3 Pricing Questions Everyone is AskingWebinar DeckMarch 20, 2013
Introductions Sarthak Brahma Vice President, P...
Buyers and providers are struggling to understand theimplications of recent trends on their contracted pricing3 common que...
Buyers and providers have their own opinions… ….lets unearth the reality together P...
Q.1 What is the impact of forex fluctuations on pricing? ...
Q.1 What is the impact of forex fluctuations on pricing?  A large portion of my ...
Q.1 What is the impact of forex fluctuations on pricing? Just like you guys have an understanding f...
Q.2 Recent pricing trends for outsourcing services: Have providers started a price war?? ...
Q.2 Recent pricing trends for outsourcing services: Have providers started a price war??  Yes, ...
Q.2 Recent pricing trends for outsourcing services: Have providers started a price war??  The hy...
Q.3 Should I adopt transaction-based pricing like my peers? ...
Q.3 Should I adopt transaction-based pricing like my peers? ...
Q.3 Should I adopt transaction-based pricing like my peers?Variabilized FTE pricing model: An alternative to TBPVariati...
Key messages in today’s webinar  Similar to COLA, forex fluctuations can be partly hedged/sharedImp...
Q&ATo ask a question during the Q&A session Click the question mark (Q&A) button located on right side of your screen –...
Everest GroupLeading clients from insight to actionEverest Group locations ...
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Webinar Deck: 3 Pricing Questions Everyone is Asking

The outsourcing industry has witnessed a multitude of changes over the last 12 months that seem to have altered the pricing dynamics radically. These include the Indian Rupee losing 15 percent of its value, sustained buyer pressure for spend reduction, aggressive adoption of non-FTE based pricing models, lowering margins for Indian providers, improved margins for global providers, among others. As a result, key stakeholders in buyer and service provider organizations are pondering the validity of these questions: Have prices also reduced by 15 percent? Have Indian providers started a price war? Should I adopt transaction-based pricing like my peers? Everest Group hosted a one-hour webinar which discussed: Impact of forex fluctuations on pricing, recent pricing trends for both IT and BPO services, and adoption of transaction-based pricing and pitfalls to avoid
Published on: Mar 4, 2016
Source: www.slideshare.net


Transcripts - Webinar Deck: 3 Pricing Questions Everyone is Asking

  • 1. 3 Pricing Questions Everyone is AskingWebinar DeckMarch 20, 2013
  • 2. Introductions Sarthak Brahma Vice President, Pricing Assurance sarthak.brahma@everestgrp.com Rahul Gehani Practice Director, Pricing Assurance rahul.gehani@everestgrp.com Anuj Sukhlecha Senior Analyst, Pricing Assurance anuj.sukhlecha@everestgrp.com Proprietary & Confidential. © 2013, Everest Global, Inc. 2
  • 3. Buyers and providers are struggling to understand theimplications of recent trends on their contracted pricing3 common questions in the minds of both buyersand 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. 3
  • 4. Buyers and providers have their own opinions… ….lets unearth the reality together Proprietary & Confidential. © 2013, Everest Global, Inc. 4
  • 5. Q.1 What is the impact of forex fluctuations on pricing? USD to INR conversion rate Yearly average 55 12% depreciation 50 45  Mr. Provider, you deliver 40 majority of your services 2009 2010 2011 2012 offshore (India) EUR to INR conversion rate Yearly average  The recent depreciation of the Indian Rupee must have 70 5% depreciation increased your margin. How 65 Buyers can I benefit from this 60 depreciation? 55 2009 2010 2011 2012  You need to reduce your billing rates! GBP to INR conversion rate Yearly average 90 11% depreciation 80 70 60Source: Oanda.com, Everest Group analysis 2009 2010 2011 2012 Proprietary & Confidential. © 2013, Everest Global, Inc. 5
  • 6. Q.1 What is the impact of forex fluctuations on pricing?  A large portion of my Examples of hedging by Tier 1 service providers revenue is hedged for forex “We hedge 40% of our inflow for the next one fluctuations. So margin year” - Tier 1 Provider benefits from forex are of “Every 1% movement in INR against US$ has much lower magnitude than an impact of ~50 basis points on the you think operating margin” - Tier 1 Provider  In addition, I don’t come to INR appreciation during 2009-2010 Yearly average conversion rates (Indexed) you when forex moves the other way 115 105 6% (USD:INR) Service 12% (EUR:INR) Providers 95 85 8% (GBP:INR) 2008 2009 2010  And you are forgetting that CPI inflation in India my costs are going up due to 12.0% 8.9% 9.4% high inflation in India 2010 2011 2012Source: Published financial reports, Oanda.com, Worldbank, Everest Group analysis Proprietary & Confidential. © 2013, Everest Global, Inc. 6
  • 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 Advisor 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 expertiseSource: Everest Group analysis Proprietary & Confidential. © 2013, Everest Global, Inc. 7
  • 8. Q.2 Recent pricing trends for outsourcing services: Have providers started a price war?? Buyer’s offshore rate card (Original)  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 -4% -5% Buyers  Plus, I keep hearing that Buyer’s offshore rate card (Revised) India-based providers have become very aggressive on pricing  Its time for you to follow suit..Source: Everest Group analysis Proprietary & Confidential. © 2013, Everest Global, Inc. 8
  • 9. Q.2 Recent pricing trends for outsourcing services: Have providers started a price war??  Yes, some of my peers with Realized pricing per FTE for three Tier-1 Indian providers US$/hr/FTE high margin have become more flexible in pricing  However approach to pricing 43 is different for each provider 42 Provider X 41  Some low margin Indian Provider Y 40 players sustained pricing 39 38  A few that focus on package 37 implementation / consulting 36 Provider Z Service Providers sustained/improved pricing 35  Also, our delivery model is 34 different, e.g., offshore 33 leverage, staffing pyramids, 32 productivity improvements.. Q111 Q211 Q311 Q411 Q112 Q212 Q312 Q412  There is a benchmarking clause in our contract if you want a third party opinionSource: Published financial reports, Everest Group analysis Proprietary & Confidential. © 2013, Everest Global, Inc. 9
  • 10. Q.2 Recent pricing trends for outsourcing services: Have providers started a price war??  The hypothesis of price cuts across providers is incorrect Trend in blended FTE price at offshore (India) for ADM services Indexed (Base = Q4 2011)  While rate cards have largely remained stable in the past year, 110 contracted pricing in existing deals swung either ways 100 – In some deals, prices increased per contracted COLA clauses 90 – Pricing in deals wherein Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 benchmarking was long Trend in blended FTE price at onsite (U.S.) Advisor overdue were mostly for ADM services negotiated downwards Indexed (Base = Q4 2011) 110  While custom benchmarking helps pave the path for fair price movements, as a buyer you 100 should think beyond rate cards about lowering your sourcing spend i.e. rationalizing portfolio, 90 improving delivery, gainshare etc. Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012Source: Everest Group analysis Proprietary & Confidential. © 2013, Everest Global, Inc. 10
  • 11. Q.3 Should I adopt transaction-based pricing like my peers? FAO deals with transaction-based pricing  I also have a large portfolio Percentage of total contracts of outsourced FAO services  A number of my peers have 40% shifted to transaction-based pricing (TBP) and I read that its adoption is increasing 25%  How about you shifting me to 19% Buyers a TBP model so I pay only for what I use  Also, what are the challenges in adopting TBP? Are there any best practices 2004-06 2007-09 2010-12 you can share?Source: Everest Group analysis Proprietary & Confidential. © 2013, Everest Global, Inc. 11
  • 12. Q.3 Should I adopt transaction-based pricing like my peers? Complexity Volume Uncertainty  TBP might appear to be the next level of  Requires strong due  Requires predicting volumes sophistication or diligence by buyer with reasonable accuracy  Benchmark data is not  Requires high volumes to maturity, but there are readily comparable derive scale benefits several pitfalls in Challenges shifting to it Process Scope Organizational Change  The 4 key challenges,  Provider requires in-depth  Fluctuating billing makes and recommended best understanding of processes financial forecasting difficult practices in TBP to price transactions  Requires more checks from Advisor implementation are.. effectively buyer’s finance department  The key motivation for Best Practices adopting TBP is tying  Transactions should be defined clearly and in detail the spend to business  Price transactions at granular level e.g. in invoice processing, volumes which is – Transaction type: Automated / electronic / manual typically not achieved in – Invoice type: With PO / without PO FTE-based pricing – 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 environmentSource: Everest Group analysis Proprietary & Confidential. © 2013, Everest Global, Inc. 12
  • 13. Q.3 Should I adopt transaction-based pricing like my peers?Variabilized FTE pricing model: An alternative to TBPVariation in transaction volumeTransaction volume  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 Time volumes and FTEs, the resourceCorresponding variation in FTE count productivity levels also fluctuate significantly 1. FTE count 3. For peak transaction volumes, FTE changes in line productivity should be higher i.e.,  Variabilized FTE pricing model is an with transaction change in transaction volume should be intermediate stage between pure FTE- volumes met with lesser change in FTE count pricing and transaction-based pricing ARC  This is an alternate solution forFTE volume environment that is not stable from a Upper limit Baseline scope/volume fluctuation perspective, to Lower limit support successful TBP RRC Time 2. No change in FTE count for variation 4. Differential pricing (ARC/RRC) within a defined range for variation outside defined band Proprietary & Confidential. © 2013, Everest Global, Inc. 13
  • 14. Key messages in today’s webinar  Similar to COLA, forex fluctuations can be partly hedged/sharedImpact of Forex on  Contracts should include clauses to formalize the impact of forexPricing  Overall, rate cards have largely remained stable in the past yearRecent Pricing  However, contracted pricing in existing deals has swung eitherTrends waysTransaction-based  TBP is not always the obvious progression from FTE-based modelPricing  Even in FTE model, business volumes can be linked to spend Proprietary & Confidential. © 2013, Everest Global, Inc. 14
  • 15. Q&ATo 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, rahul.gehani@everestgrp.com – Or visit http://research.everestgrp.com/ProductCategory/EV_RES_PRICEPOINTStay connectedWebsites Twitter Blogswww.everestgrp.com @EverestGroup www.sherpasinblueshirts.comresearch.everestgrp.com @Everest_Cloud www.gainingaltitudeinthecloud.com Proprietary & Confidential. © 2013, Everest Global, Inc. 15
  • 16. Everest GroupLeading clients from insight to actionEverest Group locations Dallas (Headquarters): info@everestgrp.com +1-214-451-3000 New York: info@everestgrp.com +1-646-805-4000 Toronto: canada@everestgrp.com +1-416-865-2033 London: unitedkingdom@everestgrp.com +44-207-129-1318 Delhi: india@everestgrp.com +91-124-496-1000 www.everestgrp.com | research.everestgrp.com | www.sherpasinblueshirts.com Proprietary & Confidential. © 2013, Everest Global, Inc. 16

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