Designing and Implementing Transaction-Based Pricing for Outsourced F&A and Procurement Operations

Executive Summary

An world-leading diversified health and well-being company moving from a shared services center (SSC) delivery model to an outsourced environment for its finance and accounting (F&A) and procurement functions engaged Everest Group to design and help implement a transaction-based pricing model. The new pricing model not only resulted in significant financial benefits for the client, but also provided it with meaningful insights for future process improvements and technological investments.

The Client’s Challenge

The client had established three SSCs, in Poland, India, and Thailand during 2002 to 2007 to process its F&A and procurement transactions. The centers served the client’s businesses globally, representing 400 reporting units, and running on 16 different SAP instances.

While the client had achieved significant cost reduction through labor arbitrage and had made good progress in standardization and automation, its SSCs faced several significant challenges including:

• Lack of expertise in technology to drive further process improvements and innovation
• An inadequate cost structure that could not adapt quickly to volume changes or macroeconomic changes such as cost of living or exchange rate fluctuations
• Lack of long-term career paths for SSC employees, who felt they were not integrated with the core client organization
• Potential high-cost liability in restructuring
• Difficulty in providing added value in service excellence

To address these challenges and realize business value, the client decided to sell its SSCs and instead outsource its F&A and procurement operations.

The objectives for that partnership included cost optimization via continued reductions, and implementation of transaction-based pricing starting in the second year of the contract. The client’s goal was to simultaneously implement transaction-based pricing across all of its businesses.

Insight to Action

Everest Group assisted the client throughout the entire process, first building the transaction-based pricing model, and then developing an optimal transition strategy for the new pricing model.

Everest Group began by defining the processes and functions in scope, which led to development of high-level goals and implementation plans. In the next phase, Everest Group aided in the design of appropriate resource units, including baseline volumes for each resource unit, based on measurement criteria and processes agreed upon between the client and its provider. Everest Group then supported in-depth monitoring of the selected processes and helped create accurate forecasts of future volumes and volume fluctuations for each year of the contract. 

The Everest Group-built model defined rate cards for each of the resource units, for multiple geographies as applicable, along with a process for addressing future tariff changes. This Everest Group thoroughly validated the pricing model with the provider, internal business units, and other appropriate stakeholders, before testing, and calibrated it in multiple shadow runs.

Impact

Implementation of the transaction-based pricing model directly linked business activity and the actual outsourcing costs, resulting in significant financial benefits to the client. The client subsequently experienced additional financial benefits from process changes that directly affected transaction volumes. Also, the insights gained by the implementation of the model became powerful factual drivers for future technological investments.

In addition, variables monitored within the model have created opportunities for the client to move toward simplification initiatives such as reduction of manual non-purchase order invoices.