S Shyamala

Chennai

While large IT companies are on course to break the linearity between headcount

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and revenue through fixed-cost pricing, smaller companies under pressure for survival are slowly resorting to outcome-based billing. This helps clients to mitigate business risks and also builds confidence in vendors during tough times, say industry players.

As companies gain expertise in particular domains and when project methodologies mature, they move to fixed-cost billing. Unlike the existing system, buyers do not have a say on the number of people to be employed. Under outcome-based pricing, the IT vendor takes a nominal fee upfront and gets the remaining amount over multiple years as a percentage of business value created for the client.

According to GB Prabhat, founder and chief executive officer of Anantara Solutions, the Indian IT industry gets about 65 per cent of its revenue by the time-and-material billing model and about 30 per cent from fixed pricing. About five per cent is said to come from outcome-based billing. IT vendors become genuine partners by sharing their business risks in this model, he added.

This means IT players work closely with clients to analyse their business problems rather than just deliver IT systems. Most large IT corporations are now consistently building their consulting capabilities to move towards this goal.

“Fixed price has gone up. That is the reflection of the time, customers are asking for more fixed price and we would also like to do more fixed price because that is an opportunity where we can get benefit out of the productivity improvement we bring to the table,” said SD Shibulal, chief operating officer of Infosys Technologies Ltd, in the company’s recent earnings call.

According to R Chandrasekaran, president and managing director – global delivery, Cognizant, value-based billing has a long way to go. However, almost all large deals these days come with strict service-level compliance and productivity improvement clauses. About 25 per cent of Cognizant’s revenue comes through such fixed-cost bids, he said.

Pure-play testing company Maveric is also executing a few deals on the outcome-based model mainly to attract clients by sharing more risks. This is possible only in mature processes, said P Venkatesh, director and co-founder of the company.

Moreover, a vast pool of mid-tier companies with IT requirements is still untapped in North America and Europe. The companies do not have the reach to outsourcing vendors. They are new to outsourcing and outcome-based pricing would help keep up the confidence in vendors, said Suresh V Chari, founder and chief executive officer of 8K Miles.

The startup company has created an electronic sourcing platform where companies can look for listed software developers and groups.

sshyamala

@mydigitalfc.com