60-minute webinar to be held on Thursday, October 17, 2019 | 9 a.m. CDT, 10 a.m. EDT, 3 p.m. BST, 7:30 p.m. IST
Despite decades of outsourcing experience, pricing models continue to be input-based, leaving little to no incentive for the sourcing teams to change or for service providers to propose new options. As the inexorable march toward the as-a-service economy continues, the input-based model is increasingly less effective in some areas. An output-based services consumption model is better suited to the overall cloudification of the IT estate.
In this session, Everest Group’s Pricing Assurance team leaders will explore adoption of output-based models and offer insights on pitfalls to avoid if you’re considering this an approach. We’ll also introduce the different output-based benchmarks we see being contracted in IT application services.
Specifically, we’ll answer these questions:
Who should attend, and why?
Sourcing, procurement, and vendor management executives, pricing/commercial leads, sales leads, and solution/delivery heads who want to understand when and where adoption of output-based pricing is taking place as well as pitfalls avoid.
Can’t join us live? Register anyway!
All registrants will receive an email (typically within 1-2 business days of the live delivery) with the link to session slides and on-demand playback.
Partner, Pricing Assurance
Practice Director, Pricing Assurance
Chief Research Guru
The irresistible force paradox asks, “What happens when an unstoppable force meets an immovable object?” I think it’s the opposite when it comes to the Internet of Things (IoT) and the already booming as-a-service economy: “What happens when an unstoppable force befriends an unstoppable object?”
Most of the discussion to date around the as-a-service economy has been focused on cloud services, SaaS, and the likes of Uber. At the heart of this economy are the fundamental premises that customers – either business or consumer – can “rent” rather than own the product or service, and can do so, on demand, when they need it, paying as they go.
Although wishing for the utopian as-a-service model may be a futile exercise, the IoT can initiate meaningful models for heavy investment industries and quite a few consumer-focused businesses, and as technologists we should continue to push the envelope.
Let’s step back and think about how the IoT can push the sharing economy to its potential. Can product manufacturers leverage IoT principles, and create a viable technical and commercial model where idle assets are not priced, or are priced at a lower rate, thus saving customers millions of dollars? This would, of course, require collaboration between customers and product manufacturers to enable insight into how, when, and how much a customer consumes the product. But consider the possibilities!
One example is the car-for-hire market. Could a customer’s wearable device communicate with a reserved car, notifying it of approximate wait time until it’s required, enabling the vehicle to be productively deployed somewhere else, in turn enabling the business to offer lower prices to the customer and reduce the driver’s idle time? I think the technology is there, and although the task is humongous and with uncertain returns, I am sure someone, (ZipCar?) will experiment with this model at scale in the near future.
Another example is the thousands of small healthcare labs that cannot afford to own a blood analyzer. Innovative manufacturers of these machines could leverage IoT principles to analyze the blood test patterns of individual labs, and offer them a subscription model by which they are charged per blood test executed, or offered a bundled price of $X per 100 blood tests (much like HP’s Instant Ink offering.)
The IoT has the potential to really bring upon us the power of a sharing economy. In the near-term, businesses face challenges in developing a viable commercial and support model. However, they must overcome this in order for society at-large to truly benefit from this once-in-a-lifetime opportunity. They must remember that most industry disruption these days comes from outside the industry. If they don’t cannibalize themselves, someone else will. Thus, as the traditional competitive strategy levers are fast losing relevance, the IoT most definitely should be an integral part of their strategy.
Photo credit: Flickr
Demand management has been the unicorn of enterprise IT – something frequently talked about but rarely seen and never captured. Every centralized IT organization would love the ability to accurately manage user demand. It would provide tremendous return if it were possible; but to date it has been largely or completely thwarted in large enterprise IT organizations. But there’s good news, thanks to the as-a-service model.
The reason demand management has been thwarted is that IT is organized on a functional basis; the data center, servers, network, purchasing, and security app development and maintenance are all defined functionally. IT leaders are held responsible for driving out cost and building capability that is shared by multiple departments. The problem is there is no relationship between demand and supply capability because business users don’t understand how to measure their usage/demand.
When IT asks business users how many servers they you use, their response is often “How many did we use last time?” Or when IT asks how many programmers will you use and why, business user typically respond with “We need 10 percent more than we had last time.” There is no relationship between actual demand and the actual demand drivers and the estimates they must provide to IT. This is a hopeless and fruitless exercise. It’s like a broken clock that is right only twice a day. This demand estimate is doomed to be wrong every day.
So what’s the answer? We need a service construct where IT is organized into service models. This construct gives business users a way to understand their usage or demand. For example, a healthcare payer understands how many people it expects to enroll. This is a metric the business can use to predict usage and the time frame in which they will need the service. IT can then manage the demand for the service it provides to the payer based on the number of enrollments.
When companies organize IT along service lines, they can translate business activities into technical consumption. The as-a-service construct attempts to make as much of its service chain or supply chain as elastic as possible. It adjusts each part of the supply chain to the usage demand. So unlike the traditional functional IT structure, business users only pay for what they use.
There are three mechanisms to make a technology or service elastic:
Typically, as-a-service providers use all three of these techniques to allow them to use their full service stack with the business metrics that the technique serves.
The as-a-service model achieves one of the Holy Grails of centralized IT – it provides a realistic demand management vehicle where the business can make accurate estimates. It also provides paying for the services only when they are used; this is the consumption-based model that the services industry is moving to.
Demand management to date has been completely illusive to centralized IT because of the take-or-pay nature of IT. This method for building capability – and business users sharing the cost to be able to use it – has no connection to business metrics that the business can control and understand how to estimate their technology capacity/demand. But the good news is the as-a-service model puts a rope around the unicorn. It creates the ultimate answer to demand management.
As the services industry begins moving into the as-a-service era customers look for providers that change their traditional services to make them elastic or consumption based. We at Everest Group have spent some time studying this, and we believe there are three key ways to change take-or-pay (fixed costs oriented) services and make them elastic (pay as used). One or even a combination of all three ways are present in the services model that customers now demand.
Customers benefit from a provider sharing its capacity among multiple clients. AWS and Salesforce are classic examples of this elastic type of service. They redeploy servers or capacity when not in use to other customers and therefore achieve an extremely high utilization rate. In fact, arguably, AWS has over 100 percent utilization rate because it can charge customers for capacity when they’re not using it, yet can use that capacity for other clients. The model is much like an airline selling more seats than its actual capacity.
Repeatable process automation (RPA) or robotics spins up a virtual robot to do the work and then shut it down again. This fundamentally aligns a customer’s costs with usage and thus makes the service elastic.
The third way customers can have elastic services is to change their purchasing so that they only buy services as they use them. An example of this would be changing the way a customer acquires software, switching from enterprise licenses to consumption-based licenses where the customer pays for the software only as they use it. A note of caution here for customers: Although this makes the service elastic to you, there may be a stranded cost to your provider, and that cost may be embedded at a higher cost to you in your cost structure. So be careful about overly using the purchasing mechanism to make a component of your IT service stack be elastic.
Although customers can use these three methods separately, it is also beneficial to look for service providers that use a combination of all three methods to make a material difference to an entire service line to make the service far more flexible and consumption based to meet your needs.
We have not uncovered other mechanisms to make a provider’s service line elastic, but we are very interested to know if you have discovered another way to achieve elastic services. Please post your comment and share your experience.
Photo credit: Flickr
I’ve been blogging about the changing world of services and how the growth is in the SaaS and BPaaS space. However, capturing SaaS and BPaaS opportunities is incredibly frustrating for large service providers, especially incumbents. Their efforts to win these deals often end up like David defeating Goliath.
That’s because, for the most part, customers select the new players in the SaaS and BPaaS space, like Salesforce and ServiceNow, instead of existing providers. This is similar to where we were in the dot-com era with startups threatening to sweep away the traditional players. Why is this happening?
First, SaaS and BPaaS tend to originate in SMB markets, which is not where the revenue is for the large incumbent service providers; large enterprises adopt SaaS and BPaaS as point solutions. As point solutions, SaaS and BPaaS hold relatively modest opportunities for large providers’ growth and revenue.
Secondly, SaaS and BPaaS offerings are based on a different business model. The as-a-service business model requires a complete rethink of traditional service providers’ delivery systems. This forces providers to move to either a multitenant environment with all the implicit change management issues for clients, or to an automated vehicle that is likely still in the early stage.
At Everest Group, we believe that now, as happened in the dot-com era, the empire will strike back. We think the way this will happen is through switching to an Enterprise IT-as-a-Service model. Borrowing from the Star Wars movie, we believe the dominant providers will strike back and reassert their role in services.
Instead of coming at IT services from a point solution and multitenant environment like SaaS and BPaaS, Enterprise IT-as-a-Service moves the entire service supply chain, component by component, into an as-a-service model. Rather than trying to have the entire supply chain operate on a single platform, it allows enterprises to migrate the individual components – data center, platform, talent factory, software licensing, etc. – into a supply chain model with components aligned with service lines.
Not all providers will be able to make this change, but those that do will be able to flourish and reignite their growth. The Enterprise IT-as-a-Service model favors large incumbent providers over startup SaaS and BPaaS providers.
SaaS models are most robust in SMBs. In the large enterprise, they manifest as point solutions, thus breaking the Dillinger principle – you rob banks because that’s where the money is. Service providers go after large deals in large enterprises because that’s where the money is.
Increasingly, the investment thesis on Wall Street favors the SaaS and BPaaS providers and rewards them with higher valuations because of their potential to disrupt industries. But we think the empire has a good chance of striking back. Traditional providers’ existing knowledge of the enterprise environment and ability to orchestrate the entire supply chain through the Enterprise IT-as-a-Service model will be favored over the SaaS and BPaaS players entering the market.
On July 2, managed healthcare companies Centene and Health Net announced a merger in a cash-and-stock deal valued at US$6.8 billion, becoming the latest deal in an intensifying wave of consolidation in healthcare. The agreement has been approved by both companies’ Board of Directors and is expected to close in early 2016. The deal combines the two companies, with the joint entity having more than 10 million members and an estimated US$37 billion in revenue this year. The large-scale reform of US healthcare (instigated by the Affordable Care Act) was never expected to be a smooth and genteel affair. One of the immediate impacts was provider consolidation as health systems (which had endemic cost and profitability issues) looked for scale, efficiency, and lean cost structures. A similar trend was also expected in the payer space, but the rollout of the Health Insurance Exchanges (HIX), which operationalized last year, delayed the eventual M&A frenzy. Last month, America’s numero uno insurer, UnitedHealth Group (UHG), approached the number three, Aetna. The latter responded by buying number four, Humana, for $37 billion on July 3, capping a seminal week for mega mergers in health insurance. Humana was earlier reported to be close to a similar deal with Cigna. The second largest, Anthem, is in the midst of a messy takeover attempt as it relentlessly pursues the number five, Cigna (which rejected an initial US$47.5 billion bid). We covered the potential impact of the potential UHG-Aetna and Anthem-Cigna deals on IT services in a blog soon after the first rumors started floating.
The announcement comes at an extremely inopportune time for Cognizant. The company had announced (with much fanfare) a marquee seven-year US$2.7 billion deal with Health Net last August. The engagement was unique in multiple ways. Along with Accenture’s Rio Tinto deal, it is the flag bearer of a bold new deal construct, which epitomizes the fundamental tenets of the As-a-Service economy and widely expected to herald the era of a consumption-based IT services model. Under the terms of the seven-year master services agreement (MSA), Cognizant was to provide a wide gamut of services to Health Net across consulting, technology, and administrative areas spanning claims management, membership and benefits configuration, customer contact center services, information technology, QA, appeals & grievances, and medical management support. Cognizant was to be held responsible for meeting specific SLA targets for improving the quality, effectiveness, and efficiency of multiple operating metrics. These included claims processing and routing times, customer contact center response times, and contact center customer satisfaction targets. In effect, a fairly wide ranging set of services with ambitious KPIs for accountability and governance.
The planned implementation was scheduled to begin in mid-2015. Given the Centene-Health Net deal, the implementation is being deferred, while the deal is completed pending the merger review and approval process. As a result, Cognizant does not expect any contribution (previously pegged at about US$100 million in H2 CY2015) from the deal, which the company can easily absorb without tempering its ambitious revenue guidance for the current financial year. Additionally, it also foresees that if the merger is completed, the existing MSA is not likely to be implemented, which (if it materializes) will be a major setback. Cognizant will still remain a strategic technology/operations partner to Health Net (under a prior contract) through 2020 with a total contract value (TCV) of about US$520 million. Cognizant has also negotiated the right to license certain Health Net IP for use in its solutions and “As-a-Service”platforms, which is not expected to be impacted by the proposed merger.
Looking ahead, despite the short-term loss of US$100 million incremental revenue, Cognizant’s CFO Karen McLoughlin has reaffirmed 2015 guidance as strength in other areas of the business are expected to offset the lost revenue. 2015 revenue is expected to be at least US$12.24 billion with non-GAAP EPS at least US$2.93. Overall, the contract was expected to be margin dilutive in the early years and in generally only “margin neutral over the long run.
As overall macroeconomic confidence is on the upswing and various industry drivers come into play, the M&A activity is only bound to intensify. This has a profound implication for service providers who are deeply entrenched in such large enterprises and need to be prepared to come out on top of any eventuality. One potential impact of such M&A is the tendency for the combined entity to rationalize its vendor portfolio – choosing to stick to a short list of key strategic vendors by trimming the sourcing pie. The selection criteria for vendors then boils down to specific value-differentiators, maturity of service portfolio, senior management relationships, competitive positioning, and account-level exposure. Technology/operations budgets also tend to shrink as enterprises leverage economy of scale and target operational efficiency.
The following image illustrates the current exposure of key service providers across UHG, Aetna, Anthem, and Cigna. As is evident, these mergers tend to benefit larger service providers that are typically well entrenched across the combining firms. However, a few, may find their portfolios at-risk given competitive underpinnings, sourcing maturity, and enterprise penetration.
Net-net, we don’t expect Cognizant to be unduly impacted by the proposed merger given the current state of affairs and its leading position in the healthcare and life sciences landscape (poised to reach US$4 billion in annual revenue in the next 18 months). The opportunity at hand is not under threat but there will be significant shifts and redistribution between vendors. The healthcare market is poised to witness increased turbulence (we believe this is just a teaser of things to come) and service providers need to realign and reposition themselves to utilize this opportunity. Let the games begin!
Lewis Carroll is famous for his novel, “Through the Looking-Glass, and What Alice Found There.” In this whimsical world, everything starts out as familiar things but, on examination, turn out to be nonsense. It puts me in mind of many service providers’ sales pitches.
Perhaps my favorite part of the Looking-Glass novel is Jabberwocky, a poem in which Carroll strung together nonsense words. When put together, they sound impressive and one wants to believe they tell a story. But as you can see in the verse below, the words are just nonsense.
’Twas brillig, and the slithy toves
Did gyre and gimble in the wabe:
All mimsy were the borogoves,
And the mome raths outgrabe.
It’s like service providers’ sales teams that talk to potential clients about a transformation agenda and driving business value from IT. They throw in words such as “agility,” “flexibility” and “cloud.” Or phrases such as “consumerization of IT” and “as a service.” They even sprinkle in entire sentences such as “outsourcing will allow you to variabilize costs.”
These pitches sound wonderful and sound like there is deep thought associated with what the speaker says. But on examination, one finds the claims are largely nonsense. For instance, there is no variabilization of costs; it’s virtual, and there is little time to business value. And the supposedly agile environment is anything but agile.
It’s very easy to grasp for platitudes and read blogs and take the ideas without really understanding them.
So just like Alice, we find ourselves asking, “Which way should I go?” Well, like the Cheshire Cat says to Alice, “It all depends on where you want to get to.” Providers’ impressive-sounding presentations, on examination, are often just gobbledygook and attempts to intrigue the audience and get them to buy services. But they fall apart on close examination.
Successful sales depend upon a clear understanding about what the customer and provider will try to accomplish, how they will do it and the steps necessary to accomplish the goals. The best presentations use common, plain language to identify the issues and how to meet the goals.
Photo credit: Flickr
Have you noticed how few service providers have the ability maintain a market leader role when the market changes to favor new technologies, or new service models? It’s very difficult to make this shift, and I’ve seen very few companies achieve the shift – let alone do it three times. Just one. Wow!
If we look back at the service provider landscape in the early 1990s in the classic outsourcing space, the leaders in the service industry were Accenture, CSC, EDS, IBM, and Perot.
Then the growth opportunities shifted to the labor arbitrage model in the late 1990s and early 2000s. Suddenly the group of leaders changed to Accenture, Cognizant, IBM, Infosys, and Wipro.
Now as we move away from those classic leaders and shift to the new models (SaaS, BPaaS, platforms, and consumption-based), there are three leaders: ADP, IBM, and Salesforce.
Looking back at the market leaders over the years, some have disappeared, as the figure above illustrates. EDS is now owned by HP, Perot is owned by Dell, and ACS is owned by Xerox. What stands out in the graph is that only one company has been able to consistently shift when the market shifts – IBM.
How have they managed to do this? Here are some lessons we can learn from Big Blue.
These four strategies have enabled IBM to maintain market leadership despite market shifts. They stand out as lessons for other firms seeking to stay relevant and stay in leadership positions in the market.
Photo credit: Flickr
Rio Tinto, a global diversified mining company, recently announced a groundbreaking initiative they are undertaking with Accenture. This can best be described as moving Rio Tinto’s enterprise IT function into an as-a-service model. Game-changing benefits permeate this deal, and it’s an eye-opener for enterprises in all industries.
Let’s look at what Rio Tinto gains by pulling the as-a-service lever to achieve greater value in its IT services.
First, it changes the relationship between the business and IT. It breaks down the functional silos of a traditional centralized IT organization and aligns each service. In doing so, it creates an end-to-end relationship in each service, whether it be SAP, collaboration or any other functional services.
Second, this initiative moves Rio Tinto’s entire IT supply chain to a consumption-based model. This is incredibly important for a cyclical commodity industry, where revenues are subject to the world commodity markets. Rio Tinto’s core product, iron ore, is a commodity that can result in revenues slashed in half in the course of a year, leading to the need for cost reduction initiatives. Correspondingly, in boom times, commodities can double and triple in price, resulting in frenetic energy to expand production. The as-a-service model ends this commodity whiplash impact. It gives Rio Tinto a powerful ability to match costs to their variable consumption patterns.
This move will change the pace of innovation within Rio Tinto, allowing it to future proof its investments in IT. As many enterprises discover, multi-year IT projects often end up being out of date by the time they are implemented. Rio Tinto sought to shorten the IT cycle time so it can take full advantage of innovations the market generates. In the as-a-service model, it can pull those innovations through to the business quickly – which is a struggle for traditional siloed centralized IT functions.
These are game-changing benefits. It’s important to recognize that the journey to capture these benefits required a complete rethinking of how Rio Tinto’s IT (applications and infrastructure) is conceived, planned, delivered, and maintained. Moving from a siloed take-or-pay model to an integrated consumption-based model required wide-ranging re-envisioning and reshaping the ecosystem for deploying its technology; it touched IT talent, philosophies, processes, policies, vendors, and partners.
Clearly this journey will be well worth the effort given the substantial game-changing benefits. Challenging times call for breakthrough answers. The cost benefits alone are significant; but even more important is the ability of this approach to accelerate the transformation of the company into a more digital business. Rio Tinto chose to partner with Accenture to move its organization to this fundamentally different action plan for delivering and consuming IT and meeting the rapidly evolving needs of the business.
Photo credit: Rio Tinto