costing and pricing in it industry

8/7/2019 Costing and Pricing in IT Industry

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Indian IT IndustryIndian IT Industry

Costing, Pricing & Cost ManagementCosting, Pricing & Cost Management1010thth Sept 2006Sept 2006

By Sushil SharmaBy Sushil Sharma

[email protected]@gmail.com


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AgendaAgenda

VendorsVendors broad categoriesbroad categories

IT Services: range of activitiesIT Services: range of activities

CostingCosting

-- Sizing and EstimationSizing and Estimation-- Project level CostingProject level Costing

-- Firm level costingFirm level costing

PricingPricing

-- IT Outsourcing metricsIT Outsourcing metrics-- IT/ITeS services pricingIT/ITeS services pricing

-- IT software pricingIT software pricing

Cost ManagementCost Management


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IT Vendors: Broad CategoryIT Vendors: Broad Category

Indian IT services providers (Satyam, Sasken)Indian IT services providers (Satyam, Sasken)

Foreign IT services providers (IBM, EDS)Foreign IT services providers (IBM, EDS)

IT software providers (iIT software providers (i--flex, Subex, Four soft)flex, Subex, Four soft)

ITeS providers (Genpact, WNS, Allsec)ITeS providers (Genpact, WNS, Allsec)

Captives (Intel India, Cisco India, Daksh)Captives (Intel India, Cisco India, Daksh)

Internal IT departmentsInternal IT departments


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IT services: TasksIT services: Tasks

Customs ApplicationsCustoms Applications

Application Decommissioning, Development, Migration &Application Decommissioning, Development, Migration &

Modernization, Portfolio Optimization, ReModernization, Portfolio Optimization, Re--engineering &engineering &Integration, Support & Maintenance, Testing, Legacy Services,Integration, Support & Maintenance, Testing, Legacy Services,Enterprise Content ManagementEnterprise Content Management

Package ImplementationPackage Implementation

Business consulting, Package impl, rollout & upgrade,Business consulting, Package impl, rollout & upgrade,

enhancement, testing, etcenhancement, testing, etc


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IT services: TasksIT services: Tasks (contd)(contd)

R&D, Outsourced product developmentR&D, Outsourced product development

EDS, Comp aided Engg (FEA, CFD etc), testing & validation,EDS, Comp aided Engg (FEA, CFD etc), testing & validation,benchmarking, support, CADM, etcbenchmarking, support, CADM, etc

IT Infrastructure ManagementIT Infrastructure ManagementHelp desk, Desktop appl support, centralized mgmt. DatacentreHelp desk, Desktop appl support, centralized mgmt. Datacentreservers, DB, storage, infra appln. Network services andservers, DB, storage, infra appln. Network services andmanagement security servicesmanagement security services

BPOBPORule based calls (billing inquiry, credit checks, tele mkting ),Rule based calls (billing inquiry, credit checks, tele mkting ),Collection srvcs (skip tracing, early/late stage etc), S&M, F&A,Collection srvcs (skip tracing, early/late stage etc), S&M, F&A,Analytics, etc.Analytics, etc.


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Project: Cost DriversProject: Cost Drivers

Deliverable attributeDeliverable attribute-- Required software reliabilityRequired software reliability

-- Database sizeDatabase size

-- Product complexityProduct complexity

Dev Environment attributeDev Environment attribute-- Execution time constraintExecution time constraint

-- Platform turnaround timePlatform turnaround time

Personal attributePersonal attribute-- Analyst/Coder capabilityAnalyst/Coder capability

-- Analyst/Coder experienceAnalyst/Coder experience


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Project: Cost DriversProject: Cost Drivers (contd..)(contd..)

Process Capability AttributesProcess Capability Attributes-- Use of modern programming practicesUse of modern programming practices

-- Use of software toolsUse of software tools

Cost Driver MultiplierCost Driver Multiplier-- DocumentationDocumentation

-- OnsiteOnsite

Factor for Economies of ScaleFactor for Economies of Scale-- PrecedentednessPrecedentedness

-- Development flexibilityDevelopment flexibility

-- Process maturityProcess maturity


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Project: EstimationProject: Estimation

Sizing and EstimationSizing and Estimation metricsmetrics-- Kilo LOCKilo LOC

-- Function PointsFunction Points

-- Number of ObjectsNumber of Objects

-- Use cases (UML)Use cases (UML)

Sizing & estimationSizing & estimation methodmethod

HeuristicsHeuristics Wideband DelphiWideband Delphi


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Project: EstimationProject: Estimation (contd)(contd)

Cost of QualityCost of Quality-- reviewreview

-- inspectioninspection

-- postpost--mortemmortem

-- coding standards & checklistcoding standards & checklist

Cost of Poor QualityCost of Poor Quality

-- rework,rework,-- delay,delay,


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IT projects: Service LevelsIT projects: Service Levels

Specific to the projectSpecific to the project

Should be well defined and measurableShould be well defined and measurable

Used more in IMS, BPO and some support projectsUsed more in IMS, BPO and some support projects

Examples could beExamples could be

Service request closure speedService request closure speed

InfrastructureInfrastructure Server uptime etcServer uptime etcNo: of calls/transaction per unit timeNo: of calls/transaction per unit time


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Project: Costing ToolsProject: Costing Tools

Gantt ChartGantt ChartOld workhorse, more of a scheduling than costing modelOld workhorse, more of a scheduling than costing model

COCOMOCOCOMOA regression based model used to predict effort and duration of dev projectA regression based model used to predict effort and duration of dev project

SLIMSLIMConstraint model based on assumption that effort for dev project isConstraint model based on assumption that effort for dev project isdistributed similarly to a collection of Rayleigh Curvesdistributed similarly to a collection of Rayleigh Curves

Tools should be used to augment rather than replace estimation process!!Tools should be used to augment rather than replace estimation process!!


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Project: Final CostProject: Final Cost

No: ofAnalyst/Coder x Salary (onsite/offshore)No: ofAnalyst/Coder x Salary (onsite/offshore)

Software & Equipment costSoftware & Equipment cost

Project specific training cost (if any)Project specific training cost (if any)

Team building costTeam building cost

Travel costTravel cost

Facility running cost on proportionate basisFacility running cost on proportionate basis


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Costing: Vertical wiseCosting: Vertical wise

Sum of all Projects Cost + Accnt management costSum of all Projects Cost + Accnt management cost

Proportionate allocationProportionate allocation of shared services cost likeof shared services cost like

-- Vertical specific trainingVertical specific training

-- Finance and payroll servicesFinance and payroll services

-- Rent, electricity and other facility cost, etcRent, electricity and other facility cost, etc


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Costing: Firm levelCosting: Firm level

Firm as a aggregate of projects/VerticalsFirm as a aggregate of projects/Verticals

Business development costBusiness development cost

General & Administrative costGeneral & Administrative cost

HR, recruitment, training and other costs.HR, recruitment, training and other costs.

Should pricing reflect S&M cost, training cost, acquisitionShould pricing reflect S&M cost, training cost, acquisition

cost (margins), internal IP development cost, etc??cost (margins), internal IP development cost, etc??


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Pricing: CaveatsPricing: Caveats

MSA is a statement of intent only, not guaranteeMSA is a statement of intent only, not guarantee

Engagement may have more than pricing modelEngagement may have more than pricing model

Pricing model may change during the engagementPricing model may change during the engagement Performance based models can be tagged with anyPerformance based models can be tagged with any

other modelother model

Name of model differs from firm to firmName of model differs from firm to firm

-- IT firms gives revenue split in terms of T&M and FP onlyIT firms gives revenue split in terms of T&M and FP only


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Internal IT Dept: Funding ModelInternal IT Dept: Funding Model

Subsidy based modelSubsidy based model -- fixed IT budget granted every yearfixed IT budget granted every year

Cost based modelCost based model -- charge back on actual costcharge back on actual cost

SelfSelf--funding modelfunding model -- service provided billed at mktservice provided billed at mktraterate

Why most of IT vendors engagement is at CIO level ratherWhy most of IT vendors engagement is at CIO level ratherthan CEO/business head level??than CEO/business head level??


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IT Outsourcing MetricsIT Outsourcing Metrics

Total cost of ownershipTotal cost of ownership

IT Returns on AssetIT Returns on Asset

IT spend as % of revenueIT spend as % of revenueIT Employee to Total employee ratioIT Employee to Total employee ratio

IT Employee to IT contractors ratioIT Employee to IT contractors ratio

IT operating expense per userIT operating expense per user

How much cost saving is expected by outsourcing/offHow much cost saving is expected by outsourcing/offshoring??shoring??


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Pricing: IT/ITeS ServicesPricing: IT/ITeS Services

Time & MaterialTime & Material-- Charged for Labor + Eqpt cost based on meeting/providing:Charged for Labor + Eqpt cost based on meeting/providing:

-- DeliverablesDeliverables

-- Milestones, schedules, and/orMilestones, schedules, and/or

-- Service levels.Service levels.

-- Charged for salary + eqpt + travel + team building + trainingCharged for salary + eqpt + travel + team building + training

Fixed PriceFixed Price

-- FP at completion with penalties/incentives for schedule &FP at completion with penalties/incentives for schedule &qualityquality

-- Usually used for short duration projects with stable reqs andUsually used for short duration projects with stable reqs andmeasurable SL metrics.measurable SL metrics.

-- Buyers gets cost control and predictable pricesBuyers gets cost control and predictable prices


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Pricing: IT/ITeS servicesPricing: IT/ITeS services (contd)(contd)

Cost plus modelCost plus model-- Actual cost + preActual cost + pre--negotiated profit marginnegotiated profit margin

-- No incentive to improve for vendor, so incentive clauses areNo incentive to improve for vendor, so incentive clauses are

insertedinserted-- Buyer uses when reqs are volatile, needs to develop trueBuyer uses when reqs are volatile, needs to develop true

costcost

Open book modelOpen book model

-- Same as cost plus model with added clause of fullSame as cost plus model with added clause of fullfinancial disclosurefinancial disclosure


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Unit based/Usage basedUnit based/Usage based-- Paid per service unit or service transactionPaid per service unit or service transaction

-- Factors fluctuations with pre negotiated inc/dec in price ifFactors fluctuations with pre negotiated inc/dec in price if

service goes above/below specified bandservice goes above/below specified band-- Mostly used in IMS and BPOMostly used in IMS and BPO

Incentive basedIncentive based

-- Base fee + bonus based on goals like reduced cost,Base fee + bonus based on goals like reduced cost,early completionearly completion

-- Sometimes T&M/FP model has incentive clauseSometimes T&M/FP model has incentive clause


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Shared risk/reward basedShared risk/reward based-- Upfront cost and downstream revenues generated is sharedUpfront cost and downstream revenues generated is shared

-- Good governance structure is preGood governance structure is pre--requisiterequisite-- Reduces risk for buyer but increases for vendorReduces risk for buyer but increases for vendor

Value/gain sharing basedValue/gain sharing based-- Paid in proportion to business value generatedPaid in proportion to business value generated

-- Used mainly in analytics /BI related projectsUsed mainly in analytics /BI related projects


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Pricing: IT SoftwarePricing: IT Software

Proprietary SoftwareProprietary Software-- Licensing fee, implementation fee, and AMC ( iLicensing fee, implementation fee, and AMC ( i--flex, subex, 3iflex, subex, 3i

infotech)infotech)

-- Royalty ( Sasken, ittiam )Royalty ( Sasken, ittiam )

Open source softwareOpen source software-- Implementation fee and AMC ( redhat, innobase )Implementation fee and AMC ( redhat, innobase )

Software as a serviceSoftware as a service-- Usage based fee ( salesforce.com )Usage based fee ( salesforce.com )


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Price DriversPrice Drivers

IT contractor rates in local marketIT contractor rates in local market

Nature, Volume and duration of engagementNature, Volume and duration of engagement

Strategic utility of clientStrategic utility of client

Demand supply scenarioDemand supply scenario

Buyers ability to payBuyers ability to pay-- especially for softwareespecially for software


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Cost ManagementCost Management

Fresher : Lateral ratioFresher : Lateral ratio

Onsite : Offshore ratioOnsite : Offshore ratio

TierTier--1 : Tier1 : Tier--2 cities2 cities

AttritionAttrition

UtilizationUtilization

Margin mgmt =Margin mgmt =above factors + project type mix + service line mix + SGnA spendabove factors + project type mix + service line mix + SGnA spend


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Tying it togetherTying it together

Cost = func ( supply, firm operation)Cost = func ( supply, firm operation)

Pricing realized is reflection of biz strategyPricing realized is reflection of biz strategy

Biz strategy= func (supply, demand, firm capability)Biz strategy= func (supply, demand, firm capability)

Is there disconnect between costing and pricing? If yes, is itIs there disconnect between costing and pricing? If yes, is itunique to IT industry?unique to IT industry?

Is there pricing power with (loss making) firms to factor full cost?Is there pricing power with (loss making) firms to factor full cost?

Why some Indian IT firms are less profitable than others?Why some Indian IT firms are less profitable than others?

Is it problem of costing or problem of strategy & execution?Is it problem of costing or problem of strategy & execution?


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Questions??Questions??

Thanks a Lot!!!Thanks a Lot!!!

costing and pricing in it industry

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