Sarthak Brahma, Author at Everest Group

Managing Demand Variation in Outsourcing Contracts | Sherpas in Blue Shirts

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Given how long the outsourcing model has had to mature, the lion’s share of “traditional” (read: not including digital labor) contracts today are realizing the expected benefits for both buyers and providers. But when unplanned levels of variation in the internal demand for outsourced services enter the picture, serious quality, satisfaction, and cost issues can quickly rear their ugly heads.

Effective demand management – whatever the reason for the unplanned level – entails meeting internal customers’ demand and service level expectations while maintaining adequate control over the total outsourced spend.

Everest Group recommends buyers embrace three methods for managing demand variation in outsourcing contracts.

Periodic adjustment of baseline or band pricing
Buyers typically opt for baseline or banded pricing to manage volume changes. While both mechanisms provide for some demand flexibility, they expose service provider risk and trigger a risk premium in service pricing. And although volume baseline/band definition is standard in new or renewed contracts, high variation or significant demand shifts can render them obsolete. A solution to these challenges is establishment of a periodic pricing adjustment in which the buyer and service provider agree to review volume in specified periods and set the baseline at the six-month rolling average.

Appropriate outsourcing agreement structuring and clear resource unit definitions
In order for an outsourcing agreement to be mutually beneficial, the buyer and service provider need to share responsibility for demand management. Devising an agreement structure and resource unit definitions that increase the service provider’s stake in managing demand is a way to accomplish this goal. For example:

Comprehensive benchmarking of both per-unit prices and pricing metrics
When demand variation is high, or when volumes consistently increase and decrease, benchmarking per-unit prices alone can result in sub-optimal financial performance for the buyer. Comprehensive benchmarking, including both the per-unit price and the relevant pricing metrics as below, is a valuable solution.

Baseline pricing metrics

  • Dead-band range and dead-band price
  • ARC and RRC ranges and rates

Banded pricing metrics

  • Band ranges
  • Unit changes in each band

By employing these mechanisms to manage demand variation, buyers and suppliers can avoid issues in their relationship, achieve the full potential of the contract, and experience a win-win situation.

To learn more, please read Everest Group’s viewpoint entitled, “Demand Variation in Output-Based Pricing Contracts.”

How Low Can They Go? Pricing and Margin Pressures Abound for IT Service Providers | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

The business environment in which today’s IT service providers are operating is one of the most challenging in recent times. A host of buy- and supply-side factors are impacting the prices they can feasibly and competitively charge their enterprise clients in the U.S., and their margins are being constricted at every turn.

On the buy-side, ongoing commodity slowdown led to overall softening in the global services market in 2016. Uncertainties created by Brexit in mid-year and the U.S. elections in Q4 delayed decisions on new sourcing contracts and temporary cuts in discretionary spending in SI type engagements.

The quantum of large application outsourcing (AO)/systems integration (SI) deals (>US$100 million annual contract value, or ACV) as a percent of total deals fell from 3.3 percent in 2015 to a low of 1.7 percent in 2016, reducing the pricing cushion typically afforded by large deals. And because enterprises continue to maintain a portfolio of preferred AO vendors to foster price competitiveness and innovation, resulting in a price war for deals, the average ACV in AO deals dropped by ~20% in 2016.

Most enterprises are optimizing their portfolios of contracted relationships to reduce overall TCO by improving nomenclatures, rates, service levels, T&Cs, productivity, etc., leading to a dip in realized revenue per FTE for providers.

Additional downward pressure on realized revenue per FTE has resulted from an increase in brownfield automation, especially in compete situations and second generation renewals. And renewals fell sharply, from 55 percent in 2015 to just 27 percent in 2016, driving price wars among providers.

On the supply-side, although resource utilization increased for Tier 1 service providers from ~80 percent in 2015 to >82 percent in 2016, it is beginning to max out as a delivery optimization lever. Consequently, providers are trying to achieve higher efficiencies and sustain margins via better project planning, DevOps, agile staffing, and proactive use of automation.

 

Pricing pressures and automaiton and digital solutions for IT enterprises and service providers

There is extreme competition in most rebid and re-compete situations, which has led to an overall decline in pricing. We saw an average dip of 1-2 percent in AO /SI FTE rate cards, but bigger dips in overall account-level TCVs. And per rate cards, some enterprises have pushed for single onshore rate card that doesn’t delineate between local and landed resources, leading to cheaper onshore rates. That said, the new U.S. government may push for more onshore hiring and localized presence, including sanctions on landed resources. This may push onshore rates higher, marginalize the landed resource model, and put additional margin pressures on service providers in the second half of 2017.

All this paints a pretty gloomy picture for IT service providers. However, they have started pivoting towards a digital first future, which can help stem their margin and profit erosion, and reverse the worrisome growth deceleration. Most are growing their top line and/or capability portfolio inorganically. Most are also investing in and pitching automation capabilities in a bullish manner. While this may led to a near-term cannibalization of their traditional offerings, in the medium- to long-term it will help sustain their margins in a price competitive landscape.

Do you believe that a digital first pivot will help service providers get back to double digit growth rates?

Recession-Era Pricing is Here to Stay in Sourcing Deals | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Originally posted on Spend Matters


The slowly fading recession has left a profound impact on pricing in sourcing contracts. That impact is seen in a trilogy of forces with long-term ramifications that will keep pricing at recession-era levels for the foreseeable future, even as contract volume rebounds with pent-up demand. This “new normal” imparts lasting implications on future sourcing agreements.

Read more on Spend Matters


Photo credit: Andreas Levers

Every Crowd has a Silver Lining | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

We all hate crowds. We leave places early to beat the traffic, avoid flea markets on Sundays, and wrap up Christmas shopping before the last minute rush. But on the Internet, it’s far different. We follow high-volume Twitter posters, aggregate on pages with maximum “fans” and “likes,” are quick to view viral videos, and trust the content that’s vetted by most. On the web, crowd is a value proposition.

In business, crowd was initially used by Internet start-ups looking to tap a large pool of low-cost labor to contribute, create, and market online products. However, in the wake of the ongoing recession, corporations are increasingly experimenting with crowdsourcing in three ways:

  • as a model to support new areas such as content localization, translation, and advertising, in addition to low-end tasks
  • as an alternative to traditional BPO models
  • as an option to more quickly, and less expensively, access talent around the world

Besides the unparalleled access to rich skills and experience, crowd sourcing offers a compelling economic proposition. Crowd resources can cost 60 to 70 percent less per FTE than traditional models. And the on-demand nature of the crowd provides additional 10-15 percent savings due to full resource utilization.

Yet, as with any service delivery model, crowdsourcing also has its challenges. Given the amorphous nature of the crowd, organizations using crowd labor may well face accountability, quality, and timeliness issues. They also run the risk of initiative and/or intellectual property plagiarism.

Also, crowd workers, especially those with higher-end skills and work experience, are wary of crowd tasks and larger projects. With tasks, workers only receive minimal information until after signing up; if they then quit, their “completion rate” and follow-through employability is negatively impacted. With projects, employers can reject unsatisfactory work, refuse to pay, and yet still retain the right to use the work. These aspects coupled with low pay and benefits make this model yet unacceptable by workers.

The onus to drive crowd adoption rests with the crowd vendors. They will need to take greater ownership of understanding the client’s scope, staffing the crowd accordingly, creating wage levels that are win-win for clients and workers, and developing tools and platforms to ensure ease of delivery and service level compliance. They will also need to bring structure to the inherently unstructured crowd in order to accelerate the penetration and utilization of crowdsourcing. All these responsibilities are hard to undertake unless you already have the expertise.

For more information on crowdsourcing, its upsides and its downsides, please read Everest Group’s viewpoint entitled, Every Crowd has a Silver Lining.