So when iGate, the Nasdaq-listed IT firm led by Phaneesh Murthy, an ex-Infosys head honcho, released an advertising campaign in North America favouring a business outcome led model, it seemed yet another example of someone talking about the need to change. The important question is: Can he actually do it
The time and material model, which runs on time spent by techies on a certain project and the materials used to deliver it, is still heavily relied upon to drive revenues. However, there is no doubt in anyones mind that this model has run its course. One can still continue to milk it, but thats not going to help us get anywhere in the future. Every top IT CEO knows this, and has been talking about it. But how many of them can come up with a winning plan This is not easy, considering that the time and material model contributes nearly 2/3rd of the revenues of Indian software firms.
Clearly, time and material (T&M) has to go. Clients have been clamouring for it for some time now, but vendors have been trying to push it aside. In this model, the client has to pay only on the outcome and not on the time and employees required to finish the project. In this slow burn kind of environment, the customer wants to eliminate all risks possible and doing away with the time and material business model is one way of doing it. Outcome based model assumes significance when the client is not just thinking cost. This model encourages partnership and provides direction towards a common business goal. A long term relationship becomes necessary for this to succeed.
From an Indian IT view too this is required. For too long Indian IT services players have stymied innovation, barring one or two major firms. If India has to go up the value chain, it has to work on alternative models of business that encourage innovation. Verticals such as BFSI and healthcare are likely to see this shift first. Already, some of the clients have put the outcome based business model in place. Indian IT firms, especially the mid- tier ones, have to look to become business partners with their clients rather than see themselves as contract players.
iGate is looking to secure over 30% of its revenues from the transaction-based model over the next few years. Infosys too is seeing good traction in outcome based pricing. But this transition requires care. Both the client and the vendor should clearly define the desired outcome. One will have to understand the myriad variables that can alter the outcome and draw out the contract accordingly. Or else there is bound to be numerous disputes. It is important to factor in the variables and finalise the pricing. For this to happen, both parties should have tremendous understanding of the overall business. They should be able to assess the risk factors effectively and build a good relationship with each other to emerge as effective business partners.