Outcome-based Pricing is a Natural Progression of a Maturing Industry

What do you think about the current state of the outsourcing industry? Where is the industry heading in this important phase of technology convergence and shifting sourcing models?

The overall industry both in terms of IT and BPO is on an upward trend although we are not anywhere near the heady growth we had about 4-5 years ago. But the very fact that the global IT-BPO industry is still managing a 4.5 -5% growth rate even in such tough times is comforting. Some clear trends are driving the market - Multi-sourcing is here to stay and majority of deals now tend to have more than one vendor with an approach towards leveraging best of breed. This is reflected in the reduced deal size although the number of deals continue to grow. Second trend is that of Technology Convergence which is driving a shift in Service Delivery architecture and engagement models. While Cloud, SaaS, Agile, Big Data, Mobility and other technologies continue to impact how organizations leverage IT for increasing business value, the service providers are grappling with the issue of servicing their client's changing needs without significantly disrupting their existing revenue base or margins. The third trend is around Engagement models that are evolving from resource driven to outcome-based pricing schemes. As Buyers strive to get more business value out of outsourcing, they are increasingly partnering with vendors in a business solutioning relationship wherein a hybrid of T&M/Transaction based pricing combined with Outcome/Gain sharing terms are replacing the traditional pricing models. There has been a tectonic shift in all aspects of sourcing ranging from new locations to technology that is almost rewriting the entire outsourcing concept. In terms of technology, while the cloud is rewriting the delivery model, e.g. T&T is looking at establishing itself as an nearshore F&A and Creative location, while E European IT hotpots are focusing on developing vertical specific high value solutions.

A lot of nearshore movement is happening. Is Latin America leading the nearshore race?

With the industry spreading both in terms of service depth as well as in terms of the range of services that could possibly be outsourced, we are seeing an interesting mix of locations emerging. While Eastern Europe continues to grow its IT and Shared Services marketshare, Latin America is fast emerging as a strong contender, especially for North American buyers. This region is not only dominating in the nearshore expansion strategies, but also piggybacking on the emerging areas within Mobility, Agile computing, Cloud services and Big Data/Analytics services. We see two clear trends - One is that of Nearshoring of vanilla IT (both ITO and ADM) and BPO services to scalable locations such as Mexico, Brazil, Argentina and Colombia. The second trend is that of specialization of nearshore locations such as Costa Rica for KPO, Shared Services, IT; Argentina for Agile/Internet applications; Mexico and Colombia for Mobile development and so on. Central American and Caribbean region is also seeing increased activity with emerging locations such as Trinidad &Tobago positioning itself as a nearshore F&A and Financial Services BPO equivalent of Sri Lanka or Mauritius.

What opportunities are unfolding as a result of the new technologies - social, cloud, mobile and analytics? What we will increasingly see is the adoption of these technologies as a core component of converged delivery models.

There is a tiering of Apps and Services moving to the Cloud with Administrative functions and some non-critical ITO components leading the way. As clients begin to see the maturity of converged Cloud service providers with higher reliability and security, their propensity to migrate additional Apps/Services will accelerate. For service providers this is a golden opportunity to redefine their existing business model as well as improving their market leadership position. New application and analytics related opportunities around Social, Big Data and Mobility are also driving new opportunities for the smaller and mid-tier providers. These projects typically require smaller, more agile teams that can work on short term projects and can leverage RAD tools and methodologies to improve productivity.

Is outcome-based pricing becoming a reality? What are the issues involved?

Outcome based pricing is a natural progression of a maturing outsourcing industry. As buyers question the value and cost savings achieved by traditional outsourcing means, they are looking at alternative models that can better tie compensation to outcomes or promised savings. Moreover as the spend matrix shifts from IT to more business-centric functions, that is driving the need for pricing model reflective of the business value generated. The global economic scenario and competition has also convinced some service providers to differentiate their service offerings by offering outcomes based pricing models. However, such a pricing model brings its own set of issues, as it is a more complex model to adopt and manage. Unless both the client and the vendor have significant outsourcing experience and have a mature internal organization, getting the desired results from an Outcomes based pricing engagement can sometimes be counter-productive. Since measurable outcomes can often be more difficult to track and reconcile compared to metrics based SLAs, such models also result in higher level of disputes and relationship issues. Nevertheless, we are seeing increasing use of hybrid pricing scenarios where tactical and commodity functions are still priced on FTE or Fixed models, while pricing some strategic functions based on outcomes or gain-sharing mechanisms.

What are the changes in the service provider landscape in terms of vendor consolidation, technology innovations, hiring strategy etc?

We will see an increasing number of acquisitions made by larger service providers of specialized niche service providers esp. in the cloud and analytics space to get a jumpstart as well as expand into newer locations. A number of Analysts have already predicted that the larger Indian offshore firms will need to be more aggressive in their acquisition strategy if they desire to continue the heady growth of the previous years. With margins under pressure and the impending impact of Immigration Reform, the offshore providers are also more circumspect with their hiring strategy. We may not see the kind of mass hiring witnessed a few years earlier. Increasing leverage of technology and innovative "bundled" solutions is also becoming evident as providers try to pursue non-linear growth strategies (wherein revenue can rise faster than headcount).

First published in Global Services