3 reasons why it pricing should not increase final
DESCRIPTION
On March 22, 2012, Everest Group hosted a webinar, 3 Reasons Why Your IT Deal Pricing Should Not Change. The one-hour webinar covered: - Common service provider arguments for price increases - The rationale behind each argument - Whether these rationale should lead to a price hike or notTRANSCRIPT
3 Reasons Why Your IT Deal Pricing Should Not Increase
March 22, 2012
Proprietary & Confidential. © 2012, Everest Global, Inc. 2
Introductions
Rahul Gehani Practice Director, Pricing Assurance [email protected]
Ross Tisnovsky Senior Vice President [email protected]
Proprietary & Confidential. © 2012, Everest Global, Inc. 3
Outsourced Pricing dipped during 2009-10 hit by the global recession, next price movement is uncertain
Realized pricing per FTE of Tier 1 Service Provider Base Index (100) = Q4 2009 price
90
95
100
105
110
Q4'08 Q1'09 Q2'09 Q3'09 Q4'09 Q1'10 Q2'10 Q3'10 Q4'10 Q1'11 Q2'11 Q3'11 Q4'11
Source: Published financial reports, Everest Group analysis
Buyers
Service Providers
Proprietary & Confidential. © 2012, Everest Global, Inc. 4
Service providers are putting together a convincing case in favor of price increase
Service provider operating costs are on an inflationary trend, therefore prices need to increase
Price should go up on account of cost of living adjustments (COLA), specially in offshore locations
Service providers agreed to price concessions during the recessionary phase of 2009-10
With the global economy showing signs of revival, these concessions should be reversed
My costs are going up …
… while economy is improving …
… finally we have COLA clause in the
contract!
Service Providers
Proprietary & Confidential. © 2012, Everest Global, Inc. 5
Can you mount a successful defense?
?
My costs are going up …
… while economy is improving …
… finally we have COLA clause in the
contract!
Service Providers Buyers
Proprietary & Confidential. © 2012, Everest Global, Inc. 6
59-64% 8-10% 16-20% 5-6% 4-5% 100%
First rationale: costs!
Wages and cost of real estate and facilities account for 75-85% of my operating cost
Break-down of service provider pricing at offshore and onshore
Escalation of these costs over the next 12 months will increase my total operating costs by 8.3% and 1.9% in India and US, which necessitates a price increase
…hence we should discuss a price increase
My costs are going up …
Source: Everest Group analysis
Cost component
Contribution to operating cost
Expected movement (next 12 months)
Impact on operating cost
India U.S. India U.S. India U.S.
Wages 59-64% 75-79% +12% +2.5% +7.4% +1.9%
Real estate & facilities
16-20% 4-5% +5% 0% +0.9% 0.0%
+8.3% +1.9%
Offshore (India)
Salaries and benefits
Admin. Overhead
Real estate and facilities
Equipment and telecom
Other direct operating expenses
Total direct operating cost per FTE
Service Providers
Proprietary & Confidential. © 2012, Everest Global, Inc. 7
First rationale: costs!
You can increase your offshore leverage ...
Offshore leverage of Tier-1 providers
Hiring profiles of Tier-1 providers
Resource utilization of Tier-1 providers
You can increase hiring of less expensive junior resources to flatten the skill pyramid ...
You can optimize utilization levels, thereby reducing the “effective” cost per FTE
Source: Published financial reports, Everest Group analysis
… but you have many ways to
compensate for that
71.6% 73.5%
28.4% 26.5%
2009 2011
Onshore
Offshore
45% 60%
55% 40%
2008 2010
Lateral hires
Freshers
100% 90% 80% 70% 60%
2009 2010 2011
Global service provider Indian service provider
Buyers
Proprietary & Confidential. © 2012, Everest Global, Inc. 8
Second rationale: economy is improving!
We understand the impact of global economic scenario on your IT budgets…
...for instance, In 2009 and early 2010 we realized that your focus shifted from discretionary projects to tactical projects, involving operations and maintenance. Therefore we not only lowered pricing in the new deals, but also agreed to rate cuts in the existing ones..
...with the global economy showing signs of revival, you operating environment has also improved. We believe it is the right time to rollback those temporary price concessions
Economy is improving, price
should improve too
Service Providers
Proprietary & Confidential. © 2012, Everest Global, Inc. 9
40
45
50
55
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 YTD
2012
Second rationale: economy is improving!
Furthermore, majority of your services are delivered from India, and the recent depreciation of the Indian Rupee further bolsters your margins…
2010 2011 2009
US$ to INR conversion rate Quarterly average
Service providers have been able to retain profitability Operating margins for select service providers
Accenture IBM
Cognizant
Wipro
TCS
Infosys
In spite of price concessions in 2009-2010, you have been able to maintain profitability. Some of your peers have even improved profitability during these recessionary times!
Source: Published financial reports, Oanda.com
… you ain’t doing so bad to begin with
5% 10% 15% 20% 25% 30% 35%
2008 2009 2010 2011
Buyers
Proprietary & Confidential. © 2012, Everest Global, Inc. 10
Third rationale: there is a COLA clause!
10.80% 12.00%
8.90%
-0.30%
1.60% 3.20%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
2009 2010 2011
India U.S.
Our contract has clause for cost of living adjustment (i.e. COLA) of price. This price adjustment is linked to country-specific CPI inflation indices
We deploy 70-80% of our resources in India, where inflation is extremely high..
Even in US, which is typically a low inflation delivery location, inflation has now crossed 3%..
CPI inflation in India and US
Hence we need to increase prices in India as well as US to offset inflation
COLA clause in the contract!
Source: World Bank data
Service Providers
Proprietary & Confidential. © 2012, Everest Global, Inc. 11
Third rationale: there is a COLA clause!
Most service providers are increasingly leveraging cheaper Indian cities such as Kolkata and Mysore where operating costs are ~15% lower than those in Delhi NCR and Bangalore. If you start utilizing those cheaper locations, it will be a win-win situation for both of us…
Increased adoption of tier-2/3 cities as delivery locations
For most of our peers, COLA clauses have in built mechanisms such as “cap” or “cap and collar”, which brings down the price increase to 4-5% in India and ~2% in US. We should make that amendment in our contract..
You have been our partner for several years now. As a result your resources are now extremely familiar with our systems, frameworks etc. Many of our peers have clauses to share productivity gains in such situations. Lets talk that about now..
Source: Everest Group analysis
Try less expensive locations and lets
talk about clauses!
42% 65%
58% 35%
2006-2008 2009-2011
~80% of upcoming
seats in Tier-2/3 location
Tier-1
Tier-2/3
Buyers
Proprietary & Confidential. © 2012, Everest Global, Inc. 12
Increase in offshore leverage Increase in hiring of freshers Optimization of resource utilization
Factor costs
Uncertain recovery of global economy Favorable foreign exchange movement
Macro-economic factors
Leverage of low cost locations for mutual benefit Sharing of inflation risk or COLA Sharing of productivity gains
Buyer and service provider deal dynamics
Key messages in today’s webinar
Although buyers received price concessions during the recession, neither macro- nor micro-economic changes justify price increase to pre-recession levels
Proprietary & Confidential. © 2012, Everest Global, Inc. 13
Pricing of IT services is impacted by several buy-side, supply-side and macro-economic factors
Service provider-related dynamics Changing outsourcing
economics Fluidity of operational
levers and constraints Global and Indian service
provider performance
Macroeconomic trends ForEx movements Inflation
Buyer-related dynamics Fluctuating demand for
outsourcing services Evolving portfolio of
locations and providers Shifting service-mix in deals Changing nature of deals
Emerging sourcing trends Alternate fee structures Adoption of pricing models Changing arbitrage across
locations
Pricing impact?
“My service providers are demanding price increases to offset high inflation at offshore locations. Should I agree?” – Global Procurement Manager, Leading networking company “We contracted our rates with suppliers one year back. What has been the pricing trend since then?” –Sourcing Manager, Global oil and energy company “What are key operating cost and pricing trends in IT-ADM in India and USA? ” –Director, BFS Vertical, Leading Service Provider
Proprietary & Confidential. © 2012, Everest Global, Inc. 14
Everest Group’s PricePoint offering analyzes key price drivers to aid pricing related decision making
Demand-side analysis
Specific coverage of key demand parameters including trends in: – Deal size – Deal volume – Value mix – New deals vs renewals
Pricing cues
Assessment of overall industry sentiment related to pricing based on service provider briefings, as well as direct conversations with buyers and services providers
Supply-side analysis
Comprehensive analysis of service provider dynamics including: – Resource cost – Overhead cost – Hiring mix – Onshore-offshore mix – Financial performance
Key macro-economic factors
Impact of inflation and ForEx movements on operating costs in key delivery locations
Overall Pricing Trend :
Pricing Outlook :
Proprietary & Confidential. © 2012, 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: – Ross Tisnovsky, [email protected] – Rahul Gehani, [email protected] – Or visit http://research.everestgrp.com/ProductCategory/EV_RES_PRICEPOINT
Q&A
Websites www.everestgrp.com research.everestgrp.com
Twitter @EverestGroup @Everest_Cloud
Blogs www.sherpasinblueshirts.com www.gainingaltitudeinthecloud.com
Stay connected
Proprietary & Confidential. © 2012, Everest Global, Inc. 16
Related content
Complimentary Viewpoints
Price Benchmarking – Time to Take a Hike?
Benchmarking for Good
Outsourced Portfolio Rationalization
Managing Large Outsourcing Portfolios – Typical Issues and Implications of a Complex Portfolio
Upcoming Webinars
Top 10 Best Practices in Procurement Outsourcing | Register – Tuesday, April 3, 2012 | 1 p.m. CDT
Incorporating U.S. Domestic Locations into Your Global Outsourcing Delivery Strategy | Register
– Tuesday, April 17, 2012 | 12 p.m. CDT
Proprietary & Confidential. © 2012, Everest Global, Inc. 17
Everest Group Leading clients from insight to action
Everest Group locations
www.everestgrp.com | research.everestgrp.com | www.sherpasinblueshirts.com
Dallas (Headquarters): New York: Toronto: London: Delhi:
[email protected] +1-214-451-3000 [email protected] +1-646-805-4000 [email protected] +1-416-865-2033 [email protected] +44-207-887-1483 [email protected] +91-124-496-1000