Ankit Goyal, Author at Everest Group

H-1B Visa Reform Impact on IT Outsourcing Deal TCV | Sherpas in Blue Shirts

By | Blog, Outsourcing

In a recent blog entitled, “Is rising costs the only impact immigration reform bills will have on the services industry?” our colleagues wrote about a variety of potential effects Representative Zoe Lofgren’s (D-CA) “High-Skilled Integrity and Fairness Act of 2017” H1-B visa proposal would have on numerous parties.

Let’s look squarely at the potential impact of these changes on total contract value (TCV). Some of the key IT service providers, especially Cognizant, HCL, Infosys, TCS, and Wipro – all of which rely heavily on “landed” resources to provide IT services in the U.S. – would have some major decisions to make, ranging from tactical, such as recruitment strategy, to business strategy, such as margin cuts.

If passed, the bill would most likely take away the landed resources cost advantage. Having assessed numerous IT ADM contracts in the last 12 months, Everest Group conducted a simulation to represent a typical three-year IT AM deal, using industry standard offshoring, staffing pyramids, and local-to-landed resource ratios. Our simulation showed that the removal of the difference in pricing of local and landed resources alone would result in a 5-6 percent increase in TCV, not taking into account any auxiliary impact on service providers’ cost (recruitment, organizational restructuring, etc.)

H-1B Visa Reform impact on TCVAlready pressed for margins, IT service providers would try to pass the TCV impact on to their enterprise clients. As it is very unlikely clients would be willing to bear the cost increase, it would remain with the providers. As a margin decline of 500-700 basis points would significantly disrupt any company’s financial standing, the providers would need to deploy countermeasures to mitigate this impact.

To reduce the impact on margins, service providers could use levers such as degree of offshoring and staffing pyramids. Our simulation showed that increasing offshoring by about 2-3 percent resulted in a 50 percent decline in the impact of TCV (essentially lowering the increase from 5-7 percent to 2-3 percent) for a typical three-year ADM deal. While the impact on more complex deals might not be easy to mitigate, our simulation demonstrates there is hope for service providers who play smartly and are proactive in adopting strategies to counter the potential impact of any negative reforms.

Another way service providers can drive down their costs is through automation. For example, key aspects of onshore resources’ work include coordination with offshore resources for alignment of work and managing timelines and quality objectives. If automated, these aspects could significantly nullify the impact of onshore cost increases. And with 300-400 basis points at stake, providers might finally have the motivation to adopt automation at the enterprise level, rather than as a deal- or client-specific objective.

It will be very interesting to see if service providers are able to convince the enterprises to share some of the increased cost burden. What’s your guess?

GIC Rate Card Standardization: Drawbacks and Corrective Measures | Sherpas in Blue Shirts

By | Blog

At a broad level, there are two models of IT management services – outsourcing to a third-party service or having a Global In-house Center (GIC).

While third-party outsourcing engagements have standardized rate cards in place, GICs often forego them, instead, charging their parent companies by actuals plus a small percentage overhead fee. While that usually works smoothly for the parent company and GICs, a non-standard rate card structure causes multiple drawbacks.

A non-standard rate card structure could be due to a couple of reasons

  • Resource units are different than what is typically seen in the market. (For example, network pricing per site, which is typically charged per device.)
  • Pricing includes services/cost components that are not part of that resource unit. For example, in a recent rate card, we saw that network services cost were being included in the desktop pricing.

Drawbacks of a non-standard rate card structure

  • Low visibility into spend by function/tower: Having a non-standard rate card structure does not allow visibility into IT services spend. For example, in the case mentioned above where desktop pricing included network services costs, the parent company would not have a true estimate of its spend on either desktop or network services.
  • Difficulty comparing with market and identifying optimization areas. Since the rate card structure is not aligned with the market, the parent company faces a significant challenge in comparing its spend across various IT functions with its peers. And obtaining even a top-level comparison with the market through an advisor becomes a comprehensive engagement.
  • The go-to-market process becomes tedious. This one has implications for both the GIC and the parent company:
    • GIC takes operations to the market: For example, one of our GIC clients wanted to take its services to the market for other clients. But, because its rate card was comprised mainly of non-standard resource units, it had no way to benchmark its pricing against the market. It engaged us to align its resource units to the market’s, estimate its pricing for market standard resource units, and then do a successful comparison. If the client had a standardized rate card in place, this entire tedious process could have been a short benchmarking exercise.
    • Parent company and GIC separate: In another instance, a GIC had separated from its parent company to set up operations as a third-party service provider, and the parent company wanted to compare its pricing with other providers. The ex-GIC’s rate card, although mostly standardized in terms of resource units, had non-standard services/cost components in its resource unit pricing. Due to this, what could have been a very straightforward process became a time-consuming and intricate assessment of the cost of each resource unit’s component/service inclusion in order to do a successful apples-to-apples comparison.

What are some simple ways to achieve better consistency?

In light of the above drawbacks, every company with a GIC should follow these three steps:

  • Standardize the rate card structure: They should have market-standard resource units and pricing metrics in the rate card.
  • Service inclusions alignment: They should ensure that billing is based on transparent and differentiated units, and that no service mix-up is happening.
  • Comprehensive review: They should review against market practices across GICs and third parties to ensure competitiveness.

These simple steps will unquestionably allow any parent company to have a better understanding of its spend breakdown and, hence, a better ability to identify optimization opportunities.

2016 GIC rate crd stnrd

 

Bringing Data Center Operations Pricing to Market Standards in All Contractual Geographies | Sherpas in Blue Shirts

By | Blog

There are several aspects of data center operations management. Various kinds of devices (server, storage, network, security, etc.) are located there and all need to be monitored and managed. One important aspect of the services involved is field services or break-fix services.

There are several pricing models followed including per ticket, per device or even per FTE deployed. When analyzing pricing, companies typically focus on their core geography, i.e., the geography with the highest volume. Service providers tend to take advantage of these situations, doing a cross subsidization wherein they charge lower in the core geography and higher in others. This is not particularly concerning to buyers in most cases, as they are getting favorable pricing for the majority of their volume.

On paper, this pricing contrast is understandable. Companies providing field services typically have strong presence in the core geography, and thus the ability to deploy and manage a large number of their own resources. This allows them to provide really competitive pricing in that geography. In the other geographies, they must rely on their own limited resources, or on sub- contractors, which of course carries much higher prices, regardless of the model used.

However, this often-ignored difference in non-core geography pricing can have serious financial impacts.

For example, recently, I was assessing the data center operations rate card of a global contract. While the majority of the contract volume was focused in North America, there were elements spread across numerous other geographies. Although the non-core geographies combined accounted for ~15 percent of the total spend, the per-unit price in those geographies was ~2x-3x higher than market standards. Bringing those price points to market standards would mean ~8-10 percent savings overall, which could translate to some serious dollar savings in a multi-million dollar deal.

Getting better pricing

The most obvious solution is for buyers and advisors alike to make sure that non-core geography pricing is in line with market standards through proper negotiations. Remember that while it is understandable that the one provider will not be able to offer the best pricing in each region, the difference in proposed and market pricing should not significantly affect the total spend.

Another way to obtain market pricing is to contract with multiple providers, likely local providers in each region. But keep in mind that this will result in increased overhead as the buyer will need to manage multiple contracts or have a service integrator manage each of the contracts.

Everest Group recommends buyers conduct a cost-benefit analysis of both options to determine the best fit strategy for their unique situation.