OP/OC (Operating Profit to Operating Costs): Definition and Uses

Definition

OP/OC — the operating profit to operating costs — is the PLI that prices the tested party’s result against its cost base: the operating profit (the numerator) over the operating costs (the denominator), the mark-up the tested party earns on the costs it incurs to perform the function. It is the PLI of record for the service provider in TNMM — the KPO/BPO line, the shared services, the contract R&D services — and the denominator discipline (the operating costs as defined, consistently across the tested party and the pool) is the PLI’s whole defensibility.

OP/OC = operating profit ÷ operating costs

Numerator: the operating profit — the operating revenue less the operating
           costs (the item definition stated in the file: the items in, the
           items out — the financial and the non-operating items treated)
Denominator: the operating costs — the costs of performing the function
           (the direct costs, the allocated overheads on the documented
            allocation; the excluded items — the financial costs, the tax —
            stated)

The use	The content
The tested party’s PLI	The service provider’s mark-up on its operating costs — tested against the pool’s OP/OC distribution (the IQR, the mid-point)
The pool’s PLI	The comparable service providers’ OP/OC, on the same item definition — the comparability of the denominator is the pool’s comparability
The adjustment base	The working-capital adjustment on the cost base (the days’ computation on the operating costs — the working capital adjustment); the TPO’s adjusted OP recomputes the numerator on its item treatment

The working distinction (the PLI reference and the TNMM guide): OP/OC and OP/S price the same operating result on different bases — the cost base for the tested party whose result is the mark-up on the effort (the service), the sales base for the tested party whose result prices the goods (the distributor, the manufacturer). The base follows the function: the service provider’s economics are the cost-plus economics, and the PLI is the mark-up — the cost plus method is the OP/OC economics as a standalone method, TNMM on OP/OC is the same economics benchmarked against the pool.

Example

The tested party (an Indian KPO entity) provides the advanced analytics service; the operating revenue is ₹120 cr, the operating costs (the defined base — the people costs, the allocated overheads on the documented allocation) are ₹100 cr. The tested party’s OP/OC is 20%. The pool (the comparable KPO providers, the same item definition) distributes at the IQR 17%–23%, mid-point 20.4%. The tested party sits inside the IQR, near the mid-point — the position documented, the range the defence. The working-capital adjustment (on the cost base, the days’ computation) is applied to the pool before the range; the TPO’s adjusted-OP question recomputes the numerator (the items, against the file’s stated definition).

See also

• OP/S (Operating Profit to Sales)
• TNMM (the guide) · PLI Reference
• Cost Plus Method · KPO & BPO TP

FAQ

OP/OC or OP/S for the services entity? OP/OC — the service provider’s economics are the mark-up on the cost (the effort is the base, the margin is the return on it); the KPO/BPO guide and the PLI reference carry the transaction-by-transaction mapping. The denominator is stated in the file (the operating costs as defined) and applied identically to the tested party and the pool — the pool on a different denominator definition is a pool that is not comparable on the PLI.

What items are in and out of the operating costs? The definition is stated in the file: the direct costs of the function in, the allocated overheads on the documented allocation in, the financial costs (the interest) out, the tax out, the non-operating items (the investment income, the one-time items) out of both the numerator and the denominator consistently. The TPO’s adjusted OP is the numerator recomputed on its item treatment — the fight is on the items’ character, against the stated definition.

Is OP/OC the cost-plus mark-up? The same economics, different machinery: the cost plus method prices the tested party at cost plus the selected mark-up (the method’s own arm’s length determination); TNMM on OP/OC benchmarks the tested party’s actual OP/OC against the pool’s distribution. The mark-up is the number in both; the comparability set is what TNMM adds, and what the best method weighs.