing regime

If baseline data is not available and/or processes are not completely streamlined, an alternative could be to start with an FTE engagement. Use the first phase of engagement to streamline the processes and baseline data. Then gradually move towards a transaction-based pricing.

Transaction-based pricing, with all its advantages, is not a solution but only a means to a solution. It offers a more predictable means to determining what you will need to spend as you grow.  While there is evident interest in this model, not everyone has been able to move to this model quickly since it is not straightforward and revolves around measurement.  If your processes are not clear or predictable, then this model is not suitable for you.  If in doubt, talk to your service provider to understand whether this will work for your organization.

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