Category: Pricing

New Kind Of Vendor Lock-In And Purchasing Concerns | Sherpas in Blue Shirts

Increasingly, there has been a push by firms purchasing services to move towards consumption-based pricing. Accompanying this move is an additional desire to reduce the length of contracts. Ideally, you should only pay for what you use; and when you stop using it, you stop paying for it. Although this is what traditional contracts purport to offer, the reality is far from this seemingly natural and beneficial state. Most traditional contracts create buyer lock-in and require some form of take or pay.

Read more in my blog on Forbes

Impact of Digital on Outsourcing Contract T&Cs | Sherpas in Blue Shirts

Many enterprises today are restructuring their existing outsourcing contracts with changes to scope, pricing mechanisms, and SLAs to help ensure they reap the benefits of the emerging digital technologies being used in their engagements.

For example, because the focus has shifted from quality of service delivery to service innovation and business outcomes, we are observing more incentive and benefit sharing mechanisms being added to digital services contracts. And because enterprises are mindful of the uncertainties that exist in the digital transformation journey, they are willing to include some contractual flexibility around scope changes, SLA revisions, etc.

However, one important area that has been somewhat neglected in this digital-driven contract realignment is terms and conditions (T&Cs.) In these contract T&Cs, enterprises must do all they can to safeguard themselves from potential risks, even those that are unforeseen. Consider the case of a global consumer goods company, whose outsourced RPA solution was working incorrectly due to issues with the automation technology platform. It took six months for the base product to be updated and fixed, but the enterprise could not recoup lost opportunity costs from its service provider because such a scenario was not adequately incorporated into the contract T&Cs.

Key outsourcing contract term considerations

Following are just some of the areas that enterprises should consider including in their digital automation outsourcing contract T&Cs.

  • Who owns the IP rights to the automation bots? Does this change when the solution has cognitive features that generate business insights?
  • Can the service provider reuse the automation solution with other enterprise clients? Can it do so with the buyer’s competitors?
  • What happens to the automation solution on contract termination? What part of the automation solution can be retained by the buyer? If the solution is non-transferable, what assistance is the automation provider contractually obligated to provide?
  • If the automation solution fails to work as originally designed, who is responsible for the damages that arise?
  • Does the outsourcing contract provide flexibility to incorporate additional scope or automation projects, or will separate negotiations and contracts be required?
  • What happens if the provider under- or over-performs on the productivity improvement or cost savings targets? Will the parties share the benefits or opportunity losses?
  • What happens if there is a change in the process or underlying IT system? Who will be responsible for the subsequent changes in automation solution?

Of course, there’s a double-edged sword here: in general, the more stringent the T&Cs, the higher the price charged by the service provider. So, you need to carefully weigh the risks versus the rewards.

Have you experienced an issue relating to non-inclusion of any clause in your digital services contract? Or did you successfully safeguard your company through a specific term or condition? Please feel free to directly share with me at [email protected].

Pharma Service Providers’ Role in Tempering Pricing Wars | Sherpas in Blue Shirts

Shortly after the U.S. Food & Drug Administration (FDA) approved Novartis’ CAR T-cell drug, Kymriah – which is used for pediatric B-cell Acute Lymphoblastic Leukemia – last month, Novartis announced its price…a whopping $475,000 per patient. This is certainly not the first market instance of highly expensive drugs (see below.)

But it might just be the tipping point for stakeholders – including regulatory bodies, payers, physicians, advocacy groups, and patients – to start having constructive discussions with drug manufacturers on how to make drugs that treat extremely rare diseases more accessible to the very small share of the population that needs them.

eg13
It is certainly time for pharma companies to overhaul their operations in order to mitigate price anger and get such drugs into the hands of those whose lives depend on them.

One way they can do so is by employing pay-for-performance, or outcome-based, contracts, wherein the manufacturer charges for the drug once it proves effective, say one or two months into treatment. Note that this pricing model hasn’t yet really taken off, especially in the United States, where the fragmented multi-payer environment acts as an added roadblock. Indication-based pricing, wherein there are different prices for different conditions, is another model that biopharma companies can use, but the U.S. market does not have mechanisms in place for it, at least as of now.

Other ways of ensuring patients are able to benefit from such critical drugs are through mixes of personalized offline and online marketing campaigns directed specifically to the relevant patient and physician pool, and improved and comprehensive patient support programs to help in solving “last mile connectivity” issues.

But at the end of the day, stakeholder backlash might – and should – force pharma companies to drive down their own costs to make these expensive, personalized medicines more affordable. And this is where outsourcing service providers can help.

The third-party service providers that are already servicing the pharma industry need to prepare or bolster solutions and capabilities around areas including patient and market access, data analytics, omnichannel marketing, IoT, automation, portals, applications, customer support, pricing analytics, infrastructure modernization, and cloud orchestration. Service providers that are struggling to enter the life sciences space should view this as a window of opportunity to get a foot in the door of these companies. Doing so will mean additional business for both these types of vendors; it could also mean reduced pricing pressure for the patients who need such vital treatments.
The future of personalized medicine depends a lot on success of such drugs, and biopharma companies can no longer afford to sit back and operate like they always have. For a detailed discussion and analysis around these solutions, and to learn about other trends in the life sciences market, look out for our soon-to-be-published State of the Market Report.

Heralding the Robot Revolution in Human Resources! | Sherpas in Blue Shirts

Until a year or so ago, the common refrain among those operating in the HR function was that HR services were already so heavy with platform automation that there wasn’t much that Robotic Process Automation (RPA) or Artificial Intelligence, its more advanced cousin, could do.

However, my extensive research shows that HR has enthusiastically jumped on the bandwagon. Even though many automation projects still inhabit the realm of slideware, many HR leaders and their service provider brethren are recognizing the impacts that automation can have on both their costs and revenue.

Enterprises: cost impact

Even though Human Resource services are heavy with platform automation (these platforms can be the traditional ones such as SAP and PeopleSoft or the new-age ones such as Workday and SuccessFactors), humans continue to do transactional tasks, such as entering data into platforms, transferring data between platforms, or preparing templated documents such as offer letters. RPA can perform these types of tasks faster and more accurately, and leave a reliable audit trail, wherever needed. It also frees people to do higher-order work. The result is significantly better efficiency and reduced costs.

Enterprises: revenue impact

Automation can also boost revenue indirectly by enhancing the employee experience, which in turn increases productivity. Think chatbots. While the current chatbot implementations are mostly RPAs, infusion of AI features such as Natural Language Processing (NLP), machine learning, and conversational user interfaces can be game changing. For instance, AI-enabled chatbots could remove employees’ toil from applying for leaves, filing expense reports or timesheets, selecting benefit plans, or getting answers to common HR queries. Managers could use chatbots to help shortlisted candidates, provide personalized onboarding assistance, and collect performance evaluation feedback. Chatbots’ 24/7 availability, ease of use, and rapid and accurate responses contribute directly to better productivity and experience.

HR service providers: cost impact

Service providers too are gaining significant cost and efficiency benefits through RPA, which mainly translates to deploying less Full-Time Employees (FTEs) to deliver the same outputs. Providers are presently grabbing most of these cost benefits to expand their margins, rather than pass them on to their clients in the form of reduced prices. That approach works like a charm for providers because the dominant output-based pricing model (per employee served, per pay slip processed, etc.) of HR services delinks FTE count from pricing, thus hiding gains through FTE reduction from clients. That is unlike the case of say, an F&A services construct, where the pricing is usually input-based (per FTE) and enterprise customers pressure providers to reduce FTE count through RPA and thus, cut prices.

HR service providers: revenue impact

However, enterprises are steadily wising up to RPA benefits that can drive lower price. Moreover, with increasing competition, providers are increasingly using RPA to set ever lower prices. Thus, providers will soon be forced to make a choice – do nothing and let others take away their business, or aggressively deploy RPA and cannibalize themselves but retain clients. The latter is obviously the lesser evil, even though revenues will be adversely impacted. That is when providers that look beyond RPA and invest in AI-based automation will trump the market. AI-based automation can provide benefits, such as enhanced employee productivity, for which enterprises will be willing to pay a premium. Powerful AI-based automation can also help providers deliver services they were earlier incapable of delivering, such as cognitive analytics. That can expand revenues and counter the cannibalization effect of RPA.

Clearly, automation is steadily becoming an imperative for both enterprises and HR services providers.

However, as with any advanced technology, enthusiasm without a generous helping of caution can be a dangerous potion. Setting realistic expectations about the benefits of automation, investing in technological and cultural change management, and bringing on-board key stakeholders are a few keys to success for enterprises and service providers in the long journey that is an automation implementation.

Keep your eyes peeled for my drill-down blog on these, and other, keys to success! In the meantime, feel free to share your opinions and stories of automation in HR – why or why not go for it, what works and what doesn’t, etc., directly with me at [email protected].

Outcome-Based Contracts in Life Sciences – An Age-old Idea Taking a New Avatar | Sherpas in Blue Shirts

Outcome-based contracts in the life sciences industry are essentially a risk sharing agreement between a drug manufacturer and its consumers, which include healthcare payers, healthcare providers, and physician groups. The agreement guarantees that if defined care outcomes are not achieved, the drug manufacturer is liable to pay compensation.

This type of contract is not a new concept in life sciences. For instance, money-back guarantees from snake oil liniment companies and for products such as Emerson’s Bromo-Seltzer have been advertised since the 1800’s. However, the idea is getting a makeover, thanks to value-based healthcare, Medicare Access and CHIP Reauthorization Act (MACRA), falling R&D productivity, and the slow death of the blockbuster drug discovery business model.

outcome-based contracts

Comparing volume versus value

Given the push for value-based healthcare, outcome-based contracts in life sciences are gaining momentum. Leading life sciences companies are making a transition from volume-based contracts to outcome-based contracts to drive higher accountability and ownership, better quality of care, optimized R&D costs, and competitive differentiation.

Outcome-based contracts

Indeed, many pharma companies, such as Amgen, Merck, and Novartis, are already experimenting with outcome-based contracts for areas such as cardiovascular treatments, diabetes medication, and cholesterol cures.

Operationalizing outcome-based contracts

To operationalize outcome-based contracts, drug companies, consumers, and technology-providers must work in tandem.

  • Life sciences firms must have a risk appetite to share the financial burden with their consumers
  • Consumers must be willing to appreciate and reward innovation provided by drug companies
  • Technology is the key catalyst in accelerating an outcome-based contracts model. In fact, it becomes the key pillar in risk analysis, value analysis, and reward analysis. Technology providers must co-innovate with pharma firms in identifying and measuring care outcomes. For example, they can provide cloud-powered IT infrastructure to enable clinical trials orchestration across multiple trial sites, and implement predictive modeling techniques to help drug companies understand consumers’ unmet needs.

Outcome-based contracts challenges

Although outcome-based contracts open new vistas for drug companies, significant challenges hamper adoption. A study conducted by the “American Journal of Managed Care” indicated that incremental investments – in both money and time—is the biggest hindrance, and pharmaceutical firms mention they are not yet witnessing evident RoI from these investments.

Stakeholders’ reluctance and regulatory restrictions are also deterring outcome-based contracts adoption.

outcome-based contracts implications for stakeholders

Implications for stakeholders

Life sciences firms
With outcome-based contracts gaining momentum, life sciences companies should be more accountable for their products. They should interact with healthcare entities and consumers to understand the efficacy of their products, and work towards improving care outcomes.

Payers
As life sciences firms embrace outcome-based contracts and providers embrace value-based care tenets, payers will have a direct financial impact. They can derive breakthrough value from their operating costs as any medication or procedure charges are directly linked to the drug quality and/or quality of care. This, in turn, optimizes claims costs and reduces fraud and abuse incidents.

Technology partners
Technology vendors and IT service providers that are struggling to open new business arenas with life sciences companies must see this as a lucrative opportunity to propose high-value technology services. Example opportunities include infrastructure modernization, cloud orchestration, a data analytics suite, interoperable API creation, customer experience management solutions, pricing analytics, etc. Overall, developing outcome-based contracts can not only create market success with life sciences clients but also help technology and IT service providers cross-leverage these capabilities in other industry verticals.

Has your company ventured into or fully-embraced outcome-based contracts? What successes and challenges have you experienced? Feel free to contact the authors (either Nitish Mittal or Chathurya Pandurangan) and let us know.

Network Virtualization – How Long Will Senior and Specialized Roles Command a Premium? | Sherpas in Blue Shirts

In the network management space, Software Defined Networks (SDN) and Network Functions Virtualization (NFV) are set to be the next game changers. These technologies – both of which are moves toward network virtualization and automation – are witnessing high levels of demand, and are expected to play a key role in the virtualization of data center environments. While they need not be operational simultaneously, in many cases we have observed them to be deployed together, leading to significant synergies and positive impact on the overall network architecture.

However, as with any relatively nascent technology, there is currently a shortage of skilled SDN and NFV resources. This is especially true for senior roles such as business analysts, architects, and senior network architects. There are a number of factors that have caused this gap:

  • Most networking professionals have typically remained focused on equipment from a particular vendor, but the requirement is broader for SDN and NFV
  • SDN specialists need to understand both networking concepts and scripting / code development. Traditionally, these skills have co-existed but within separate parts of large buyer and service provider organizations
  • As the transition to SDN is a complex activity that impacts the entire IT environment, senior roles require leadership traits to be able to drive the associated change.

So what does this mean for pricing of resources?

We have seen an interesting trend in some of the large network services contracts we analyze each year. While service providers have maintained or even slightly reduced project services rates for junior resources, the pricing for specialized/senior resources has been consistently inching up.

The skills gap mentioned above is the major contributor to the higher prices. We have also seen contracts in several European countries that explicitly require use of local resources, which leads to further price increases.

On the positive side, an increasing number of engineers are opting for SDN/NFV certifications, some of which are being sponsored by organizations. Large enterprises and service providers are also bulking up their training capabilities to up-skill the current workforce.

Key considerations for enterprise buyers of SDN and NFV services

Enterprise buyers should keep a close watch on pricing for network project resources, as the dynamics could change over the next 12-24 months.

Factors they should consider include:

  • The current price premium is justified, but there could be a price correction as the supply of skills improves
  • The overall total cost of ownership (TCO) impact on a yearly basis, as well as individual day rates
  • Right-sizing the effort to ensure there is no over-capacity on the particular project/initiative.

It is clear that the networking infrastructure world is becoming more software oriented, and it is a case of “when” more than “if” the supply of skills will stabilize. Having the right skills on critical projects is of paramount importance. It will be interesting to see how the labor pool and pricing for these skills evolves.

If you have recently been part of a similar negotiation discussion, our readers would love to hear your experience!

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?

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