IT service providers are increasingly exploring monetizing their proprietary software tools and accelerators as independent products. This strategic decision can create new revenue streams and differentiate providers. While these accelerators offer numerous benefits, they face challenges in gaining client acceptance. In this blog, we explore the pricing strategies for accelerators and discuss five crucial factors that providers need to consider to maximize the value of their assets. Contact us to explore further.
IT service providers have invested heavily in developing homegrown intellectual properties and proprietary accelerators, tools, and software solutions that have demonstrated impactful results and value creation for clients.
Many providers are now actively pursuing monetizing these assets as standalone offerings. TCS and HCL have created subsidiaries, TCS Digitate and HCLSoftware, respectively, focusing on software and accelerator monetization.
Suppliers have developed software solutions used in different phases of the technology development lifecycle (build, quality assurance, run, modernize, and transition/transformation). Some examples are TCS Ignio and Mastercraft, Infosys LEAP and Nia, Wipro Holmes, and HCL Tech Advantage.
Let’s delve into the opportunities and obstacles service providers face in this pursuit.
Challenges to asset monetization
Despite the money-making potential, success has been limited for various reasons. Some of the primary factors we have observed contributing to this shortcoming include:
- Internal challenges – Difficulties with legal and procurement process delays in maintaining and executing separate license agreements for these accelerators
- Post-implementation challenges – Issues related to continued support and maintenance requirements of the accelerators, particularly after the end of services Statement of Work (SoW) term, and the ongoing need for product innovation and marketing investments
- External challenges – Struggles with low revenue and profitability from product licenses
How accelerators are sold
Let’s take a look at the two ways accelerators are sold:
- Bundled with services: Service providers frequently include accelerators in their solutions and position them as key differentiators. These accelerators are bundled with services within the provider’s scope and delivered to the customer. This model is preferred when:
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- The accelerator adds value to the existing services offered
- Customer preferences and market trends show demand for all-inclusive solutions
- Licensing models: Licensing models can be structured as follows:
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- One-time fee – Service providers propose that customers use the capabilities of their accelerators for a one-time fee
- Recurring fee/subscription-based – Charging the customers for accelerators through recurring monthly or annual fees is another prominent commercial model
In addition to the one-time/recurring fee, some providers charge for professional services separately. This model is preferred when:
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- The accelerator addresses specific pain points with a standalone solution
- Customers seek flexibility and independence in using the product
While service providers ultimately aspire to move toward standalone licensing for accelerator monetization, bundling with services is currently the more dominant model. Providers tend to leverage services to grow the reach and mindshare of their accelerators through bundling.
Service providers typically provide the costs of these assets separately in deals where external advisors are involved or where the client’s procurement function is mature. There is a growing emphasis among service providers to focus on asset-led models, with many expecting high asset revenue growth in the coming years.
Research findings
To unlock the value that service providers can realize through their asset and accelerator monetization, we conducted detailed research to understand the key areas that providers must consider.
Here are five key insights from our research:
- Positioning: Providers position assets as “investments” in some deals until a predefined threshold is met. This strategy helps to increase the penetration of their specialized accelerators and tools in a client’s ecosystem. The provider then starts charging for these assets when the client has consumed services proportionate to the initial investment
- Value proposition: Providers tout numerous benefits for clients using their accelerators, including increased productivity, streamlined costs, reduced rework, automation of routine tasks, instant simulation, end-to-end incident remediation, predictive failure, and proactive decision-making
- Fee amortization: The period over which the accelerator fee is charged is determined by its share of the total contract value (TCV). For deals where the share of accelerator fees is minimal, the accelerator fee is charged in the first year. Conversely, the duration is longer when the share of the accelerator’s fee in the overall deal value rises
- Return on investment (ROI) articulation: ROI articulation is critical to reinforce the client’s confidence and willingness to invest in accelerators. ROI in the 2.5 to 5 times range has been observed in large deals covering services across the technology development lifecycle
- Sales channel: Service providers use different sales channels to increase sales of their assets, including leveraging channel partners, independent software vendors (ISVs), the third-party marketplace, and, in some instances, their subsidiaries
As service providers move towards establishing alternate revenue streams through their accelerators, the observations in this blog will help move them toward devising a robust accelerator monetization strategy.
Everest Group collaborates with leading global and Indian service providers to help identify suitable commercial model(s) and pricing strategies for tools and accelerators. To discuss software solutions and accelerator monetization in more detail, contact Rahul Gehani, Udit Maheshwari, and Manan Arora or email us at [email protected].
