iGate has begun a high decibel and provocative media campaign in North America. The ads have banner lines that say: 'Mega Corporations' No. 1 enemy exposed' or 'Billions swindled from large enterprises'. They go on to identify the villain as the time & material business model, and then push companies to switch to the business outcomes model.
The California-based IT company, which does most of its delivery out of India, will spend $4 million on this marketing campaign.
In the crowded IT services market, iGate may be building a good differentiator for itself. Not that others don't have outcomes-based contracts, but iGate has been an early adopter of the model and, compared to others, it perhaps has the highest proportion of revenues coming from this model (we say `perhaps' because nobody other than iGate yet breaks up their revenues from the outcomes based model). Its campaign could also persuade other vendors to move faster on this new model.
Traditionally, IT has used what is called the time & material model and the fixed price model. But in neither of these two models does the IT vendor take any responsibility for the value that the application it has developed would provide to the customer. IT is meant to simplify a company's operations, enhance revenue and/or reduce costs.
But one application by itself need not guarantee any of these objectives. It's also possible that a new application would add complexity because it does not work very well with other applications or the existing processes in the company.
The outcomes-based model addresses such issues, because the vendor takes responsibility for the outcomes. Customers pay only when the agreed outcomes are achieved. In the current economic climate where clients are demanding a return on every dollar spent, the attractiveness of the model is obvious.
And every IT vendor admits the model is becoming important. "Customers are increasingly looking to engage with a service provider who can demonstrate value and risk management," says R Chandrasekaran, group chief executive for technology and operations in Cognizant.
Phaneesh Murthy, CEO of iGate, notes that the IT industry has been quoting in dollars per hour for the last two decades, and adds, "I have been saying in the past few years that the IT industry lacks innovation and that there is a need for a better partnership model between customers and vendors."
Krishnan Chatterjee, VP & head of strategic marketing in HCL Technologies, says customers are under tremendous budget pressures and are looking for strategic IT partners who can help them realize incremental return from their IT spends. "This is leading to a rise in the adoption of the outcomes-based pricing model," he says.
But moving to an outcomes-based model is not easy. Often it is difficult to define outcomes, especially if the IT application that is implemented does not directly touch a revenue-earning function in the company.
"IT companies have to build some tracking mechanism to define outcomes based on quantifiable metrics. They have to learn to price contracts on the incremental risk value," says Sanjay Dhawan, leader-technology practice at consultancy firm PricewaterhouseCoopers India.
Even if you can define outcomes, it may be problematic for the vendor to accomplish those outcomes unless the customer is willing to cede control. As a report by outsourcing consulting firm Everest says, the implementation team "needs to have control over the business process and the underlying stack, including platforms, management, and reporting tools, and quite simply...the way you do business".
Notwithstanding these difficulties, several IT vendors have developed platforms and models that enable outcomes-based projects. Infosys is using its new mobile commerce platform called WalletEdge to deliver Bharti's Airtel Money service. Infosys makes money depending on the number of transactions on Airtel Money. Infosys's TalentEdge, a cloud-based talent management platform that simplifies HR processes and deepens employee engagement, is also modeled around the outcomes-based model.
HCL's engagement with the Boeing 787 Dreamliner project was based on a risk-reward sharing model with the aircraft manufacturer. HCL provides hardware, software and validation services for Boeing under this programme.
About 10% of iGate's overall business comes from the outcomes-based model. "Our goal is to take this to 30% by 2017," says Hemant Bhardwaj, senior VP for marketing in iGate. That could be an indication of where the industry would be moving to.
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