Pricing Models and Choice of IT Service Providers

Among the various pricing models in vogue with the offshore based IT services providers, the key ones are time and material (T&M) and fixed price (FP) models. While there may not be complete data ( or at least I have not seen), on which ones rule the most --- my personal take is that T&M contracts should be accounting for almost 80% of the contracts if not more. The rest are mostly fixed price. There are some others like device based unit pricing, outcome related pricing which may be there in pockets but mostly T&M rules the chart.

This also shows the nature of engagement --- the customer owns the risk in such contracts -- and probably s/he don't mind it as the nature of work outsourced is chopped and packetized to ensure it follows the technologies, processes and skill requirements that already exist. However as corporations move to a managed services environment, if you can rely on your provider, then to help them realize the full potential of their innovativeness and cost-efficiency, one needs to look at pricing models like fixed price, utility based, transaction based or, outcome based. However, the difference across these models (apart from how you assess the charges and the risk ownership) is also the degree of control you, as the outsourcing enterprise, would wield. So, not only does it require a mature, stable and innovative partner with a track record, but it also needs the outsourcing enterprise to agree to let go control, to varying degrees to completely benefit from outsourcing.

It is not uncommon to see most CIOs embark on a roadmap starting with T&M model, with a stated objective to move to other more deeper models gradually, but somewhere down the road that does not happen -- often fuelled by the outsourcing enterprises' staff's need to retain control or due to the lack of leading-the-curve trait shown by the chosen provider. And then, between the choice of going for a new partner in the hope that it will be different or to continue with the current one but with a lower degree of involvement ( and no transition and a whole lot of other stuff to face) organizations often choose to continue with the chosen provider.

So, it is also important to choose a service provider carefully in the first place before you let them in. It is much more difficult than shifting to a new desktop manufacturer ( which in itself is not easy either!) when it comes to changing service providers for IT services.

Wall Street Meltdown & Offshore IT Players

The happenings of the last couple of weeks at the Wall Street has for ever changed the way people will look at these companies. Who would have thought in their wildest dreams that the largest retail and investment banks would fall like a pack of cards within couple of weeks. This is a logical 9/11. The one in 2001 had deep impact and was recovered relatively easily because this has had prime physical impact. This one has jolted the very fabric of banking across the world.

I happen to be in US for the past few weeks as this drama was unfolding. In fact I was at the corporate offices of one of these major banks on the day their acquisition was announced and saw the reaction first hand. Unbelievable!

Now what does it mean to the offshore based IT ousourcing players? A lot. And here is why:

• Banking, Financial Services & Insurance (BFSI) as an industry vertical is the largest contributor for almost all IT services companies and certainly for the bigger ones
• These IT services companies have been growing on a "get more (people) to get more (dollars)" mantra. In the past years, in anticipation of the trends as they saw, they have added staff, a large of whom will now be redundant
• US as a region has been the largest contributor across various regions for their revenue and so with the maximum impact in US, they would be hit hard
• As it would apply to everyone, with the sudden deep impact on banks all related and evern unrelated industries will get impacted, eventually eroding the topline and the bottomline

It is very likely that the following fallouts will be seen:

• These offshore based IT services companies will accelerate the process of de-risking by seeking out opportunities in other non-US regions. Many consciously initiated this couple of years back when they saw all their eggs in one basket but it has not been easy. EU is the major destination as the labor arbitrage holds greater promise (which unfortunately continues to be a key revenue generating driver) as compared to other regions like Asia.
• The de-risking will continue in terms of seeking opportunities across major non-BFSI verticals
• It is also imminent that these companies will bring in the first wave of layoffs for their India based workforce which was recklessly bought on board with the "get more (people) to get more (dollars)" mantra. All new hiring and promotions are already a freeze for most - either explicity or implicitly.

So, is it all gloom? Well yes, it is but couple of positives which will take some time to contribute to their growth though:

• A well spread and diverse portfolio of customers across regions and verticals can be expected in future. These IT services companies will not consciously choose where they want to do business.
• A more efficient and cost conscious culture. For most, they have not seen any cost cutting measures. Many already initiated these in the past months cutting travel and communication costs. Earlier with the excessive margins they enjoyed, it was still a value based approach in terms of revenue but now markets will rationalize with a cost based approach

The recession is there now in the US economy and so will spread other economies soon. If US stops producing and consuming others get affected the fastest. People are comparing this to the Great Depression of the 1930s and it surely will take a long time to return to the 2006-07 levels before growth can happen further on.

To a large extent the party has stopped if not over for the offshore based IT outsourcing services companies. It is probably the morning after. Of course there will be evening again and the party will start after some time, but these companies will be more sober then.