This document provides an overview of arguments made by service providers in favor of increasing IT outsourcing pricing and potential counterarguments from buyers. It discusses 3 main reasons given by service providers: 1) increasing operating costs, 2) an improving global economy, and 3) cost of living adjustment clauses in contracts. The document then presents ways buyers could potentially counter each argument, such as increasing offshore leverage or optimizing resource utilization. It aims to help buyers and service providers effectively negotiate pricing changes in outsourcing contracts.

1. 3 Reasons Why Your IT Deal Pricing
Should Not Increase
March 22, 2012

2. 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

3. Outsourced Pricing dipped during 2009-10 hit by the
global recession, next price movement is uncertain
Realized pricing per FTE of Tier 1 Service Provider
Base Index (100) = Q4 2009 price
110
105
100
95 Service
Providers
90
Q4'08 Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11
Buyers
Source: Published financial reports, Everest Group analysis
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4. Service providers are putting together a convincing
case 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
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5. Can you mount a successful defense?
My costs are
going up …
… while
Service
Providers
economy is
improving …
? Buyers
… finally we
have COLA
clause in the
contract!
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6. 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
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7. 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 2011
Source: Published financial reports, Everest Group analysis
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8. 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

9. 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 2012
Source: Published financial reports, Oanda.com
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10. 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 inflation
Source: World Bank data
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11. 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
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12. Key messages in today’s webinar
Although buyers received price concessions during the recession, neither macro- nor micro-
economic changes justify price increase to pre-recession levels
 Increase in offshore leverage
Factor costs  Increase in hiring of freshers
 Optimization of resource utilization
Macro-economic  Uncertain recovery of global economy
factors  Favorable foreign exchange movement
Buyer and service  Leverage of low cost locations for mutual benefit
provider deal  Sharing of inflation risk or COLA
dynamics  Sharing of productivity gains
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13. 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

14. Everest Group’s PricePoint offering analyzes key
price 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

15. Q&A
To 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_PRICEPOINT
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16. Related content
Complimentary 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 Portfolio
Upcoming Webinars
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– 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
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