Category: Pricing

The R-word and What It Means for IT Services Spending This Time | Blog

What factors make this economic downturn different, and is IT services spending recession-proof? Despite recessionary fears, digital transformation and post-pandemic demand will help maintain IT services growth with more cautious tech spend moving forward. Learn the three strategies service providers should take now to plan for the slide in this blog. 

By all accounts, it seems we are entering a cyclical phase of economic downturn. Gross Domestic Product (GDP) declined for the US, Italy, and Japan in the first quarter, while the UK, France, and Canada flatlined or deaccelerated meaningfully.

This has been visible a long way off, and the equity markets have adjusted their guidance for IT services stocks accordingly. However, we at Everest Group believe this is very different than past cyclical downturns.

To truly understand the nature of the impact on the IT services industry, we need to ask the following three questions:

  1. Is IT services spending truly discretionary?

Chart one tells us a few things:

  • During a downturn, IT services spending tends to follow a meaningful lag effect. Our channel checks reveal careful prioritization of fresh capital expenditure (CAPEX) items, but not cancellation of committed tech spend
  • Modern enterprises view technology and tech spend to transform their business and become more innovative and efficient. A downturn will sharpen the focus on pragmatic digitalization to create new revenue streams
  • A meaningful part of the inflationary pressures can be attributed to global fiscal expansion post-pandemic. This is not necessarily true for private businesses and tech spend. If anything, remnants of pent-up demand continue in the wake of pandemic-induced austerity

A combination of the second and third factors is leading to the divergence between the IT services and aggregated economic activity, as measured by the GDP.

Chart 1

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  1. How much has already been baked in?

Now, look at this second chart. Suffice to say that IT services stocks have taken a beating in 2022.

While some stock price erosion can be attributed to inflationary pressures leading to margin compression, a significant part is due to negative macro expectations.

Curiously, during the same period, consensus revenue estimates have continued to expand (Accenture, Cognizant, Infosys, Wipro, TCS), and book-to-bill ratios remain healthy (expanded Year-over-Year for Capgemini and IBM, with mild deceleration for TCS and Accenture).

Quite simply, this downturn was visible a mile off. All of us could see it, as could customers, economists, governments, central banks, and equity markets. And a little bit like seeing a slow train coming, we skipped the tracks and readjusted our expectations. Consequently, it’s unlikely we will see a trainwreck, but tech Return on Investment (RoI) will be increasingly scrutinized.

Chart 2

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  1. Are the usual lemons drying up?

Finally, we need to remember that the world is still coming out of COVID-19. Every enterprise made massive cost adjustments during the pandemic by automating routine tasks, moving to the cloud, and divesting non-core assets. In other words, many of the usual cost adjustment levers are already pre-adjusted, and one has to pause and ask – how much padding do we still have before we risk cutting too close to the bone?

What’s likely to happen – our prognosis

  • Yes, there will be a downturn in the IT services industry. But it is very unlikely to be severe. We forecast 6.7 % growth (organic, constant currency basis) as the base case for the year ending March 2023. This includes a set of very large supply side players with company-specific issues (e.g., Atos), while more resilient companies will comfortably beat the average. Irrespective, industry growth will be significantly above the pre-pandemic trendline. The reality is that we are in the midst of a decadal mega cycle of digital transformation, which will significantly counteract a slow-burning cyclical downturn
  • Enterprises will have to grow out of the recession through waste avoidance, innovation, and digitalization, and not through canceled tech spend
  • There will be limited manifestation of the usual downturn-linked opportunities (e.g., shared services divestments, vendor consolidation, etc.)

Three service provider strategies

Service providers will still need to readjust. Here are some recommended immediate steps to take:

  • Examine your portfolio: Not every industry and customer within the same industry will be impacted equally. Now is the time to critically examine your portfolio and evaluate every account. Ask yourself:
    • Which parts of my portfolio are critical to the customer’s business success? If they are not core, how can I gain share in business-critical categories?
    • Have parts of my portfolio already been adjusted for maximum efficiency during the pandemic? If not, what can I proactively do about this?
  • Focus on systems of growth: Systems of growth are digital platforms that help enterprises create new revenue streams and transform the customer experience. In a downturn where brute-force cost-cutting options are likely to be limited, having a robust strategy to help customers grow will be a true differentiator
  • Continue hiring: The talent market may move from “white hot” to “warm,” but the war for tech talent is not over by a long stretch. A temporary lull may represent a brilliant opportunity to attract and train differentiated talent. When the markets rebound, it will make a difference

What is your outlook for IT services spending? And how are you planning for the downturn? Please feel free to share your perspectives, email me at [email protected] or Contact Us.

To learn more about the increase and changing rates across the services industry, request a 30-minute briefing.

Optimizing Guidewire Licensing: A Guide to SaaS Vendor Management Pricing

With increased competition and cost pressure in the property and casualty industry, insurers are rapidly modernizing technology and moving to the cloud. Top SaaS vendors like Guidewire and Duck Creek are playing increasingly important roles in insurers’ modernization journeys. Getting the correct licensing for your enterprise needs is critical to the success of these strategic partnerships. Read on to learn the key aspects that go into Guidewire pricing to negotiate smarter and make more informed purchasing decisions.     

How does Guidewire charge for its platforms?

The most common Guidewire products we see clients use are InsuranceSuite and InsuranceNow. For both platforms, Guidewire’s annual fees are charged as a percentage of the annual Direct Written Premium (DWP) of the procuring enterprise.

An incremental license fee applies to all DWP increases once the enterprise exceeds the DWP baseline contracted during the term period. The incremental fee is typically staggered in nature and decreases as a percentage with increased DWP.

Negotiating the right fees for the platform remains a key stepping-stone to realizing commercial success and increased ROI for the platform. Some of the key negotiating levers in SaaS vendor management scenarios are:

Capture

Five factors to focus on beyond fees

While subscription fees remain the most important aspect of the commercial agreement, the following factors play a key role during negotiations:

  • Non-production environments

The number of non-production environments (NPEs) included in the subscription is an important parameter to consider.

Similarly, Guidewire provides additional credits that can be redeemed to provision NPEs. These NPEs are typically used to provision dev, test, pre-production environments and come in multiple sizes from Guidewire – Standard, Enhanced, Performance, etc. Since these environments are chargeable (post credit redemption), it becomes extremely important to internally calibrate enterprise requirements for NPEs and understand if the provided credits will suffice now and in the future.

  • Price renewals

Price hikes during contract renewals are one of the most dreaded conversations for an enterprise, especially for a niche vendor like Guidewire. Negotiating favorable terms around price renewals is critical. Typically, we observe enterprises pushing for renewal prices to be capped at a mutually agreeable percentage.

  • Price lock-in

Guidewire typically provides multiple add-ons like Predictive Analytics, DataHub, etc., at additional costs. While these may not be immediate enterprise requirements, they may later become necessities. In certain scenarios, Guidewire offers price holds for some of these products.

We recommend price lock-ins at the time of contracting for add-ons that may become requirements in the future and also advise that customers take these two additional steps:

      • Be sure the price lock-in term is longer to take into consideration the implementation period
      • Negotiate a broad price lock-in that includes all add-ons that may become future requirements
  • Service credits

In addition to the core product, Guidewire significantly cross-sells its services. It typically offers service credits that come with conditions. Using service credits is restricted up to a certain percentage of the invoice value (thereby allowing Guidewire to bill for the remaining invoice amount) and the credits expire.

Both of these conditions are geared towards allowing Guidewire’s professional services arm to make inroads into the client environment. Based on our benchmarking engagements, some of the key negotiation points for clients remain around service credits adequacy and the validity period, and the increased usability of each invoice.

  • Support costs

Support costs are an often-overlooked aspect of the agreement. As is the case with most top SaaS vendors, platform support remains with the product vendor, and the cost is baked into Guidewire’s licensing fees. However, Guidewire charges a certain percentage of the subscription fee for extended support if the enterprise is currently on an earlier product version.

This can be a tricky scenario since enterprises may choose not to upgrade due to various reasons – making this one of the most important aspects to benchmark and negotiate as part of your SaaS vendor management.

To learn more about how Everest Group can help your enterprise optimize and navigate through your Guidewire license procurement and SaaS vendor management, please reach out to [email protected].

Learn more about pricing in the services industry in our webinar, Outsourcing Pricing: 3 Pitfalls and 2 Unknowns Enterprises Need to Know in 2022.

 

Increased Deal Activity in Revenue Cycle Management (RCM): What is the Winning Formula? | Blog

Health systems are increasingly seeking competitive proposals post-pandemic to outsource Revenue Cycle Management (RCM) and get the best prices and innovation in contracts. Learn what enterprises want and how providers can win these RFPs. 

Why has outsourcing gained traction in the Revenue Cycle Management (RCM) market?

The hospital revenue cycle process was not immune to the many changes COVID-19 brought to the US healthcare provider ecosystem, causing health systems to significantly shift operations to survive.

Challenges such as financial pressure, regulatory changes, the quality care and patient experience focus, and digital penetration pushed health systems – who traditionally prefer to keep operations in-house – to look outside for support. This drove more than 10% year-over-year growth in sourcing in the RCM market in 2021, and the strong contracting activity continues to gain traction this year.

Several health systems, including MarinHealth, Baptist Health, SSM Health, and Bassett Healthcare, have entered into outsourcing agreements with third-party vendors. However, unlike most past arrangements when sole-source was the dominant sourcing model, RFP-led sourcing is now the preferred model for healthcare providers in the post-pandemic world.

Exhibit 1: Split of new Revenue Cycle Management (RCM) services deals in 2021 – sole-sourced versus RFP-led

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Source: Everest Group’s coverage of 32 major RCM services outsourcing providers

Why do healthcare providers prefer RFPs?

Key factors driving health systems towards a competitive route over sole-sourced are:

  1. Unlike the pre-COVID era, when outsourcing was, typically, limited to a revenue cycle function or segment, the new deals coming in the Revenue Cycle Management (RCM) market are broad-based and many times encompass the end-to-end revenue cycle needs of healthcare providers. Given the size and scale of such deals, healthcare providers prefer the competitive route to get the best possible deal
  2. While cost used to be the primary decision-making driver, health systems are now emphasizing deal aspects such as innovative pricing (wanting third-party providers to have skin in the game) and offering diversified delivery network, innovation pool commitment, and compatibility with existing infrastructure, including experience of working with platforms such as Epic
  3. With hundreds of outsourcing providers in the RCM market, health systems know they can shop around to get the best deal

Key decision-making parameters for health systems in a competitive bid

Healthcare provider enterprises are looking for service providers who can provide end-to-end services covering the entire gamut of Revenue Cycle Management (RCM), rather than discrete, siloed services.

From a decision-making perspective, below are some of the key parameters that enterprises look for when selecting a potential service provider, along with their relative importance rated on a scale of 1 to 10:

Exhibit 2: Level of importance of key buyer decision-making parameters for outsourcing Revenue Cycle Management (2021)

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Source: Everest Group’s coverage of major Revenue Cycle Management (RCM) providing enterprises

Service providers need to pay special attention to how they position themselves effectively in the extremely competitive RCM market. The two main levers determining a winning proposal are:

  1. High-quality, well-structured proposals that demonstrate a deep understanding of the client’s needs
  2. Commercial proposals that are well aligned with the client’s budget and offer flexible payment terms

 

As competitive RFPs rise in the RCM market, providers who can create a differentiated value proposition and align their strategies with the enterprise’s vision will succeed in securing these lucrative deals.

To discuss Revenue Cycle Management (RCM) reach out to us at [email protected], [email protected], or contact us.

Learn more about RCM operations in the healthcare industry in our video, Revenue Cycle Management RCM Operations – Emerging Opportunities & Strategies.

Comparing Microsoft Office 365 Enterprise Plans: Getting Your Licensing Strategy Right | Blog

Selecting the right Microsoft Office 365 licensing plan is a critical decision for organizations that can lead to greater cost savings, negotiating power, and flexibility. Read on to discover how Everest Group’s 5S Framework can make this complicated task easier and see our expert analysis comparing the various license plans to make the best choice.

Since its inception at the start of the century, Microsoft Office has become one of the leading business productivity suites, with more than 1 million companies worldwide now subscribing to Microsoft 365 (M365) and over 731,000 companies in the United States alone using the family of office software.

Introduced in 2017, Microsoft 365 brought together the best of Office, Windows, and Enterprise Mobility and Security (EMS) and eventually replaced Office 365 three years later. As part of this move, previous O365 subscriptions for small- and medium-sized businesses as well as the enterprise-level Office 365 ProPlus subscriptions were renamed with M365 branding.

Many enterprises grapple with the decision over whether to use Microsoft 365 or Office 365. Having gone through several feature and licensing model iterations over the past years, Microsoft has a plethora of licenses to choose from. Thus, selecting the right license can often be tricky and confusing. But by getting this strategy right, organizations can obtain higher cost savings and greater flexibility.

To help clients select the optimal license plan and the right fit for their organizations, Everest Group has curated a set of guiding principles called the 5S Framework that considers budget, requirements, inventory, plans, and usage. See below for a snapshot of the framework applied for M365 licensing. To read more about the 5S Framework, see our prior blog.

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Selecting the appropriate plan

Choosing whether users require an M365/O365 suite or if acquiring individual components would better meet their needs is one of the most important decisions enterprises face. Suites usually make sense when you need at least three online services such as Exchange, SharePoint, or Teams. It is more cost-effective to buy a suite if your organization requires more online services.

The below table summarizing the main features of Microsoft Enterprise Plans (suites) with data being sourced directly from Microsoft can help you choose the appropriate license plan based on your requirements:

 

 Features/License Plans Microsoft 365 Apps for enterprise (FKA O365 ProPlus) Office 365 E1 Office 365 E3 Office 365 Microsoft 365 E3 Microsoft 365 E5
Office apps (PowerPoint, Word, Excel, OneNote, Access (PC only)) X X (partially, web apps) X X X X
Email and calendar (Outlook, Exchange, Bookings) X (partially) X X X X X
Meetings and voice (Teams) X (partially) X (partially) X (partially) X X (partially) X
Social and intranet (SharePoint, Yammer)   X X X X X
Files and content (OneDrive, Stream, Sway) X (partially) X X X X X
Task management (Power Apps, Power Automate, Planner, To Do) X (partially) X X X X X
Advanced analytics (MyAnalytics, Power BI Pro)   X (partially) X (partially) X X (partially) X
Device and app management X X (partially) X X X X
Identity and access management X X X X X (partially) X
Threat protection       X X (partially) X
Information protection     X (partially) X X (partially) X
Security management         X X
Advanced compliance     X (partially) X   X

 

The next step after choosing the offering that will deliver maximum value to your enterprise is getting the Microsoft licensing right. Merely deciding which plan to select is not enough, how to license it is equally important since discounts are directly linked to this. An enterprise’s ability to negotiate with Microsoft also depends on the nature of its contract. See more details on the contracting models in our next blog in this series.

While every organization has its own set of requirements to consider, using this framework will help you negotiate effectively and attain the best licensing fit for your Microsoft/Office 365 portfolio. For a more detailed analysis, please reach out to [email protected].

Explore more about Everest Group’s benchmarking offerings.

 

Everest Group’s 5S Framework: Choosing the Right Software Licensing Strategy | Blog

With the myriad of cloud software choices on the market, determining the right licensing strategy is more complicated than ever. Don’t let confusion and indecision prevent your enterprise from getting vendor discounts and fully optimizing your resources. Learn how Everest Group’s 5S Framework can help your organization choose the right license model.

Organizations are increasingly dependent on various software for productivity, automation, security, and other critical enterprise needs. Google pioneered the move to cloud-based applications with G-Suite. Today nearly every major enterprise platform or productivity suite has a cloud-based version.

The rapid transition of enterprise applications, tools, and platforms from on-premise to the cloud has simplified commercial models and invoicing. But it has also made subscribing to the right license all the more complicated and important.

Having a plethora of licensing options available for each software often leads to indecision by organizations in selecting the right fit. While this task can be arduous, having the right licensing strategy will lead to higher savings and optimized resources.

Enterprises are frequently at a disadvantage in negotiating better prices and discounts because they don’t understand the licensing nuances, which often leads to vendors overselling features that are then underused.

After analyzing the key licensing models prevalent in the market, Everest Group developed its comprehensive 5S Framework. This simple yet effective approach to choosing the right license model works as a guiding principle to reduce associated risks and helps enterprises build the optimal licensing strategy.

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The 5S Framework covers the most important aspects an organization should delve into when licensing a software, platform, or product. Here is an overview of the process:

  • First and foremost, understand your environment and inventory and then determine the tools or platform needed based on stakeholder input
  • After mapping the requirement, identify the right license which meets stakeholder expectations and budget requirements. Striking this balance is usually the key element to a successful licensing strategy
  • Once all the pieces are in place, validate and ensure no further optimization possibilities exist before finally proceeding to the procurement stage
  • Lastly, neither the extent of usage nor the available licensing options remain static. Therefore, it is important to monitor usage statistics across the organization and revisit the available licensing options periodically

We have used the 5S approach to not only help clients determine the right fit for their organizations but also within our internal IT environment.

To learn more about how this approach can help your organization select the right Microsoft Office 365 licensing plan, stay tuned for our next blog in this series, Comparing Microsoft Office 365 Enterprise Plans: Getting Your Licensing Strategy Right.

For more details, please reach out to [email protected].

Why Areas of Enterprise Services Spend Will Increase in 2022 | Blog

When looking at the market outlook for services spend in 2022, I see several areas that will change dramatically. It is clear there are two primary drivers for the changes: the post-COVID-19 situation and the need to be more strategic in a digital world. Both drivers will change the way companies need to operate next year, and both will increase the cost to operate. Here is my overview of the coming changes.

Read more in my blog on Forbes

How Much Will Your Next Outsourcing Deal Cost? Understand These Seven Factors That Impact Pricing for Services | Blog

With outsourcing activity again picking up after slowing when the pandemic hit, now is a good time to gain a better understanding of how providers price IT services. To help ensure your enterprise gets the right value out of your next outsourcing deal, read on for expert pricing tips based on Everest Group’s experiences.

Below are seven common trends we see that can impact the pricing of outsourcing services:

  1. Of course, it’s the economy: Without a doubt, the economy plays a major role in the movement of deal pricing, especially when Black Swan events such as COVID-19 can throw away all previous estimates on the futures of pricing rate cards. The pandemic forced many enterprises to ask for short- to mid-term invoice discounts while others used it as an opportunity to renegotiate their existing contracts. As markets rebound, talent scarcity and travel bans are resulting in upwards movement in pricing at high-cost locations while pricing for digital talent at low-cost locations has reached an inflection point and is expected to turn around
  2. RFP versus sole-sourced deals: First, there is nothing wrong with a sole-sourced deal. It can be more efficient, shorter in duration, and deliver greater value compared to an RFP-led scenario, given you have a trusted relationship with a vendor of choice. By introducing competitive tension into the overall bidding process, an RFP can often be more effective in getting the best pricing. However, due to excessive price undercutting, the quality during delivery may not be what was promised during the talks or negotiations
  3. Cross subsidization of accounts: Often, vendors subsidize their loss-making accounts through their profit-making ones. This is why it’s so important for enterprises to benchmark regularly to see how prices compare against market peers and the overall industry
  4. Enterprise and sector financial performance: The performance of the industry or the sector as a whole can widely influence deal pricing. Sectors such as insurance or oil and gas that typically do not have very high margins usually have visibly low time and materials (T&M) costs or managed services pricing compared to enterprises in well-performing verticals such as life sciences, retail, investment management, or capital markets. While paying less in low or underperforming sectors is not guaranteed, clear trends point to this practice
  5. Buyer persona: The sourcing team can impact the negotiations in ways enterprises often can’t fathom. For example, a senior purchasing manager who has worked across a range of sectors and seen at least the last two recessions will bring a different experience into negotiations than purchasing resources who are newer in their careers and have worked in the cash-rich internet, high-tech, or e-commerce sectors, which can impact the price and length of the deal-making
  6. Transformation versus technical upgrade: If embarking on a complex transformation engagement that involves multiple elements such as change management, business consulting, architecture design, and a longer advisory/blueprinting cycle, it is highly likely you will engage a Tier 1 systems integrator or consulting heritage vendor (including the Big 4 firms) for the entire scope of work. Expect such engagements to cost as much as two and a half times more than a technical upgrade of a similar effort
  7. Contract terms and conditions: Service levels, service credits, and penalties can have a major impact on pricing without enterprise procurement realizing it. In our experience, most all the holdback or fees at risk the enterprise asks the vendor to commit to are baked into the deal as contingencies. So, if you are planning to have the most stringent service levels and fees at risk for your next deal, think twice about whether you need it

 

After advising on countless engagements, we’ve seen many other checkpoints that impact deal pricing. By starting with understanding the factors above, you’ll begin thinking about pricing from a more holistic viewpoint and be more educated at the negotiation table.

If you would like to talk more about pricing, please reach out to Achint Arora at [email protected].

Why the Focus Is Returning to Cost of Living Adjustments and Benchmarking Clauses in Outsourcing Contracts | Blog

Once standard provisions in outsourcing contracts – Cost of Living Adjustments (COLA) and benchmarking comparisons – are needed now more than ever to ensure long-term success for both parties in today’s changed outsourcing environment. With the turns over the past half-year making it a seller’s and employee’s market, these clauses can ensure enterprises capture high-quality talent without being overcharged for service delivery. To learn more about why it’s time to refocus on these provisions, read on.  

Over the past six to eight months, the global services industry has experienced a curious turn from starting the year as a “buyer’s market” due to uncertain demand and portfolio consolidation at large and medium enterprises. Similarly, the talent market was an “employer’s market.”

Fast forward to today, and the contrast could not be starker. Demand for global services has been booming. Enterprises are looking to diversify their provider portfolios. All it takes is one look at the quarterly reports of providers to see it is a “seller’s market,” while on the talent side, it is an “employee’s market.”

What is even more striking is that the talent shortage that is most visible for high-end digital skills also very much exists for other skills. It is not surprising that service providers are struggling to hold on to their existing talent even though they are rolling out salary hikes, special skills allowances, employee retention funds, etc. Further, the booming demand is forcing companies to hire at even higher compensations to fill the positions of departing employees and new openings.

Against this backdrop, it is important to also consider these few additional macroeconomic factors:

Onshore (U.S.)

  • Consumer Price Index (CPI) inflation has surpassed the 5% mark for the first time in 30 years
  • U.S. Bureau of Labor Statistics show that job openings are at an all-time high at an overall economic level

Offshore (India)

  • For the past two decades, India has consistently been a high inflation country, with CPI inflation generally ranging between 6% and 8%. Despite the high inflation, it retained a strong cost reduction proposition because of a broad trend of currency depreciation. However, over the past year, the Indian Rupee has appreciated against the U.S. Dollar. As a result, the strong tailwinds currency appreciation provided has been replaced by moderate headwinds

As a result, pricing both onshore and offshore is now trending upwards. We have witnessed service providers approaching enterprises with proposals of out-of-cycle price hikes that, in some cases, exceed 20%.

The client’s conundrum

Enterprises are facing a dilemma of whether to break the budget and pay the desired prices to service providers or risk facing shortages in quality talent and potential business disruptions.

While there are no easy answers, a few factors to keep in mind are:

  • It is widely accepted that the talent shortage is here to stay for three to five years. However, the intensity of the shortage could stabilize. For instance, in the U.S., some states are prematurely ending unemployment benefits, and COVID vaccination prevalence is increasing by the day. As a result, additional workforce might enter the job market, potentially reducing some of the demand-supply mismatch for low complexity roles
  • In India, if the Rupee returns to its depreciating trajectory, the need for higher prices could abate

Therefore, a more pragmatic, immediate approach for clients is to align on short-term pricing increases instead of agreeing to structural changes in prices that would apply for the remaining deal term. Instances where clients are already paying above fair market rates might not require any further price increases.

Contract solutions

While short-term pricing increases can be a tactical way to accommodate the pressure of price hikes, to remain aligned with the fair market prices in the medium- to long-term, it is critical for enterprises to push for the inclusion and enforcement of two key clauses: Benchmarking and COLA.

Having a balanced benchmarking clause that contractually allows for an ongoing/annual reset of prices to market standards is in the interest of both sides. It can guarantee providers do not overcharge for their services. At the same time, it can ensure that the contracted prices are not too aggressive and out-of-line with market realities, to the extent that they impact the quality of talent or services delivered by the provider.

For situations where benchmarking is not done regularly, the fallback is having a robust COLA clause that allows service providers to adjust charges on an annual basis to reflect a fair increase in delivery costs. Historically, COLA used to be present in all deals. However, in some outsourcing deals that we reviewed or benchmarked over the last couple of years, COLA had been taken out of the contract under pressure from enterprises.

While that could have been justified in a low inflation environment and a buyer’s market, in the current situation having a robust COLA clause will ensure the long-term sustainability of the contract for the enterprise as well as the service provider.

To explore how our pricing analytics services could benefit your enterprise and share your pricing experiences, contact Rahul Gehani, Partner, at [email protected].

Are IT Buyers Pushing for Discounts Due to the Pandemic?

Not surprisingly, we’ve been flooded with questions about the implications of COVID-19 on the IT services industry over the past two months.

Let’s take a look at the two most prevalent questions.

How are IT contracts being impacted?

Financial distress – such as a dip in revenue generation and restricted cash flow – is forcing enterprise IT to review their IT contracts. Clients are exploring three options:

  • Putting non-critical projects on hold
  • Deferring payments to keep critical projects running
  • Seeking discounts

Their preferred option is putting non-critical projects on hold. Clients are triaging to keep their business-critical functions – like transactions systems, call centers, datacenters, and supply chain systems – running. However, they’re putting non-critical engagements, such as new application development and feature upgrades, on the back burner.

Second in order of priority is deferring payments. We’re seeing deferral requests increase in frequency, especially in distressed industries such as travel, transportation, hospitality, and medical devices. And we’ve seen payment terms going up to 180 days in a few situations. However, an early trend that will soon establish itself as the IT industry norm is balance sheet (or cash pile) financing; vendor balance sheets have started to play a role in enabling billing deferrals and “deploy now pay later” models. For example, Cisco has set up a US $2.5 billion war chest leveraging its balance sheet to help some of its clients defer payments until 2021.

Our analysis shows that vendor balance sheets, both tech products and IT, are healthy. For example:

  • IT vendors’ (HCL, Infosys, TCS, Wipro, etc.) balance sheet assets over liabilities ratio ranges from 1.3x to 3.5x
  • Tech vendors’ (Adobe, Amazon, Microsoft, Oracle, etc.) balance sheet assets over liabilities ratio ranges from 1.1x to 3.4x.

And there is evidence that they may dip into them to help their clients out.

The third in priority is seeking discounts. We’re seeing anecdotal evidence of clients seeking discounts on contract value and in a few cases extending up to 50 percent of the annual contract value. But to clarify and qualify this:

  • The discount discussions are largely focused on time and materials (T&M) projects. Few are around fixed price and managed service engagements, which form a larger share of revenue profile for large IT vendors
  • And this means that smaller IT and staffing vendors – for which T&M constitutes larger share of the revenue profile – are going to be impacted more than the large IT vendors

Most importantly, we’ve seen enterprises being very flexible and collaborative with their vendors – working closely with them to keep initiatives running.

How will enterprises prioritize and fund IT initiatives during this crisis?

Enterprises are currently preparing their playbooks to navigate the ongoing recession. It’s important to note that recession does not mean that IT initiatives will be broadly deprioritized. Depending on the impact they see on their overall business and their anticipation of recovery, enterprise executives will triage their resources (cash, talent, vendors) to keep critical initiatives running.

Here’s a look at the framework we’re using to help buy-side clients prioritize their decisions:

  • Rescue business critical initiatives most severely impacted by the recession through financial engineering and aggressive cost takeout
  • Revitalize revenue-generating business functions that can gain from automation usage and cloud-driven agility
  • Reinforce the lowest impact portions of the revenue profile through M&A and product launches
  • Restructure those portions of the portfolio – such as vendors, locations, and talent – that already had redundancy and concentration risk issues

Portfolio approach by enterprises

In the coming weeks, enterprises will be using this framework to:

  • Triage between critical and non-critical IT spends
  • Build their blueprints for how they will reallocate budgets and engage with vendors
  • Identify new scope and financial models on which they’ll engage their vendors

Watch this space to see how this playbook evolves. If you have any questions or ideas on other approaches, please write to me at [email protected].

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