An enduring and successful credit control outsourcing relationship is possible only when the agreement between the service provider and the client is mutually beneficial. Outsourcing your credit control function to an offshore location is bound to deliver the obvious cost advantages from labour arbitrage. But as the F&A outsourcing services sector has matured, it is possible to gain advantages beyond cost gains – including customer service gains and improved cash flow.
While the pricing based on the work done by an FTE (full-time equivalent) continues to dominate credit control outsourcing, transactional and outcome-based engagement models have gained ground over the last few years.
In this article, we will take a look at the most effective pricing models for credit control outsourcing and see how they compare with each other. Please do note that a reliable and professional credit control service provider can deliver the benefits while shielding you from the negatives of the pricing model.
1. FTE-based pricing model for credit control outsourcing
Contract-labour model, input-based pricing and dedicated resource model are some of the other names for this type of outsourcing model. For a business with a broad scope of requirements, this linear pricing model of credit control can be a great option.
- Easy to understand, define and implement
- Pricing and timelines are clearly defined which makes it easy to compare competing vendors
- Can set up a team of dedicated credit control and AR personnel who work exclusively on your project
- Option to direct the resources to other back-office tasks of choice
- Scalable – opportunity to add more resources at a short notice if required
- Prices are not tied in with the actual volumes
- There are no direct incentives for the service provider to improve efficiency
- A major change in requirements can cause disruption in staffing
Scenarios where the FTE-based pricing model works
- Lack of demand forecasting practices or the volume of transactions is not consistent
- A volatile environment where services descriptions can change and the option to direct resources to out-of-scope work is required
- The client or the service provider or both are new to outsourcing and lack the maturity to define and implement more complex models
2. Transaction-based pricing model for credit control outsourcing
Unit-based pricing, output pricing and utility pricing are some of the other names for this pricing model. The pricing is based on the amount of ‘work done’ or the output; for instance, the client pays a fixed price for the complete processing cycle of each invoice. The pricing could also relate to any specific unit of task related to credit control – the number of calls made, dunning letters sent, queries resolved, legal actions taken, etc.
For this model to succeed, the client and service provider require the ability and maturity to set a mutually fair unit price for each type of transaction. Often, a service provider will set a base price for a specified volume of transactions, with reduced price for usage surges beyond the bandwidth.
- Efficiency improvements as the vendor is paid for the volume of work delivered
- The risk related to the increase or decrease in volume is borne by the service provider
- High level of flexibility in pricing with freedom to scale operations
- Difficult to design and implement the model if the service provider or the client don’t have a clear understanding of the cost structure
- Clients accustomed to an FTE or dedicated resource model can feel a loss of control as they may not have a say in the resource allocation or productivity decisions
- Not directly tied in with the client’s business outcomes
Scenarios where the transaction-based pricing model works
- The service can be broken down into a set of standard and measurable transaction units
- Transactional volumes are acceptable to the service provider and tied in with their cost drivers
- For clients whose volume of transactions vary substantially over short spans of time, this may be a more suitable model for pricing
3. Outcome-based model
Collection-based model and percentage-model are some of the other names for this type of pricing model. This model aligns directly with the actual business result – collections received. The service provider is paid a percentage of the collections made; the percentage varies by debt age. At times, this model is combined with other models as a variable part of a fixed+variable pricing model.
- Direct correlation with the client’s business outcome – the client pays only for actual results
- Builds trust and aligns the objectives of the service provider’s team with the client’s team
- Opportunity to gain massive saving that can potentially be higher than those offered by labour arbitrage
- Client can feel a loss of control over the collections process and may lack visibility into how the process is performed
- Unreliable service providers may reduce the potential collections by focusing only on the low-hanging fruit and avoiding difficult collections
Scenarios where the outcome-based pricing model works
- Can be a no-brainer in case of outstanding payments that are going to be written off as bad debts anyway
- The desired outcome is clear and the client can trust the service provider to follow best practices and processes
Not sure which credit control pricing model works the best for your business? Please feel free to get in touch with us and get expert advice from our credit control leaders.