Indian software companies are searching for answers to the conundrum of how to price their services as the market shifts irrevocably from a time-tested model which has served them well for several decades. More exacting clients and technological changes have meant that the traditional model of charging for labour is giving way but no single replacement has been found yet.

The popularity of cloud-based delivery of services over the internet is reshaping the pricing landscape along with what is being called an "outcome-based model" of paying for predetermined business results.

"Clients are looking at their IT partners being responsible for delivering on business or process outcomes beyond managing specific technology mandates," said Chandrashekhar Kakal, senior vice-president and head of business IT services at Infosys, India's second-largest software exporter.

Buyers are increasingly looking to link payments to business outcomes, which indirectly also transfers some of their risks to service providers, who for years have been charging clients based on number of hours worked by engineers on a project. But, given the shaky macroeconomic environment and shrinking technology budgets, corporations are insisting that service providers deliver tangible, measurable value and not merely technology.

The push to revisit outsourcing industry pricing models comes at a time India's $108 billion (Rs 6.4 lakh crore) IT industry is facing fundamental shifts in the way technology services are bought. Once known for growing at a double-digit pace year after year and generating employment for hundreds of thousands of engineers, the sector has now slowed down considerably and may even see shrinkage in employment.

Kakal is confident that large IT providers, including Infosys, Wipro and TCS, are best placed to manage the change in pricing models due to their scale and ability to experiment. "A shared partnership (where risk is shared) will ensure that the client and the IT partners bring in their best abilities to ensure that gains of growth and efficiency are enjoyed in equal measure by both."

Noida-based HCL Technologies, India's fourth-largest IT outsourcer, sees a possible dent in profit margins in the short term as the industry transitions to an outcome-based pricing model.

"There are huge challenges that come with an outcome-based model, especially with the ability to handle the market and the large number of service lines that it will impact. But if you look at the way things are moving, outcome-based model is here to stay and it will only gain in significance," said Krishnan Chatterjee, vice-president and head of strategic marketing at HCL Technologies.
For HCL, which has about $5 billion in annual sales, only 47% of sales came from the traditional time and materials model in the March quarter, compared to 57% two years ago.

Wipro and Tata Consultancy Services declined participate in the story.

For an industry that was built on labour arbitrage made possible by the abundant supply of inexpensive engineering talent, the new pricing models are a result of the way they envisage and sell technology services. To be able to commit to get paid only for defined business outcomes, the IT providers must have engineers with excellent domain expertise and salesmen capable of identifying gaps in clients' existing systems and pitching improvements, industry observers said.

"The outcome-based model is rather complicated and many clients are still learning about it," said Peter Bendor-Samuel, chief executive officer at Everest Group, a technology researcher and advisory. "While there is some uptick in the outcome-based model, its adoption has been slow." In the interim, he said, increasingly, companies are moving towards a usage-based model, especially in infrastructure services, which can now be consumed like a utility, thanks to cloud computing.

Some companies are more aggressive than others as a means of differentiating themselves, especially as competitive intensity rises. Last year, US-based iGate ran a multi-million-dollar advertising campaign in leading newspapers and magazines in the US urging corporations to insist on outcome-based pricing models.

Some industry experts warn that new pricing models come with challenges that undermine the interests of service providers. "Service providers have to balance long-term staffing structures with short-term changes in pricing models," said Ray Wang, chief executive officer at Constellation Research. "If the client is purely cost-focussed, then it could quickly become a race to the bottom."

Source : TOI