Getting role taxonomy right enables effective rate card negotiation e book

Helping Clients Leverage Global Services & Sourcing
Advisory | Supply Monitoring | Governance Support
www.NeoGroup.com | www.SupplyWisdom.com
www.NeoGroup.com | www.SupplyWisdom.com
Copyright © 2016 Neo Group, Inc. All Rights Reserved.
GETTING ROLE TAXONOMY RIGHT ENABLES
EFFECTIVE RATE-CARD NEGOTIATION

GETTING ROLE TAXONOMY RIGHT ENABLES EFFECTIVE RATE-CARD NEGOTIATION
INTRODUCTION
There are a variety of ways in which clients of outsourced IT Applications
Development Maintenance & Support (ADMS) services engage with their
suppliers. These may be broadly classified into: resource-based (e.g., Staff
Augmentation) and deliverable-based (e.g., Fixed Price, Managed Services).
The former is usually the preferred choice during the early stages of the
client’s outsourcing journey, since it replicates IT managers’ hiring of external
resources to augment the strength of their existing staff, without having to
significantly change the way work is done. This provides a degree of comfort
to client IT/ADMS managers having to deal with the impacts of transition from
an in-house to an outsourced workforce, while reducing the risk of
dependency on a new supplier relationship.
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As clients advance further in the outsourcing journey, and as their suppliers prove themselves and
inspire confidence and trust to actually perform the work (instead of merely providing resources),
clients tend to migrate the outsourcing of their routine IT operations (such as maintenance and
support of production systems) from a Staff Augmentation model to a Managed Services model,
and project work (such as systems development) to a Fixed Price model. However, even after
such migrations, the Staff Augmentation model continues to be relevant, especially for projects
that involve a considerable amount of innovation or experimentation; projects in which
requirements cannot be clearly specified and/ or the underlying technologies are too new for the
retained team to handle without expert assistance.
At the heart of the Staff Augmentation model is the Time & Materials (T&M) pricing mechanism
that draws upon a “rate-card” that has been contractually agreed by the client and the supplier,
which forms the basis for periodic billing. Each resource employed by the supplier and deployed to
work for the client, is billed according to the agreed hourly billing rate for the specific role played by
the resource (taking into account the complexity of skill and depth of expertise required of the
resource) multiplied by the number of billable hours expended on client service by the resource
during the billing period. The rate-card therefore must cover the entire gamut of roles,
technologies, skill levels and combinations thereof as relevant to the client’s needs.
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INTRODUCTION

Copyright © 2016 Neo Group, Inc. All Rights Reserved. 4
Rate-Card Change Control – Issues and Challenges
It is commonly observed that over the life of the contract, the rate-card evolves organically, with
ad-hoc changes and additional line items appended into it as the supplier responds to growing
client needs. This often leads to duplication of entries, which in turn causes inconsistencies. Then
again, there could be instances of resources being deployed to fulfill needs that don’t match any
line item on the rate-card, and who subsequently are billed per rates agreed with a specific IT
manager, but not entered back into the rate-card. As a result, after some years into the contract
the client will likely find that the rate-card is too long, too inconsistent and too complex to support
an error-free billing process.
Now imagine the same thing happening across multiple suppliers, each with their own
nomenclature for roles and skills and levels of expertise. Meanwhile, the supply side of the market
is continuously evolving. New suppliers, new services, new technologies, new labor pools,
changing foreign exchange rates, etc. open new opportunities for clients to negotiate more
favorable pricing. Skills that were once considered “hot”, for which clients paid a premium,
become mainstream in a few years.

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And so when it is time for contract renewal and clients prepare to renegotiate with their suppliers,
the rate-card is the first item on their list. Mature clients prepare well in advance for such
renegotiations.
While preparations may include various steps, the two most important ones are:
(1) Rationalizing and normalizing the role taxonomy, to help remove duplication
and inconsistencies and thereby simplify, restructure and standardize the rate-card across
all suppliers of the same or similar services, and
(2) Hourly rate benchmarking, to help determine market pricing for the roles and skills
that they source from suppliers. While both steps may be conducted in parallel, it is prudent
to first get the taxonomy right so that the benchmarking can be done against a cleaner,
simpler rate-card structure.
RATE-CARD CHANGE CONTROL – ISSUES AND CHALLENGES

Role Taxonomy – Foundations
Three key dimensions underpin the foundation of a robust role taxonomy:
(a) Role groupings, based on primary functional responsibilities underlying each
role
(b) Skill categories, based on price-bands determined by the economics of the
labor market, and
(c) Skill levels, based on depth of expertise needed to perform the role. The
importance of each of these 3 dimensions is outlined below.

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Functional Groups
This is the first step of role rationalization and it is extremely critical to get this right. Every role in
the rate-card is defined by the primary functional responsibility (e.g., developer writes/ edits code,
a tester tests the code written by the developers, and so on). Some suppliers may have different
nomenclature for the same role (e.g., a developer may be called a programmer). So it is important
to understand the primary functional responsibility pertaining to various roles and then group them
accordingly. This leads to reducing the number of items in a rate-card to a more manageable level.
A practical approach to grouping roles based on primary functional responsibilities involves
leveraging the conventional Software Development Life Cycle (SDLC) and the kinds of skills
involved at each stage in the SDLC: Analysis, Design, Construction, Testing, and finally, cut-over
to Production. Straddling all these stages across the SDLC, are the Management skills needed to
bring in projects on time and within costs.

Accordingly, we may define the following Groups:
A. Analyst/ Consultant: (i) to analyze (business and/ or technical) needs and develop/ modify
business requirements or system specifications and/ or (ii) to provide consultation on the business
domain/ process/ systems/ technology topics associated with the ADMS work performed by other
resources.
B. Architect/ Designer: to design technical architecture and/ or user interfaces, user experience, etc.
that forms the basis for technical work (such as coding). May include secondary responsibilities such
as providing technical consultation/ advice/ guidance to other ADMS resources such as developers,
testers, etc.
C. Developer: to create and/ or edit code (applications software programs) based on requirement
specifications.
D. Tester: to test code submitted by Developers for testing as per agreed testing strategy.
E. Administrator: to perform system/ database admin and/ or user support services.
F. Manager: to ensure successful completion of work products by the team of resources assigned to
them to deliver an ADMS project/ service. May include secondary responsibility of performing some
part of the ADMS work (typically the most complex/ critical pieces).
FUNCTIONAL GROUPS

This is the last step in rationalization of the role taxonomy. For each combination of role and skill
category, the depth of expertise required to perform the role may vary. Since depth of expertise is
difficult to objectively define (and agree, while negotiating prices) a good proxy that comes in handy
from a pragmatic viewpoint, is the number of years of experience of the resource. Thus, one may
differentiate by junior, senior or expert level depending on the number of years of experience. As may
be obvious, the more senior the skill level, the more the hourly billing rate. Which is why it is
important to review resource requisitions that specify a high skill level (to check if a slightly lower
level of skill would suffice).
Skill Levels

SKILL LEVELS
Fig. 2 tabulates the combination of the three dimensions – Functional Groups, Skill
Categories and Skill Levels – that defines the “space” in which the rate-card may
be structured. It may be noted that based on the supply location, prices are likely to
vary. Therefore, every location will require one instance of this table, in which each
cell will contain the price for that role quoted by a supplier.

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Role rationalization and normalization in itself is an exercise that can yield substantial benefits in
rate reduction, in situations where there are limitations on time and budget that preclude
investment in benchmarking. It leads to a simplified and easy-to-implement rate-card and can
also identify potential savings by consolidating similar roles (quite often – the same role
described using different words) that were previously at different price points in the old rate-card.
Our experiences with various clients show that role rationalization and normalization alone could
unlock anywhere from 5% to 10% savings. These savings may be obtained purely by
consolidating a wide spread of different-sounding roles, all of which are associated with the
same primary functional responsibility. Adding benchmarking to that could increase the savings
potential up to anywhere between 12% and 15%. These are proven numbers and our track
record stands testimony to having helped clients save several millions of dollars on their annual
ADMS T&M spends.
Summary & Conclusion

Neo Group Can Help
The global sourcing landscape is constantly evolving. For a deeper discussion on planning and executing
a successful globalization strategy, contact one of our lead advisors.
Atul Vashistha Brad Pickar Hemant Puthli
CEO & Founder Partner & SVP Partner & SVP
Atul@NeoGroup.com Brad@NeoGroup.com Hemant@NeoGroup.com
Kevin English Pankaj Sharma Vikram Naaidu
Partner & SVP Partner & SVP Partner & SVP
Kevin@NeoGroup.com Pankaj@NeoGroup.com Vikram@NeoGroup.com
About the Author
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Hemant Puthli is a Partner and Senior Vice President at Neo Group, where he is responsible for assisting
clients in the development of their outsourcing strategies and governance models. Hemant brings over 25
years of experience in Management Consulting and IT Services, having served several clients in North
America and India
.

About Neo Group
Founded in 1999, Neo Group helps organizations meet business objectives and address business
challenges by leveraging global services and sourcing. To learn more about Neo Group, please visit
www.NeoGroup.com.
About Supply WisdomSM
Supply WisdomSM is a unique cloud-based service that provides data and intelligence for sourcing risk
and opportunity monitoring of global countries, cities and suppliers. To learn more about Supply
WisdomSM, please visit www.SupplyWisdom.com.
No part of this report may be reprinted/reproduced without prior permission from Neo Group.
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