3 Reasons Why IT Pricing Should Not Increase final
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On March 22, 2012, Everest Group hosted a webinar, 3 Reasons Why Your IT Deal Pricing Should Not Change. ...

On March 22, 2012, Everest Group hosted a webinar, 3 Reasons Why Your IT Deal Pricing Should Not Change.

The one-hour webinar covered:

- Common service provider arguments for price increases

- The rationale behind each argument

- Whether these rationale should lead to a price hike or not

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3 Reasons Why IT Pricing Should Not Increase final 3 Reasons Why IT Pricing Should Not Increase final Presentation Transcript

  • 3 Reasons Why Your IT Deal PricingShould Not IncreaseMarch 22, 2012
  • Introductions Ross Tisnovsky Senior Vice President ross.tisnovsky@everestgrp.com Rahul Gehani Practice Director, Pricing Assurance rahul.gehani@everestgrp.com Proprietary & Confidential. © 2012, Everest Global, Inc. 2
  • Outsourced Pricing dipped during 2009-10 hit by theglobal recession, next price movement is uncertainRealized pricing per FTE of Tier 1 Service ProviderBase Index (100) = Q4 2009 price110105100 95 Service Providers 90 Q408 Q109 Q209 Q309 Q409 Q110 Q210 Q310 Q410 Q111 Q211 Q311 Q411 BuyersSource: Published financial reports, Everest Group analysis Proprietary & Confidential. © 2012, Everest Global, Inc. 3
  • Service providers are putting together a convincingcase in favor of price increase  Service provider operating costs are on an My costs are inflationary trend, therefore prices need to going up … increase  Service providers agreed to price … while concessions during the recessionary economy is phase of 2009-10 improving …  With the global economy showing signs of Service Providers revival, these concessions should be reversed … finally we have COLA  Price should go up on account of cost of clause in the living adjustments (COLA), specially in contract! offshore locations Proprietary & Confidential. © 2012, Everest Global, Inc. 4
  • Can you mount a successful defense? My costs are going up … … while ServiceProviders economy is improving … ? Buyers … finally we have COLA clause in the contract! Proprietary & Confidential. © 2012, Everest Global, Inc. 5
  • First rationale: costs!  Wages and cost of Break-down of service provider pricing at offshore and My costs are real estate and onshore going up … facilities account for 75-85% of my Offshore (India) operating cost 5-6% 4-5% 100% 16-20% 59-64% 8-10%  Escalation of these costs over the next 12 Salaries Admin. Real Equipment Other Total and Overhead estate and direct direct Service months will increase benefits and telecom operating operating Providers my total operating facilities expenses cost per costs by 8.3% and FTE 1.9% in India and US, which necessitates a Contribution to Expected movement Impact on price increase operating cost (next 12 months) operating cost Cost component India U.S. India U.S. India U.S. Wages 59-64% 75-79% +12% +2.5% +7.4% +1.9% Real estate & 16-20% 4-5% +5% 0% +0.9% 0.0% facilities  …hence we should discuss a price increase +8.3% +1.9%Source: Everest Group analysis Proprietary & Confidential. © 2012, Everest Global, Inc. 6
  • First rationale: costs! You can increase your Offshore leverage of Tier-1 providers … but you have offshore leverage ... many ways to Onshore 28.4% 26.5% compensate for that Offshore 71.6% 73.5% 2009 2011 You can increase hiring of less Hiring profiles of Tier-1 providers expensive junior resources to flatten the skill pyramid ... 40% Lateral hires 55% Buyers 60% Freshers 45% 2008 2010 You can optimize utilization Resource utilization of Tier-1 providers levels, thereby reducing the 100% Global service “effective” cost per FTE 90% provider 80% Indian service 70% provider 60% 2009 2010 2011Source: Published financial reports, Everest Group analysis Proprietary & Confidential. © 2012, Everest Global, Inc. 7
  • Second rationale: economy is improving! Economy is improving, price should improve too  We understand the impact of global economic scenario on your IT budgets…  ...for instance, In 2009 and early 2010 we realized that your focus shifted from discretionary projects to tactical projects, involving operations and maintenance. Therefore we not only lowered pricing in the new deals, but also agreed to rate cuts in the existing ones.. Service Providers  ...with the global economy showing signs of revival, you operating environment has also improved. We believe it is the right time to rollback those temporary price concessions Proprietary & Confidential. © 2012, Everest Global, Inc. 8
  • Second rationale: economy is improving! Service providers have been able to retain profitability  In spite of price Operating margins for select service providers … you ain’t concessions in 2009- doing so bad 2010, you have been 35% Infosys to begin with able to maintain 30% TCS profitability. Some of 25% Wipro your peers have even 20% Cognizant improved profitability 15% IBM during these 10% Accenture recessionary times! 5% 2008 2009 2010 2011  Furthermore, majority of your services are delivered from India, and the recent depreciation Buyers of the Indian Rupee further bolsters your margins… US$ to INR conversion rate Quarterly average 55 50 45 40 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 YTD 2009 2010 2011 2012Source: Published financial reports, Oanda.com Proprietary & Confidential. © 2012, Everest Global, Inc. 9
  • Third rationale: there is a COLA clause!  Our contract has clause for cost of living adjustment (i.e. COLA) of price. This COLA clause in price adjustment is linked to country-specific CPI inflation indices the contract!  We deploy 70-80% of our resources in India, where inflation is extremely high..  Even in US, which is typically a low inflation delivery location, inflation has now crossed 3%.. CPI inflation in India and US India U.S. 12.00% 12.0% 10.80% Service Providers 10.0% 8.90% 8.0% 6.0% 4.0% 3.20% 2.0% 1.60% 0.0% -0.30% -2.0% 2009 2010 2011  Hence we need to increase prices in India as well as US to offset inflationSource: World Bank data Proprietary & Confidential. © 2012, Everest Global, Inc. 10
  • Third rationale: there is a COLA clause!  Most service providers Increased adoption of tier-2/3 cities as delivery locations Try less expensive are increasingly locations and lets leveraging cheaper talk about clauses! Indian cities such as 35% Kolkata and Mysore Tier-1 58% ~80% of where operating costs upcoming are ~15% lower than seats in Tier- those in Delhi NCR and 2/3 location Bangalore. If you start 65% Tier-2/3 42% utilizing those cheaper locations, it will be a win-win situation for 2006-2008 2009-2011 Buyers both of us…  For most of our peers, COLA clauses have in built mechanisms such as “cap” or “cap and collar”, which brings down the price increase to 4-5% in India and ~2% in US. We should make that amendment in our contract..  You have been our partner for several years now. As a result your resources are now extremely familiar with our systems, frameworks etc. Many of our peers have clauses to share productivity gains in such situations. Lets talk that about now..Source: Everest Group analysis Proprietary & Confidential. © 2012, Everest Global, Inc. 11
  • Key messages in today’s webinarAlthough buyers received price concessions during the recession, neither macro- nor micro-economic changes justify price increase to pre-recession levels  Increase in offshore leverageFactor costs  Increase in hiring of freshers  Optimization of resource utilizationMacro-economic  Uncertain recovery of global economyfactors  Favorable foreign exchange movementBuyer and service  Leverage of low cost locations for mutual benefitprovider deal  Sharing of inflation risk or COLAdynamics  Sharing of productivity gains Proprietary & Confidential. © 2012, Everest Global, Inc. 12
  • Pricing of IT services is impacted by several buy-side, supply-side and macro-economic factors Buyer-related dynamics Emerging sourcing trends  Fluctuating demand for  Alternate fee structures outsourcing services  Adoption of pricing models “My service providers are  Evolving portfolio of  Changing arbitrage across locations and providers locations demanding price increases  Shifting service-mix in deals to offset high inflation at  Changing nature of deals offshore locations. Should I agree?” – Global Procurement Manager, Leading networking company “We contracted our rates Pricing with suppliers one year impact? back. What has been the pricing trend since then?” –Sourcing Manager, Global oil and energy company Service provider-related Macroeconomic trends “What are key operating dynamics  ForEx movements cost and pricing trends in IT-  Changing outsourcing  Inflation ADM in India and USA? ” economics –Director, BFS Vertical,  Fluidity of operational levers and constraints Leading Service Provider  Global and Indian service provider performance Proprietary & Confidential. © 2012, Everest Global, Inc. 13
  • Everest Group’s PricePoint offering analyzes keyprice drivers to aid pricing related decision making Demand-side analysis Pricing cues Specific coverage of key  Assessment of overall demand parameters industry sentiment related including trends in: to pricing based on service – Deal size provider briefings, as well – Deal volume as direct conversations – Value mix with buyers and services – New deals vs renewals providers Overall Pricing Trend :  Pricing Outlook :  Supply-side analysis Key macro-economic factors Comprehensive analysis  Impact of inflation of service provider and ForEx dynamics including: movements on – Resource cost operating costs in – Overhead cost key delivery locations – Hiring mix – Onshore-offshore mix – Financial performance Proprietary & Confidential. © 2012, Everest Global, Inc. 14
  • Q&ATo ask a question during the Q&A session Click the question mark (Q&A) button located on right side of your screen – this opens Q&A Be sure to keep the default set to “send to All Panelists” Type your question in the box at the bottom of the Q&A box and click the send button Attendees will receive an email with instructions for downloading today’s presentation For more information on PricePoint, please contact: – Ross Tisnovsky, ross.tisnovsky@everestgrp.com – Rahul Gehani, rahul.gehani@everestgrp.com – Or visit http://research.everestgrp.com/ProductCategory/EV_RES_PRICEPOINTStay connectedWebsites Twitter Blogswww.everestgrp.com @EverestGroup www.sherpasinblueshirts.comresearch.everestgrp.com @Everest_Cloud www.gainingaltitudeinthecloud.com Proprietary & Confidential. © 2012, Everest Global, Inc. 15
  • Related contentComplimentary Viewpoints Price Benchmarking – Time to Take a Hike? Benchmarking for Good Outsourced Portfolio Rationalization Managing Large Outsourcing Portfolios – Typical Issues and Implications of a Complex PortfolioUpcoming Webinars Top 10 Best Practices in Procurement Outsourcing | Register – Tuesday, April 3, 2012 | 1 p.m. CDT Incorporating U.S. Domestic Locations into Your Global Outsourcing Delivery Strategy | Register – Tuesday, April 17, 2012 | 12 p.m. CDT Proprietary & Confidential. © 2012, Everest Global, Inc. 16
  • Everest GroupLeading clients from insight to actionEverest Group locations Dallas (Headquarters): info@everestgrp.com +1-214-451-3000 New York: info@everestgrp.com +1-646-805-4000 Toronto: canada@everestgrp.com +1-416-865-2033 London: unitedkingdom@everestgrp.com +44-207-887-1483 Delhi: india@everestgrp.com +91-124-496-1000 www.everestgrp.com | research.everestgrp.com | www.sherpasinblueshirts.com Proprietary & Confidential. © 2012, Everest Global, Inc. 17