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Optimizing Prices of Outsourced Services | How to make benchmarking work for you?
 

Optimizing Prices of Outsourced Services | How to make benchmarking work for you?

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Pricing dynamics in the outsourcing market have witnessed a multitude of changes over the last 12 to 24 months. While enterprise buyers are looking to benchmark their current procured rates, many of ...

Pricing dynamics in the outsourcing market have witnessed a multitude of changes over the last 12 to 24 months. While enterprise buyers are looking to benchmark their current procured rates, many of them are not realizing the full benefits. In most cases, the pitfall is the quality of benchmark normalization and the lack of underlying context.

Are you saving the most you can from your outsourcing arrangement?

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    Optimizing Prices of Outsourced Services | How to make benchmarking work for you? Optimizing Prices of Outsourced Services | How to make benchmarking work for you? Presentation Transcript

    • Optimizing Prices of Outsourced ServicesHow to make benchmarking work for you?June 2013
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 2The outsourcing industry has witnessed a multitude ofchanges over the last two years that have altered the pricingdynamics radicallyThree reasons why your prices might not bereflective of the current market rates: Significant fluctuations in macro-economicfactors Decline in premium for specialized andlanguage-based skills Increased competitive intensity betweenoutsourcing service providersThough your prices might have been competitive when they were originallycontracted, if they have not been calibrated with benchmarks in the last 12months, you could be overpaying by up to 15%123
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 3Favorable trends in macro-economic factors: depreciation ofIndian Rupee, decline in inflationCurrency of the most prominent offshore location (i.e., India) has depreciatedsignificantly against $, €, and £951202011 2012 2013YTDYearly average forex conversion rates (Indexed)14% (USD:INR)10% (GBP:INR)8% (EUR:INR)Depreciation between2011-2013Inflation in most delivery locations across the globe has reduced0%5%10%2011 2012 2013YTDAnnual consumer price inflationIndia (3%)Brazil (2%)Decline in inflation ratebetween 2011-2013Romania (2%)Philippines (3%)Poland (4%)These macro-economic changes have led to downward price revision in majority of the contracts in 20131
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 4Decline in premium for specialized and language-based skillsSkills earlier deemed as “highly specialized” are getting commoditized leading to lower price premiumsIncreased availability of talent has led to decline in language-based price premiumsGeneric skills(C, C++, Java)Specialized skills(ERP)18%Actual IT-ADM deal example: Comparison of specialized skill premium across years in the same deal2011Generic skills(C, C++, Java)Specialized skills(ERP)12%2013The decline in premium for “specialized” skills in ITO and language-based skills in BPO has created a pricenegotiation opportunity for buyersBase language(Polish, English,German)Premium lanaguage(French, Spanish,Italian)29%Actual FAO deal example: Comparison of language premium across years in the same deal (delivery center in Poland)2011Base language(Polish, English,German)Premium lanaguage(French, Spanish,Italian)20%20132
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 5Competitive intensity at all time high, amid indications oflower growth in the marketRevenue growth of outsourcing service providers declined significantly during 2011-2012Decline in service providers’ growth rates has led to increased competition and pricing aggression. Inthe last 6 months, price benchmarking has helped our clients to reduce their outsourcing spend by upto 15%9%-0.4%-10%0%10%20%30%2011 2012Revenue growth (Y-o-Y) – Global providersaverage25%12%0%10%20%30%2011 2012Revenue growth (Y-o-Y) – Indian providersaverage3
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 6There is a large number of organizations that offer “pricebenchmarks.” Ironically, there is a large number of reasonswhy those benchmarks can be erroneousBenchmarkers providing “off-the-shelf” and “quick anddirty” metrics fail to give buyers any negotiationleverage. Here are some questions you should ask beforeselecting your benchmarking service provider:1. Does the benchmarker offer first-hand, contemporary, andbest-in-class data repository?2. Does the normalization process account for accuratenomenclatures, proxies, inflation, forex changes, etc.?3. Beyond the metrics that highlight variances, are yougetting context that is essential for decision making?4. Does the output include the resource unit details in orderto ensure apples-to-apples comparison?5. Does the benchmarker have a pressure-tested approachto render guidance for less mature functions/locations?6. Is the benchmarking only reflective of past pricing or doesit provide forward looking guidance on price expectations?7. Does the benchmarker have exposure to buy and supplysides of sourcing mandates; are the credentials robust?Everest Group has a dedicated Price Benchmarking team that has tested and refined its valueproposition for each of the above on 100+ benchmarking engagements
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 7Does the benchmarker offer first-hand, contemporary, andbest-in-class data repository?Everest Group’s Value Proposition #1: Pricing data sourced from live-dealsEvaluation of multiple live global deals We use CLEAN deal-data from~50 ITO deals and ~80 BPO deals(<2 years old), each with its set ofparticipating service provider pricing(i.e., multiple price per deal) Deal data comprises of only serviceprovider BAFO (final-bid) pricingtotaling to over ~10,000 price pointsacross roles and locations Extensive coverage of key deliverylocations across the globe Pricing for Tier-1 and Tier-2 Globalas well as Indian service providersDoes notinclude anypurchased, third-party, or survey-based data
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 8Does normalization account for accurate nomenclatures,proxies, inflation, forex changes, etc.?Everest Group’s Value Proposition #2: Comprehensive normalization of dataIdentify accurateproxies indatabasesIsolate deal data pointswith characteristics thatmatch client’srequirements including: Buyer industry Deal size/scope Role/resource units Volumetrics Delivery locationsNormalizedataFinalbenchmarksfor clientExcludeoutliers Perform analysis tocluster similar skillsfor price analysis Remove the low andhigh end priceoutliers to preservedata accuracy Retain the 20thpercentile to 80thpercentile values, andcalculate the medianpricing for each roleFiltereddataset forbenchmarkingNormalizeddataset forbenchmarkingPre-2013 data isnormalized to factorforex and inflationmovements in servicedelivery location in orderto reflect current pricingtrend3 4 5Understand keycharacteristics such as Role or resource unitdescriptions Volumes of roles /resource units Delivery locations Service levels Pricing modelBuyer/service providernomenclatures tend todiffer in terms ofdescriptions, SLAs etc.Everest Group mapsthese nomenclatures toits standardized formatfor apples-to-applescomparisonFinalizedbenchmarknomenclaturesMap clientnomenclaturesto standards2Understandclient’ssourcingenvironment1Inputs fromclient sourcingand user groupsEverest Group’s normalization process
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 91168573625745Serviceprovider 1Serviceprovider 2Serviceprovider 3Serviceprovider 4Serviceprovider 5Serviceprovider 6Beyond the metrics that highlight variances, are you gettingcontext that is essential for decision making?Everest Group’s Value Proposition #3: Contextualized benchmarksIndexed onsite rates for Project Manager role1Median rate, base index = 100 Resource up-skilling Relevant ‘value-add’ Multiple competency JD Resource ‘force-fit’ Low cost Tier-2 provider Cross subsidizationBenchmarkcontext1 Rates are representative of pricing from deals of similar size and scope60%Low-endoutlierBenchmark price rangeHigh-endoutlierLow pricingmay not always bebeneficial; higher pricemay sometimes bejustifiedAs Everest Group derives its benchmarks from live deals that it has advised on, it can provide the additional context behindnumbers to help drive focused price negotiationsFTE PRICING EXAMPLE
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 10Does the output include the resource unit details in order toensure apples-to-apples comparison?Everest Group’s Value Proposition #4: Detailed benchmarking deliverablesExpected outcomes Rates for onshore, landed, and offshore delivery models Pricing range for each service provider category (Global and Indian service provider) Discrete price benchmarks for each role and locationTypical onshore pricing per FTE in U.S.US$ per hour, 2013Role characteristics: IT Systems AnalystTenure: 1-3 yearsQualification: Bachelors degree in EngineeringDescription: Reviews, analyzes, and evaluates business systemsand user needs Documents requirements, defines scope andobjectives, and formulates systems to parallel overallbusiness requirement 050100150200XXXX XXXXIndian serviceproviderGlobal serviceproviderMedian rateBased onfinal-bids fromLive-deals only
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 1115,965 2,1254,995 9283,260 27,2734,691 31,964Does the benchmarker have a pressure-tested approach torender guidance for less mature functions/locations?Everest Group’s Value Proposition #5: Robust estimation processExpected outcomes Insight into service provider operating costs, mark-up and pricing Average price estimate for a given role in a given delivery location Clarity on location-specific cost-side drivers (wage, real-estate inflation, resource availability etc.)Senior Agent – Price build-up per FTE in Costa RicaUS$ per annum1 Hourly rate built assuming 1920 annual billable hours and 100% utilization. Refer utilization-based rates for practical price estimatesSalariesand benefitsAdministrationoverheadReal estateand facilitiesEquipmentand telecomOther directoperatingexpensesTotal directoperatingcost per FTETypical margin &supplier corporateover headsBilling rateBilling rate:US$ 16.6/hr1Practical price estimateBenchmarkroleExperience(years)PricingUnitGround-upbenchmarking rate(100% utilization)Utilization-based rates for Costa Rica85% 80% 75% 70% 65%Snr. Agent - Hourly 16.6 19.6 20.8 22.2 23.8 25.6Typical utilization-based ratesUS$ per hour
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 12Is the benchmarking only reflective of past pricing or does itprovide forward looking guidance on price expectations?Everest Group’s Value Proposition #6: Actionable guidance on pricing outlookDemand-side analysisAnalysis of key demandparameters: Deal size Deal volume Value mix New deals vs. renewalsPricing cuesAssessment of overall industrysentiment related to pricingbased on service providerbriefings, as well as directconversations with buyers andservices providersSupply-side analysisAnalysis of service providerdynamics: Resource cost Overhead cost Hiring mix Onshore-offshore mix Financial performanceKey macro-economic factorsImpact of inflation andforex movements onoperating costs in keydelivery locationsEverest Group complements its benchmarks with guidance on future pricing based on assessment of key cost and price drivers100999899 99989698100102104Trend and future outlook for blended FTE price at offshore (India)IndexedH1’ 20132012 H2’ 2013
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 13Does the benchmarker have exposure to buy and supply sidesof sourcing mandates; are the credentials robust?Everest Group’s Value Proposition #7: Established past credentials Understand current cost-price-skills landscape as a new entrant into a sourcing geography Understand practical price premiums associated with specific value-adds Understand pricing trends and potential areas for price improvement Validate delivery and pricing models compared to industry best practicesServiceprovider Benchmark ongoing contracts for price optimization and focused negotiations Evaluate additional savings potential by optimizing delivery e.g., Tier-2 locations, flatter pyramids etc. Vet service provider bids for apples to apples comparison and optimum value for money Compare and validate provider pricing at multiple global delivery locations Rationalize outsourced skill portfolio and optimize commensurate spendBuyerSample pricing advisory clients in 2009-2012Client category Objectives fulfilled
    • Proprietary & Confidential. © 2013, Everest Global, Inc. 14Everest GroupLeading clients from insight to actionEverest Group locationswww.everestgrp.com | research.everestgrp.com | www.sherpasinblueshirts.comDallas (Headquarters):New York:Toronto:London:Delhi:info@everestgrp.com+1-214-451-3000info@everestgrp.com+1-646-805-4000canada@everestgrp.com+1-416-865-2033unitedkingdom@everestgrp.com+44-207-129-1318india@everestgrp.com+91-124-496-1000