2.

How does the pricing model influence the way operations are designed
and managed?
Ans :
FTE (full time equivalent) is the number of working hours that represents
one full-time employee during a fixed time period, such as one month or one
year. FTE simplifies work measurement by converting work load hours into
the number of people required to complete that work.
Transaction based pricing where a deal is priced on the basis which a
service provider possesses for a customer. More number of transactions
possesses by service provider results in more payment.
For compare both of them we can take an example
A customer outsourced Accounts payable process to a service provider.
Based on the past data it is expected that invoice volume to be approx.
25,000 per month.
FTE Pricing:
The service provider quoted $12.5 per hour per FTE and has estimated
approximately 50 FTEs to perform the work. If service provider bills
customer for 8 hours per day and for 20 days in a month, so customer would
pay an amount of $100000 every month.
Month
Invoice
volume

1
25000

2
29000

3
17500

4
18000

5
20000

6
27000

So from customer prospective the low hourly rate makes it compelling

option. But the capacity to process invoices would remain at 25000 per
month. So if the volume is less than 25000 invoices as in months 3, 4 and 5,
customer will still have to pay this amount to the service provider .In case, if
it is more than 25000 invoices as in the month 2 and 6, customer either have
to face diminished service level or would have to provide sufficient time to
service provider to arrange the resources. This invariably leads to
unfavorable impact on customers business.
Transaction pricing:

Service provider has quoted $4 as the transaction price for each invoice
processed. Invoice volume expected to be processed per month is 25000 and
there is price for volume variation. From customer perspective this is an
attractive option because all the risk related to increase or decrease in
volume of transactions in borne by service provider. For the months when
transaction volume is more than 25000 the service provider would put in
extra resources to meet the service levels and when it will be less than
25000, the service provider utilizes extra resources for another customer and
customers have to pay the service provider only for the transactions
processed in a given month.
For example,
Month

Invoice volume

Customers cost
in $ (FTE pricing)

1
2
3
4
5
6
Total

25000
29000
17500
18000
20000
27000
136500

100000
100000
100000
100000
100000
100000
600000

Customers cost
in $ (Transaction
pricing)
100000
116000
70000
72000
80000
108000
546000

And from service providers prospective, FTE pricing is better but to be

competitive in market and from competitor they have to be charge less and
should be flexible with amount of work which provides only transactional
pricing.
Full time equivalent can be used when
1. Transaction volumes are unknown.
2. Transaction volumes are not closely tied to service providers cost
drivers.
3. Output cannot be defined or isolated to service provider.
Transaction based pricing can be used when
1. Output can be defined.
2. Transaction volumes are known and predictable
3. Transaction volumes are tied to service providers cost drivers.

Infosys BPO shifted from FTE to TBP because

1. It is more flexible and scalable pricing model as payment is for
consumption only.
2. Effective monitoring of costs due to enhanced visibility into
consumption pattern.
3. Lower per unit cost due to improved efficiency
4. Makes it easy to compare and select service providers by comparing
their per transaction price along with service level agreement.
5. Improve profit margin by charging more for value created and
higher risk owned
6. Better control of service delivery as people ramp up/down and re
allocation becomes easy.
7. Offer commercial differential (higher savings) due to standardization
and innovations that result in higher output for lesser input.