Ever since the global financial meltdown in 2008, the Indian IT services industry has been struggling to find its feet. After registering explosive growth for more than a decade, and having positioned itself as the poster child of “reforming” India, it has struggled to maintain profit margins as its overseas clients struggle in an uncertain economic environment.
Indian IT service providers find the old formulas that were the recipe for unprecedented success in the pre-crisis years are meeting with resistance from clients. They find that clients no longer accept the old model, derisively termed ‘body shopping’, under which they could bill clients for the number of hours put in by their workforce on the job outsourced to them. In short, clients are increasingly resisting the ‘time and material’ model of outsourcing.
Infosys, for long considered the embodiment of perfection in fine-tuning the old model of billing clients, and which has been known to chase higher margins than its industry peers, is apparently less smug in these new times. Stung by the fall in its margins, and lagging behind its peers in revenue growth, the company is increasingly moving away from its old model.
The new way of pricing services — Infosys sometimes calls it non-linear pricing models — marks a shift towards a pricing that is no longer proportional to the volume of service sold to the client.
Others such as iGATE Corporation, a second-tier service provider, have been more aggressive. One advertisement (in a series targeted at potential clients in the U.S.), released late last year, attacks rivals using the time and material model as being the “No. 1 enemy of mega corporations.” It urges the target audience to stay away from service providers who insist on charging fees irrespective of the results they actually deliver and shift over to an ‘outcome-based model’.
Although industry rivals such as Infosys and Wipro have claimed that they too have been offering similar “outcomes,” Phaneesh Murthy, CEO, iGATE, believes otherwise.
‘No longer relevant’
According to Mr. Murthy, the old model is no longer relevant. “If you ask a freelance journalist to write a piece for which you will pay him/her by the hour, your article is not likely to be finished in a hurry,” he quips. In short, the client ought to pay only for the tangible results that have been delivered by the service provider, he argues.
But, shorn of all the sophistry, what this means is that it brings to the IT services industry what has been happening in the world of traditional industry — such as textiles, automobiles or even the beedi industry — where piece rates are the rule. The ongoing global recession has, in other words, been a great leveller. It brings to the doorstep of the ‘knowledge worker’ what their poorer cousins have been facing for years.
Outcome-based pricing
Mr. Murthy explains his company’s journey to this new model with the example of how iGATE changed the way it processed clients’ loan applications. In 2003, when iGATE started processing loans for banks, it used to cost them $2,300 to $2,500 per loan application. “At that time, the process was heavily manual: there was no automation and was very paper-intensive,” he recalls. When iGATE suggested to the banks that it would do the processing for $1,000 per loan, they were delighted. The company used imaging technologies to cut down the quantity of paper that had to move back and forth from clients, which increased productivity. By using technology, the company increased the speed of workflow and cut costs to as low as $350 per loan application that was processed, resulting in “whopping margins for us”, says Mr. Murthy.
Use of analytics
But more than automation what delivered greater value to the client was iGATE’s use of analytics, which dramatically increased the “success rate” of a bank’s customer opting for a mortgage from its client rather than from its rivals, Mr. Murthy claims. The success rate for clients improved from 40 per cent to 60 per cent by reducing the “turnaround time” for a loan application from 42 days to 13 days. After the banking crisis erupted, which led to a consolidation of banking activity in the U.S., iGATE realised it had to scale up significantly. That is what triggered its acquisition of Patni Computers in 2011.
Assessing risk is key
The company’s customers are realising that the outcome-based model offers them a chance to “pass on risk” to an external agency, which offers opportunities for companies such as iGATE, argues Mr. Murthy. But are there no limits to how much risk companies can stomach? “I manage risk by taking six or seven customers, I put them on the same platform and I basically bet that they will not behave identically,” Mr. Murthy responds. “This is what breaks the linearity of revenues by deploying people,” he argues.
Pricing in this model has to take into account the risks in the business, he says. “The industry has played the trading game so far, paying no attention to risks. It now has to be ready to play an entirely new ball game,” he quips.
“IT service providers have to now undertake many kinds of risks, such as technology and business risks, whose level may rise and ebb over time. Is industry prepared to play the new game, that is the question,” he says.
