Tag: transaction-based pricing

Big Bad Wolf Coming to Huff and Puff and Blow Down Providers’ Houses | Sherpas in Blue Shirts

At Everest Group, we researched the potential effect of robotics and automation on the F&A services space. The outcome is almost as grim as the Grimm’s Fairy Tale of a fictional wolf huffing and blowing down the three little pigs’ houses. Where companies implement robotics into finance and accounting functions, we see a reduction of 25-40 percent of the FTEs by the time the implementation is complete.

Some service providers are scared – and rightfully so if our data holds – about the industry turning in a significant way to robotics and automation.

Like the big bad wolf blowing down the first pig’s straw house then moving to the next pig’s wood house, automation and its impact will come in waves. The first wave, as providers move away from an FTE-based model to a transaction-based model, will result in 25-40 percent FTE reduction, with the next two waves in increments of 10-15 percent each. Making the situation for providers even worse, clients will expect their providers to share the cost benefits of automation with clients, which will cause further revenue compression. For service providers, the shift to robotics and automation is a horror story right out of Grimm’s Fairy Tales.

But in the children’s tale, the third pig built a house of brick that the wolf couldn’t blow down. The good news is there is time for providers to build brick houses.

Here’s the blueprint for building a service provider brick house: Build a transaction-based model rather than an FTE-based model and use the savings from that to expand into new areas. This will create a growth engine that can offset the revenue decline in the shift from FTEs to automation.

It’s clear at this point in time that existing F&A clients aren’t lining up to drive automation schedules … but they will over time. The big bad wolf is coming, but providers have time to build a brick house, and they can use their existing client foundation to do that.

Just don’t wait and get caught in a straw house when the big bad wolf arrives.

Photo credit: Flickr

Consequences of Pressuring Service Providers to Reduce Price | Sherpas in Blue Shirts

As we work with service providers across the industry, a theme we hear increasingly is the buyers’ unrelenting pressure on providers to reduce price. The pressure is exacerbated by the growth slowdown in the industry. I believe this pricing pressure will soon show up in providers’ financial performance with decreased earnings per share.

The unrelenting pressure — which also seems to be growing — is linked to the power of purchasing departments and their inability and unwillingness to consider factors outside of price per unit in decisions.

The pressure frustrates service providers across two dimensions. First of all, it’s always unpleasant to have a services client ask a provider to reduce its price when its costs are rising. I think this is one of the reasons why we see a rise in anti-incumbency that I’ve blogged about before. If not the number-one reason, it’s at least a significant concern of service providers. Customers increasingly ask their providers to make investments in the customer’s business, but their pricing pressure deprives the providers of the margins with which to do that.

The second frustrating aspect is that the pricing pressure creates a set of unintended consequences. Most notably, there is less and less time for clients to take into consideration quality, total cost or total efficiencies the providers deliver. Instead they place more focus on reducing the cost per FTE or cost per unit.

It was easier for providers to resist, or at least manage, pricing pressures when the industry enjoyed a fast-growing marketplace thus affording providers the benefit of scale. In addition, most service providers also have been fortunate over the last few years to have forex tailwinds with the dollar to rupee or the pound or Euro to rupee. But the rupee depreciation can’t go on forever and may well be reversed as India puts its house in order.

Certainly there are growth areas in the market today: automation, cloud and as a service. And providers have the possibility of changing pricing algorithms from FTE-based deals to transactional outcome-based deals. However, those techniques are uncertain, difficult and, taken collectively, may not be sufficient to offset the downward pricing pressure on a provider’s core business.

HCL Catches Lightning in a Bottle | Sherpas in Blue Shirts

Double the fun! HCL’s stock valuation doubled in a just a little over 12 months. They’ve been on a tear, improving every month, with revenue per employee skyrocketing and the corresponding profitability rising. Sure, HCL has shifted some positions in its leadership team. But what really caused the investing community to value HCL at twice the price as before is HCL’s successful shift to transaction-based pricing.

The strategy behind the leadership shifts was to ensure future growth. Former CEO Vineet Nayer became Vice Chairman a year ago, and Anant Gupta moved from President/COO to President/CEO. Gupta has been with HCL for 19 years and built its infrastructure business — which is now the dominant marketplace for HCL.

HCL’s growth strategy is taking hold, and it successfully transitioned its infrastructure offerings from an FTE-based pricing model to per/service transactional pricing.

Previously I blogged about payment companies outperforming their BPO brethren: it was because they implemented platforms for transaction pricing. As I explained then, there are few examples of transitioning successfully to transaction pricing models outside the payments space. It’s almost as rare as catching lightning in a bottle.

Spectacular and Rare

But HCL is one of those rare instances and succeeded in the infrastructure space.

Where success happens in rolling out and implementing transaction pricing, a service provider can reap tremendous benefits because it captures productivity gains from automating. When a provider can scale this strategy, as HCL is doing, the financial and competitive benefits are spectacular.

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