Author: RickySundrani

The Evolution of Contracting Models in Testing Services | Sherpas in Blue Shirts

A large enterprise client recently asked us to confirm whether its belief that the majority of organizations have moved to output- and outcome-based contracting models for testing services was true.

What’s the Reality vs. this Perception?

Our analysis of deals in our extensive database over the last 18 months showed that more than 75 percent of buyers are still contracting for testing services on a fixed price basis. Of those, nearly 50 percent are managed services contracts, where performance is linked to key performance indicators (KPIs.) The other 50 percent are a combination of fixed price and Time and Materials (T&M) contracts. In these types of arrangements, the part of the contract where the scope is clear and well defined is fixed price, and the T&M is for the part of the contract where the requirements are unclear, like testing support during the UAT phase, for change requests, etc.

Market Share for Testing Services

About 10-15 percent of the contracts in our set of deals from the last 18 months are purely T&M contracts where clients ask for specific testing resources.

Only the final remaining 10-15 percent of the contracts are based on output- and outcome- based models.

Deeper Look at Output- and Outcome-Based Contracting Models

While the current percentage of output- and outcome-based models is small – the model is  well-suited for engagements where the majority of work is transactional in nature, the client wants pricing clarity and guarantees, and the service provider has no explicit motivation to improve performance beyond service levels.

In fact, we believe that the transition to these as-a-service models is both critical and inevitable for enterprises with engagements matching these criteria – which exceed 15 percent of our database. Why?

  • They ensure enterprises pay for deliverables, not for time
  • They are more closely tied to enterprises’ business activities, as they provide flexibility and visibility into the expected spend
  • They allow enterprises to remain engaged at a strategic level, without worrying about day-to-day responsibilities
  • Since the pricing is delinked from the underlying number of FTEs, process Improvements are driven by the service provider’s motivation to reduce internal costs and improve margins.

At the same time, output- and outcome-based models pose different types of challenges than other types of contracting options, and enterprises must be prepared to address them to achieve success. For example:

  • Due to their fairly complex structure, these contracting models require sophisticated governance and strong due diligence
  • They are not easily benchmarked, because to ensure an apples-to-apples comparison, the benchmarking exercise needs to normalize for all the underlying environment characteristics
  • In multi-vendor environments where there are more dependencies, moving to output- or outcome-based models may increase costs as providers bake the higher risk into their fees.

In our view, most enterprises going down the output- and outcome-based model path will be best served by phasing in the adoption. Doing so will not only help them reduce risks, but also enable them to appropriately update their systems to process output-based transactions, create and put in place sufficient governance mechanisms for the new contracting regime, etc.

Have you embraced an outcome- or output-based contracting model for your testing services? Are you considering it? Please share your experiences with us at [email protected].

Deep Discounts in IT Infrastructure Services Pricing – Is This the New Normal? | Sherpas in Blue Shirts

The IT services industry is going through a tremendous change with the onset of new technologies, geo-political uncertainty, and disruption of traditional business models.

Deal renewals have fallen significantly, leading to intense price competition among service providers trying to meet their top-line revenue expectations. As expected, the pricing pressure is higher in some of the more commoditized services such as IT Infrastructure operations. Indeed, recent Engagement Reviews for numerous North American clients suggests that pricing for some mature services within the IT infrastructure domain, such as storage and backup management, server management, and database management, has fallen significantly. Our analysis suggests that the Indian service providers have upped their ante, and have become even more competitive in terms of pricing.

As a case in point, the per instance pricing for virtual server management has fallen by 25-35 percent over the last 12 months. The fall in pricing for some other resource units has been even steeper.

Services Pricing 2017

What’s driving these deeply reduced prices? Numerous solution-related changes have impacted pricing dynamics in this market.

  • Maturity of internal automation/autonomics capabilities of service providers
    While these have largely been buzzwords in the last 12-18 months, we believe that the impact of some of these investments has finally started to show up in deals.
  • Further improvement of internal productivity
    Just when we thought that the solution effort ratios such as servers managed per FTE, databases managed per FTE, etc., had reached their true, optimum levels, we have seen instances of further changes in some of these solution metrics. Some of these can potentially be attributed to the above point.
  • Complete offshore operations
    We are seeing more and more deals where 100 percent offshore delivery is the norm. This enables service providers to quote very competitive per unit pricing. It will be interesting to observe how this metric changes going forward if new regulations come into play by the new U.S. president’s administration.
  • Increased competition, smaller deal sizes, and deal durations
    The past 12 months have been difficult for most IT service providers, with increasing competitive intensity and delayed enterprise decision making due to geo-political uncertainty. As a result, they are going all guns blazing to win new accounts.

Most of this low pricing has been observed in new deal situations. We have seen very few occurrences of providers proactively reducing prices in existing deals, unless faced with the threat of the deal going into a competitive situation. Of course, it would be unfair to expect service providers to reduce unit prices significantly in all deals, since each deal level pricing scenario is very contextual and a deeper analysis of the underlying environment is warranted.

Have you had discussions with your infrastructure provider about recalibrating prices?

“Hackathons” in GICs Can Increase Employee Engagement, Break Down Functional Silos, and Help Hiring | Sherpas in Blue Shirts

Hackathon is a portmanteau word that combines the words “hack” and “marathon.” A hackathon’s objective is to team together people from different technical backgrounds to solve a problem. Generally conducted over a period of 24 hours, the uninterrupted and captivating nature of the activity makes it highly productive.

Large technology organizations such as Facebook, Google, and Microsoft often conduct internal company hackathons. While hackathons are less common in global in-house centers, (GICs), they can be equally powerful, enabling talent to be hired from the market (when external participants are allowed), increasing employee engagement, encouraging collaboration among functional silos, improving connections with the parent organization, and encouraging entrepreneurship to create a culture of innovation. From an overarching perspective, they allow the opportunity to experiment with different ways of working together.

Hackathon best practices

Following are Everest Group’s top tips for making a GIC hackathon a resounding success.

Plan well and encourage participation across all functions of the organization including development, testing, the project management office (PMO), information security, and the business. Each function can play the role to which it is best suited. For example, business users can provide realistic problem statements for the teams to solve, and supply the teams with resources to help work on their ideas. Or, business users can participate in various teams, and mentor them on fine-tuning their thoughts and ideas. The PMO can be involved in the logistics and event management.

Conduct your hackathons in an informal setting to enable participants to have fun while getting their creative juices flowing. We know of several organizations that have experimented with associating certain social causes with their hackathons.

With the advent of the digital journey, GICs must not only support their parent organization but also lead the way for digital transformation. This in turn requires building strong innovation capabilities and a talent pool for digital. It will be interesting to see if GICs use hackathons as one of the means to this end. Note: we encourage it, for all the above reasons.

Has your GIC held a hackathon? Have you participated in one? Our readers would love to hear your experiences!

Live Deal Support for Service Providers – Seller Beware! | Sherpas in Blue Shirts

Everest Group recently conducted an interesting engagement with a large service provider organization that displays the opposite of the phrase “caveat emptor”…caveat venditor, or “seller beware.”

The provider was trying to extend its five-year-old deal with its client. The buyer had retained a consulting firm to advise on the competitiveness of the proposed pricing. Based on a quick diagnostic assessment, the consulting firm suggested that the as-is pricing was above the market. The service provider, faced with the threat of pulling down the price to avoid the deal going into a competitive bid process, asked for opinion on the pricing. Based on a detailed analysis of the in-scope services, we found that the pricing – which was prima-facie 9-12 percent above the market – was actually 2-3 percent lower than market after factoring in value-added services and other deal-specific nuances.

We’ve seen multiple such examples recently. Buyers are churning their vendor portfolios much more than in the past, and aren’t afraid to pressure their service providers for reduced pricing with the underlying message that they should be prepared for competitive re-bidding process. Deal pursuit life cycles have also become longer, and the competitive intensity has been on the rise consistently.

In this environment, it becomes paramount that service providers get their solution and pricing correct on the first go. And it can be to their advantage to obtain advisory support during live deal negotiations. However, there is a big caveat here: leveraging off-the-shelf benchmarks is unlikely to add any competitive advantage to providers’ bids. The benchmarks must be very contextualized, bearing in mind the buyer environment, the vertical industry, the volumes in scope, the deal terms, the delivery locations, the provider’s solution, etc. This will not only enable development of winning bids, but also ensure that the provider doesn’t leave money on the table.

Caveat venditor!

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