Transaction based Pricing Model (TPM) for IT services

Though Transaction based Pricing Model (TPM) has been there for a number of years, particularly for IT product based services, off late it has become a buzzword in the IT services industry. But, is it really suitable for IT services? What does it take to get the best out of a TPM?
This article examines the benefits of TPM for IT service delivery, implementation prerequisites, what are the typical roadblocks.
Why TPM in IT services?
1. Outflow linked to revenues – Customer pays per transaction processed – pays less during lean periods which translates to less burden when revenue is low.
2. Like any other outcome based models, customer does not bother about intermediate processes (black box approach), which reduces the vendor management time drastically.
3. reduces subjectivity in vendor productivity measurement – productivity can be linked to transaction volume and hence can be measured objectively
Suitability of TPM
 One size does not fit all –TPM is not best solution for all situations.
1. TPM is best suited for IT maintenance & support and BPO activities
2. TPM fits well with business environments with volume fluctuation. E.g. in a order management system where the order volume changes drastically from month to month
Pre-conditions for implementing a TPM
1. Mature relationship with the vendor – first and a foremost requirement before rolling out TPM, which in turn save heartburns later.   
2. Clear cut agreement of a transaction and well defined methodology to track the transactions e.g. a good ticketing system to keep track of maintenance/support tickets. All alternative paths of the transaction life cycle must be identified. E.g. if order processing is the transaction, equity order processing, fixed income order processing, handling of a failed order etc. will follow independent processing steps  
3. Floor and ceiling volume/price – Customer and vendor must agree on a minimum and maximum volume before implementing. Vendor needs to maintain a minimum workforce for lights-on and the commercial model will not be viable if volume consistently falls below a certain minimum level. Similarly, vendor needs to cap its billings for better price predictability.        
Time period
 It typically takes six to 12 months to implement TPM
Other measures that add value to TPM: 
1. IT BPO integration – Appointing a single vendor for the business operations as well as underlying IT services helps assigning ownership and accountability. Certain SLA can be combined across IT and BPO.
2. Gain sharing model – TPM helps increasing productivity that results in gains for the customer. Incentivizing a TPM by sharing gains will make the commercial model sustainable for a much longer term

Lalit Dash


One Reply to “Transaction based Pricing Model (TPM) for IT services”

  1. Very interesting and insightful article.

    I suppose this would drag the break even period further ?

    Given the huge initial set up cost, as IT services provider, does it workout to be profitable for contracts <6 years ?

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