The Artha Shastra Framework is a structured set of processes, methodologies, and tools to map client needs to service provider capabilities.

Pricing of off-shoring projects is often seen as a function of financial parameters alone. This one-sided approach leads to inconsistencies in pricing that later go on to become points of contention between the outsourcing organization and the BPO service provider. The Artha Shastra framework, in contrast to traditional practices, views pricing as a function of several trade-offs, both financial and non-financial.

Double-Entry rule of pricing

Drawn from the double-entry rule of accounting, this rule of pricing states that every decision has an opposite but not necessary equal impact on two different parameters. To take advantage of such arbitrage opportunities, pricing must be computed as a function of both financial parameters as well as trade-offs made by the bank in accordance with its priorities.

	Process understanding	Wage Structure	On-boarding cost	Organization design	Shift construction	Infrastructure & Hardware	Transition ramp-up	Financial Parameters
Process understanding
Wage Structure
On-boarding cost
Organization design
Shift construction
Infrastructure & Hardware
Transition ramp-up
Financial Parameters

Trade off Matrix

Business Unit of Measurement

In most outsourcing situations, full time equivalent (FTE) cost is used to determine volume-based transaction pricing. This methodology makes some glaring omissions:

Conflict of interest: What if the BPO provider hires only untrained staff to pump up FTE cost and improve its margins while sidelining the interests of the bank?

Controllability: Who takes the onus of extraneous factors such as global economic cycles that are beyond the control of both the outsourcing organization as well as the service provider?

The Artha Shastra framework works around these inadequacies of FTE-based pricing by arriving at relevant business units of measurement to factor in the aspect of controllability of parameters and also manage conflicts of interest between both parties.

Volume Volatility Management

The aspect of variations in volume of business in the long term and its impact on pricing is often overlooked during price negotiations. This important parameter is factored into and handled by the Artha Shastra framework using a modified version of the Black-Scholes methodology of financial option pricing. The "option premium" for handling variations in volume is computed for different structures of risk sharing between the bank and the service provider. This model is unique in that it moves beyond the cosmetic ± 5-8% band of volume variation. Importantly, it also provides a methodology for service providers to "hedge" their positions and, hence, manage risks effectively.

Risk Sharing and Management

It is important to realize that the cost of errors is not equal to cost of reprocessing the transaction. The Artha Shastra framework recognizes this distinction and recommends that the risk of losses arising from errors must be borne by the party that is best equipped to rectify / handle them. However, it is equally important for BPOs to scale up their operational capabilities to handle such risks if they wish to evolve as a value player in the market. Artha Shastra, with its rich experience, provides valuable advice to BPOs to handle such risks from the operational and pricing perspective to create value for their customers.

Business Value

The Price Discovery stage of the Artha Shastra frameworks rounds up the insights obtained from and the trade-offs made during all the previous stages of the framework and utilizes them to arrive at an optimal and fair pricing model based on financial and non-financial parameters.