Thinking of the Pricing Model before you initiate an improvement initiative
While working with a BPO Organization it is imperative that the Process Owner or the Six Sigma Professional consider the Pricing Model before they initiate any improvement initiative.
Typically below are a few Pricing models that the industry uses today:
1) FTE based Pricing
2) T&M Pricing
3) Transaction Based Pricing
4) Outcome based pricing
5) Firm Fixed Price
FTE based Pricing essentially means that the organization shall be paid basis the count of people logged in. Availability and not utilization here is the key metric that is to be monitored. For FTE models some customer companies may also use Login hours instead of headcount for billing purposes….login hours again is manifestation of the AVAILABILITY than UTILIZATION.
When the Process under consideration is billed using the FTE model, it may hurt the company when they look at doing a project on improvement of Productivity as the same may end in reduction of FTE (or headcount). Eg if I have a 100 FTE process which is handling 50K transactions, and I set out to improve productivity of my people I may end up needing only 80 or 90 to do the same work. Project success may result in loss of 10-20 FTE revenue for the month
Pricing model 2: T&M or Time & Material Pricing model is done when either there is absolute lack of clarity of what is required to be done. Hence, a competent resource is on-boarded by the customer on a fixed rate per hour model (plus any material cost involved).
Most consulting assignments which require discovery shall use time & material as to the provider company there is lack of visibility on how much time shall the initiative require. T&M is mostly used when the customer has the ability to closely monitor the resource and the engagement is short term. Several customer companies will put a upper cap on a T&M contract.
T&M productivity projects could hurt revenue.
Pricing Model 3: Transaction based pricing- Organizations that have gained expertise over a particular activity/activities look at opting for TBP model. Productivity improvement projects in TBP businesses is highly recommended as more transactions mean more money or doing same amount of transaction using less resources would mean more margin. Eg. If Airtel pays me money by number of bills I generate, it is recommended that I develop competence to improve productivity either to process more bills or generate the no.of bills with lesser no.of people.
Pricing Model 4: Outcome Based Pricing- Organizations that have wanted to deliver value to the customer and are competent have now move towards OBP models. Eg- Lot of PPP projects happening in India are based on OBP. In OBP productivity improvements projects and still better outcome improvement projects are the order of the day.
Pricing Model 5: Firm Fixed Pricing- Organizations