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3 Pricing Questions Everyone is Asking Webinar Deck March 20, 2013
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3 Pricing Questions Everyone is Asking Webinar Deck
March 20, 2013
Proprietary & Confidential. © 2013, Everest Global, Inc. 2
Introductions
Rahul Gehani Practice Director, Pricing Assurance [email protected]
Sarthak Brahma Vice President, Pricing Assurance [email protected]
Anuj Sukhlecha Senior Analyst, Pricing Assurance [email protected]
Proprietary & Confidential. © 2013, Everest Global, Inc. 3
Buyers and providers are struggling to understand the implications of recent trends on their contracted pricing
3 common questions in the minds of both buyers and service providers:
The INR has depreciated greatly over the last 12-18 months. How has this impacted pricing?
There are news reports of some service providers slashing their rates. Is that a secular industry trend?
There is a lot of hype around transaction-based pricing. Should we also transition from FTE-based pricing to transaction-based pricing?
Proprietary & Confidential. © 2013, Everest Global, Inc. 4
Buyers and providers have their own opinions…
….lets unearth the reality together
Proprietary & Confidential. © 2013, Everest Global, Inc. 5
Q.1 What is the impact of forex fluctuations on pricing?
Mr. Provider, you deliver majority of your services offshore (India)
The recent depreciation of the Indian Rupee must have increased your margin. How can I benefit from this depreciation?
You need to reduce your billing rates!
40
45
50
55
2009 2010 2011 2012
USD to INR conversion rate Yearly average
12% depreciation
55
60
65
70
2009 2010 2011 2012
EUR to INR conversion rate Yearly average
5% depreciation
60
70
80
90
2009 2010 2011 2012
GBP to INR conversion rate Yearly average
11% depreciation
Source: Oanda.com, Everest Group analysis
Buyers
Proprietary & Confidential. © 2013, Everest Global, Inc. 6
Q.1 What is the impact of forex fluctuations on pricing?
Examples of hedging by Tier 1 service providers
85
95
105
115
2008 2009 2010
INR appreciation during 2009-2010 Yearly average conversion rates (Indexed)
6% (USD:INR)
CPI inflation in India
A large portion of my revenue is hedged for forex fluctuations. So margin benefits from forex are of much lower magnitude than you think
In addition, I don’t come to you when forex moves the other way
12% (EUR:INR)
8% (GBP:INR)
And you are forgetting that my costs are going up due to high inflation in India
12.0% 8.9% 9.4%
2010 2011 2012
Source: Published financial reports, Oanda.com, Worldbank, Everest Group analysis
“We hedge 40% of our inflow for the next one year” - Tier 1 Provider
“Every 1% movement in INR against US$ has an impact of ~50 basis points on the operating margin” - Tier 1 Provider
Service Providers
Proprietary & Confidential. © 2013, Everest Global, Inc. 7
Q.1 What is the impact of forex fluctuations on pricing?
Just like you guys have an understanding for managing impact of inflation (through COLA clause), you should have one for forex fluctuations
1. Absorption band approach: Service provider bears the risk of forex movement within a defined band of +/-3-5% variation from
contracted exchange rate Impact of forex movement outside the band is shared with the buyer
2. Cap & Collar approach: Forex movement till a “collar” of 2-3% is absorbed by the provider; buyer bears the impact of forex
movement beyond the “collar ” till a “cap” of 5-6%
3. Pass-through approach: Buyer bears entire risk of forex movement This approach can be deployed by large buyers with in-house currency hedging and risk
management expertise
Source: Everest Group analysis
Advisor
Proprietary & Confidential. © 2013, Everest Global, Inc. 8
Q.2 Recent pricing trends for outsourcing services: Have providers started a price war??
I have 11 vendors in my outsourced IT portfolio, and majority of them provide similar services from similar locations
A couple of them offered me a price cut on offshore rates
Plus, I keep hearing that India-based providers have become very aggressive on pricing
Its time for you to follow suit..
Buyer’s offshore rate card (Original)
Buyer’s offshore rate card (Revised)
-4% -5%
Source: Everest Group analysis
Buyers
Proprietary & Confidential. © 2013, Everest Global, Inc. 9
Q.2 Recent pricing trends for outsourcing services: Have providers started a price war??
Yes, some of my peers with high margin have become more flexible in pricing
However approach to pricing is different for each provider
Some low margin Indian players sustained pricing
A few that focus on package implementation / consulting sustained/improved pricing
Also, our delivery model is different, e.g., offshore leverage, staffing pyramids, productivity improvements..
There is a benchmarking clause in our contract if you want a third party opinion
32
33
34
35
36
37
38
39
40
41
42
43
Q1'11 Q2'11 Q3'11 Q4'11 Q1'12 Q2'12 Q3'12 Q4'12
Realized pricing per FTE for three Tier-1 Indian providers US$/hr/FTE
Provider X
Provider Y
Provider Z
Source: Published financial reports, Everest Group analysis
Service Providers
Proprietary & Confidential. © 2013, Everest Global, Inc. 10
Q.2 Recent pricing trends for outsourcing services: Have providers started a price war??
The hypothesis of price cuts across providers is incorrect
While rate cards have largely remained stable in the past year, contracted pricing in existing deals swung either ways – In some deals, prices
increased per contracted COLA clauses
– Pricing in deals wherein benchmarking was long overdue were mostly negotiated downwards
While custom benchmarking
helps pave the path for fair price movements, as a buyer you should think beyond rate cards about lowering your sourcing spend i.e. rationalizing portfolio, improving delivery, gainshare etc.
90
100
110
Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012
Trend in blended FTE price at offshore (India) for ADM services Indexed (Base = Q4 2011)
90
100
110
Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012
Trend in blended FTE price at onsite (U.S.) for ADM services Indexed (Base = Q4 2011)
Advisor
Source: Everest Group analysis
Proprietary & Confidential. © 2013, Everest Global, Inc. 11
Q.3 Should I adopt transaction-based pricing like my peers?
I also have a large portfolio of outsourced FAO services
A number of my peers have shifted to transaction-based pricing (TBP) and I read that its adoption is increasing
How about you shifting me to a TBP model so I pay only for what I use
Also, what are the challenges in adopting TBP? Are there any best practices you can share?
Source: Everest Group analysis
19%
25%
40%
2004-06 2007-09 2010-12
FAO deals with transaction-based pricing Percentage of total contracts
Buyers
Proprietary & Confidential. © 2013, Everest Global, Inc. 12
Q.3 Should I adopt transaction-based pricing like my peers?
Source: Everest Group analysis
TBP might appear to be the next level of sophistication or maturity, but there are several pitfalls in shifting to it
The 4 key challenges, and recommended best practices in TBP implementation are..
The key motivation for adopting TBP is tying the spend to business volumes which is typically not achieved in FTE-based pricing
Advisor
Complexity Requires strong due
diligence by buyer Benchmark data is not
readily comparable
Volume Uncertainty Requires predicting volumes
with reasonable accuracy Requires high volumes to
derive scale benefits
Process Scope Provider requires in-depth
understanding of processes to price transactions effectively
Organizational Change Fluctuating billing makes
financial forecasting difficult Requires more checks from
buyer’s finance department
Challenges
Best Practices
Transactions should be defined clearly and in detail Price transactions at granular level e.g. in invoice processing,
– Transaction type: Automated / electronic / manual – Invoice type: With PO / without PO – Complexity: With VAT coding / without VAT coding
Leverage collaborative volume forecasting for higher accuracy Avoid survey-based benchmarks for pricing and productivity.
These metrics are dependent on outsourced environment
Proprietary & Confidential. © 2013, Everest Global, Inc. 13
Q.3 Should I adopt transaction-based pricing like my peers?
In FTE-based pricing situations, it is common to see headcount remaining more or less independent of fluctuating business volumes
Further, due to the disconnect between volumes and FTEs, the resource productivity levels also fluctuate significantly
Variabilized FTE pricing model is an intermediate stage between pure FTE-pricing and transaction-based pricing
This is an alternate solution for environment that is not stable from a scope/volume fluctuation perspective, to support successful TBP
Variabilized FTE pricing model: An alternative to TBP
Upper limit
Lower limit Baseline
Tran
sact
ion
volu
me
FTE
vol
ume
Time
Time
3. For peak transaction volumes, FTE productivity should be higher i.e., change in transaction volume should be met with lesser change in FTE count
Variation in transaction volume
Corresponding variation in FTE count
2. No change in FTE count for variation within a defined range
ARC
RRC
4. Differential pricing (ARC/RRC) for variation outside defined band
1. FTE count changes in line with transaction volumes
Proprietary & Confidential. © 2013, Everest Global, Inc. 14
Similar to COLA, forex fluctuations can be partly hedged/shared Contracts should include clauses to formalize the impact of forex Impact of Forex on
Pricing
Overall, rate cards have largely remained stable in the past year However, contracted pricing in existing deals has swung either
ways
Recent Pricing Trends
TBP is not always the obvious progression from FTE-based model Even in FTE model, business volumes can be linked to spend
Transaction-based Pricing
Key messages in today’s webinar
Proprietary & Confidential. © 2013, Everest Global, Inc. 15
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: – Rahul Gehani, [email protected] – Or visit http://research.everestgrp.com/ProductCategory/EV_RES_PRICEPOINT
Q&A
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