Major Outcome based pricing deal by Top Indian Outsourcing Vendors till 2012

TCS started to use outcome based pricing in 2006 during which it signed some deals but the major deal it did was in 2008, when it won a project from Ministry of External Affairs to automate passports and is paid a combination of project fee and an outcome fee based on number of applications it process. In 2007, TCS signed a $1.2 billion deal with Nielsen, provider of consumer and media information services spread over 10 years and as soon as the finance and the HRO processes are centralized onto the new platforms, TCS has an option to review the deal and move to outcome-based pricing. TCS has used outcome-based pricing models in its BPO deal with Pearl Insurance in the UK and in the $250m IT infrastructure management deal with Tata Teleservices in 2005. TCS' British BPO subsidiary, Diligenta, will be taking over the IT and customer services functions of the UK business of Friends Life earlier known as Friends Provident, for 15 years and the deal is worth $2.2 billion. It is outcome-based pricing and TCS will charge per policy to the client.

In December 2008, AstraZeneca has awarded Infosys a five year, multi-million dollar global sourcing deal Infosys is delivering the services through a global shared-services model that offers fixed price for outcome-based deliverables, and flexible, unit pricing for managing changes in the base scope of the engagement. Infosys signed three-year Services agreement to manage Microsoft's Internal IT Services in April 2010 and the deal includes IT Help Desk, Desk Side Services, and IT Infrastructure and Applications Support and the engagement is delivered based on outcome based pricing model, enabling Microsoft to associate and manage IT costs directly to business variables and demand. Infosys highlighted that outcome-based model was at the core of its new strategic vision 'Infosys 3.0' and the main vehicle for the new model was the firm's 'Infosys Edge portfolio of platforms. “Each of the Infosys Edge platforms guarantees a business outcome to our clients - it either contributes to clients' revenues or it contributes to profitability by driving efficiency. This is a strong differentiator for us," the firm said. Infosys' result-oriented model provides clients with "outcome-based", "transaction-based" or "function-based" pricing and CEO Shibulal highlighted the increasing acceptance of customers for Infosys’ new engagement model based on variable pricing. The model is based on the number of transactions, events, maintenance tickets or devices.

Cognizant’s earliest projects based on outcome were with pharmaceutical company AstraZeneca. For 3M too, Cognizant used an outcome-based, managed service engagement model with productivity benefits over the long term. In its partnership with Sanofi Pasteur, there was an increase in effectiveness as measured by time. This reduced process hiccups in bringing the drug maker’s vaccines to the market. One area where PAC (a privately held research & consulting firm for the software and ICT services market) believes Cognizant has a particularly strong story is in moving towards outcome-based pricing models. In the F&A space, Cognizant is looking beyond taking out cost and hitting SLAs, to committing to targets that increase its client’s revenue and working capital, or improve compliance and control. In life sciences, the vendor is talking about moving towards being charged per study for handling clinical trials, while in the area of mortgage administration, it is looking at charging lenders for only processing the loans that are signed rather than the quotes they provide for customers. Recently Cognizant signed a deal with Royal Philips Electronics for services like consulting and application services on a global basis. As per the terms of the multiyear engagement, Cognizant will allow Philips to switch the IT organization to a platform and output-based managed services model across multiple business lines and corporate functions.

Wipro said that it has numerous clients whose billing/payments are intimately linked to the client's business. "Some of our clients, like airports, pay us based on the number of boarding passes or the baggage tags issued," said Suresh Senapaty, Wipro's chief financial officer. In December 2011, as part of the five year strategic relationship, Wipro will be supporting both systems and processes to enhance efficiency of Premier Foods’ supply chain. Wipro’s strong partnership with SAP, global SAP consultant base, end to end implementation coverage, delivery innovation, and outcome based service models and competencies in cloud based services will be leveraged for this engagement. In June 2011 Wipro won an outcome-based deal from Chaucer Syndicates, a specialist insurer at Lloyd’s, to develop an end-to-end regulatory compliance solution that would generate better analytics and improved management reporting for the client In 2009, Wipro has won a new application development and support contract with long-time client, UK insurer Friends Provident. The ‘fixed price, outcome-based’ deal runs for three years with a two-year extension option. Wipro says that if they get the full 5-years, it will be worth £40m over the period. TK Kurien, CEO, Wipro Technologies told FE: “We are seeing a great uptick in outcome-based pricing. There is a clear increase in outcome-based models among customers, who want to have their business outcome linked to the actual work done. Most of them love to go for long-term, but you are not sure of the long-term perspective. Not all of them are going for long term.”

HCL Technologies, India's fourth largest IT outsourcer, claimed that it had actually "pioneered the outcome-based pricing model in the mid-2000s". "We have many active client engagements based on outcome-based pricing models," a spokesperson for the firm said, citing its multi-million dollar contract with aircraft-maker Boeing where it works on a "risk-reward sharing model". In July 2008, HCL BPO acquired UK-based Liberata Financial with revenues of $80 million, which is to life insurance and pensions and US-based Control Point Solutions, a provider of voice, data and wireless telecom expense management services with revenues of $37 million and both the companies helped the company to increase its outcome based pricing revenues. HCL BPO is offering platform-based offering, a combination of software platforms and services such as administering payroll for a client and charging the client based on transaction or outcomes. HCL Tech, which acquired Axon, an SAP consulting company in 2008 which has significant capability in terms of outcome based pricing models. “We have worked with number of companies on business outcomes based on our outsourcing work and this is an area that we will continue to build on,” says Shami Khorana, President, HCL America. However, he added that the company will look at a combination of regular outsourcing and outcomes-based outsourcing, in the future.

HCL Technologies Limited - Revenue Analysis & Operating Metrics 2006-2011

HCL Technologies Limited - Financial Performance 2006-2011

Financial Performance:

• 2009 revenue growth was affected due to global recession and Financial crisis and YoY growth was only 17%. YoY growth picked up again in 2010 ( 24%) and 2011 (31%) 
• Reduced Operating expenses by almost half in 2009 (17% YoY) but again increased according to the revenue growth. 
• Negative YoY growth in net profit in 2008 (-11%) and 2009 (-6%) but profitability significantly increased in 2011 (35% YoY)

HCL Technologies Limited - Geography Mix 2006-2011 

Geography Analysis:

• Dependency on the US market is always high and the contribution reduced in 2011 compared 2010 but still 56% revenues come form the region. Peaked in 2010 with 62% of revenues. 
• Europe is the second largest market but the contribution fell in 2010 but again increased in 2011 and historically HCL had strong presence in Europe. 
• Rest of the world is also increasing compared to previous years and the company is looking to increase further. 

HCL Technologies Limited Vertical Revenue Mix 2006-2011

Vertical Analysis:

• Manufacturing is the core vertical but the revenue contribution has been falling. 
• Financial Services second largest vertical and growth is constant. 
• Telecom is the third largest vertical but revenues have fallen significantly since 2009.  
• Retail & CPG have fallen in 2007 and constant since. Healthcare revenues are constant in last two years. 
• Energy Utilities and public sector have seen constant growth since 2009. 

HCL Technologies Limited -Services Revenue Mix 2006-2011

Services Segment Analysis:

• Custom Application Services is the largest offering followed by Engineering R&D Services. Custom application services saw growth in 2011 and Engineering R&D services fell in 2011 compared to 2010. 
• Enterprise Application services is growing constantly in the last three years between  21-24%. 
• Infrastructure services are seeing significant growth from 15% in 2008 to 23% in 2011. 
• BPO services revenue is falling since 2006 from 13% to 6% in 2011. 

HCL Technologies Limited Contract Type 2006-2011

Time & Material contracts are the most preferred. But the Fixed price contracts are also seeing growth since 2008.

HCL Technologies Limited Onsite/Offshore Mix 2006-2011

Onsite has always been dominant contributor for HCL Tech but since 2009 the contribution significantly increased.

Source: Company Investors Site                               Website : www.hcltech.com/investors

Wipro Limited - Revenue Analysis & Operating Metrics 2006-2011

Wipro Limited Financial Performance 2006-2011

Financial Performance:

• Wipro saw revenue growth slowing down during 2009 (10% YoY) due to recession caused by 2008 Global Financial Crisis but revenue growth doubled in 2010 (20% YoY) which highlighted the fact that Wipro did well during 2010 compared to its peers.  
• 2011 (17% YoY) is a different story as the company struggled with its Dual CEO structure and was forced to replace them by single CEO in January 2011 and there were other organizational changes too which affected its revenue growth. Its peers did tremendously well in 2011. 
• Wipro reduced its operating expenses significantly in 2009 due to the cost cutting measures that the company adopted and since then there has been constant rise in expenses along with revenues. With significant organization and leadership changes the company is planning to recover its lost growth. 

Wipro Limited Geography Mix 2006-2011

Geography Analysis:

• Dependency on the North American is constantly being reduced as evident in the above chart but still 55% revenues are from that region. 
• Europe is the second largest market but the revenues have fallen since 2009 and constant at 26%-27% and the region is struggling to cope with Sovereign Debt crisis. 
• India & Middle East market is growing significantly particularly in India it has won some big contracts from Government of India and other State governments. 
• APAC and other markets are also seeing good growth and Japan is constant. 

Wipro Limited Vertical Revenue Mix 2006-2011

Vertical Analysis:

• Like its peers Wipro is also dependent on BFSI vertical for majority of its revenues and it is one of the significant player. 
• Manufacturing is the second largest and constant growing vertical. Retail & Transportation too has been constantly growing over the years. 
• Wipro is a significant player in the Energy  & Utilities vertical and has maintained constant revenues. Technology vertical revenues have been falling and Telecom vertical revenues are constant. 
• Communication and Media and Healthcare Services have also seen good growth in the last few years. 

Wipro Limited Services Revenue Mix 2006-2011

Services Segment Analysis:

• Application Development & maintenance services is the largest service offering but dependency on the offering has reduced over years as Wipro was looking to increase revenues from other services. 
• Revenues from Technology Infrastructure services saw significant growth and the company had invested significantly for increasing the revenues in this service offering. 
• Testing services is constant revenue contributor. Package Implementation too constant revenue generator. 
• Wipro also focused on constantly increasing the BPO revenues. 

Wipro Limited Contract Type 2009-2011

Time & Material contracts are the most preferred. But the Fixed price contracts are also seeing growth since 2009.

Wipro Limited Onsite/Offshore Mix 2006-2011

Onsite has always been dominant contributor for Wipro. Except in 2009-2010 when clients to reduce cost favored offshore. In 2011 onsite saw growth.

Source: Company Investors site                                      Website: www.wipro.com/investors

Infosys Limited - Revenue Analysis & Operating Metrics 2006-2011

Infosys Limited Financial Performance 2006-2011

Financial Performance:

• Global recession due to the 2008 Global financial crisis have slowed down the revenue growth in 2009 (12% YoY) and 2010 (3% YoY). Growth recovered in 2011 with revenues growing by 26% YoY. 
• Infosys was able to control its operating costs as is evident in the operating expenses growth in 2009 (10% YoY) and 2010 (2% YoY). Stringent cost cutting measures were adopted and the company kept up its operating margins and profitability during this time. 
• Infosys saw good growth in 2011 as the company saw revenue and profitability both growing and also had improved its spending for growth. 

Infosys Limited Geography Mix 2006-2011

Geography Analysis:

• Infosys is most dependant on North America with more than 65% revenues as American companies are at forefront of the outsourcing industry. 
• Europe is the second largest market but the revenues in the region had been falling due to the European sovereign debt crisis and UK companies are also reducing outsourcing to India. 
• Slightly improving business from Rest of the World. 
• Indian presence is very low not a focus area. 

Infosys Limited Vertical Revenue Mix 2006-2011

Vertical Analysis:

• BFSI is the dominant vertical for Infosys (36%) and one of the major player in the industry. 
• Manufacturing is second largest vertical which has seen good growth in 2009 and the growth is constant at 20%. 
• Telecom was good vertical for Infosys but revenues started falling form FY 2009 and saw significant fall previous year too. Services vertical also saw revenues falling. 
• Retail has been constantly growing over years. Rest of the verticals are maintaining constant growth over the years. 

Infosys Limited Services Revenue Mix 2006-2011

Services Segment Analysis:

• Since 2006 Application Development and Maintenance revenues have been constantly falling from 50% in 2006 to 39% in 2011.  
• Consulting Services & Package Implementation has seen good growth from 20% in 2006 to 26% in 2011 . 
• Rest of the verticals have seen constant growth. Infrastructure management services saw up and down growth. 

Infosys Limited Contract Type 2006-2011

Time & Material contracts are the most preferred. But the Fixed price contracts are also seeing growth since 2009.

Infosys Limited Onsite/Offshore Mix 2006-2011

It has always been a balanced mix of onsite and offshore for Infosys except during recession years 2008 till 2010 when Offshore is preferred. 2011 saw rise in onsite revenue mix.

Source: Company Investors Site                                 Website: www.infosys.com/investors

Tata Consultancy Services Limited - Revenue Analysis & Operating Metrics 2007-2011

TCS Financial Performance – 2007-2011

Financial Performance:

• TCS saw strong revenue growth in FY 2011 (29% YoY) compared to FY 2010 (5.4% YoY) and FY 2009 (6.8% YoY). 
• Revenue growth in FY 2010 and 2009 affected by the global financial crisis and TCS through its strategy of improving efficiency and constant cost base kept up the profitability and delivered good results. 
• Due to the volatile economic environment that originated from the 2008 Global financial crisis TCS was forced to control its expenses by reducing costs on travel, communications, rationalizing infrastructure and optimizing resources which was evident in constant operating expenses for FY 2008, 2009 and 2010. 

TCS Geography Mix 2007-2011

Geography Analysis:

• North America continues to be the major market as American companies are the forefront in Outsourcing to India. US has always been the primary market with significant dependence. 
• Europe including Continental Europe is the second largest market but facing problems due to European sovereign debt crisis. UK has seen fall in contribution since 2009 due to weakness in the Telecom sector. 
• TCS is very active in Indian Market. TCS has many Government of India and other projects in India. 
• Latin America is another focus area for the company but the contribution fell in 2011. 
• APAC is also seeing good growth particularly in 2011. Middle East Africa constant contribution. 

TCS Vertical Revenue Mix 2007-2011

Vertical Analysis:

• BFSI is the dominant vertical and TCS strengthened its position in this vertical. 
• Telecom is the second vertical where TCS is very active and this vertical revenues has fallen down since 2009 as there is weakness in the Telecom sector. 
• Retail & Distribution is the third largest vertical and it has gained significantly since 2009. Hi-tech vertical revenue contribution also started in 2009. 
• Life Sciences is one vertical where TCS is constantly improving and since 2009 started to wil significant deals in Media and Entertainment vertical. 
• All the industry verticals are seeing good growth in 2011. 

TCS Services Revenue Mix 2007-2011

Services Segment Analysis:

• Application Development and Maintenance is the dominant service offering. 
• BPO services have started picking up since FY 2008-2009 with Citi Bank Captive acquisition. 
• Infrastructure services category saw slight growth and constant Engineering and Industrial services revenues. 
• Falling revenues in Enterprise Solutions. Assurance Services seeing some growth. 
• Global Consulting revenues are not seeing growth along with Asset leverage solutions. 

TCS Contract Type 2007-2011

Time & Material contracts are the most preferred. But the Fixed price contracts are also seeing growth since 2010.

TCS Onsite/Offshore Mix 2007-2011

Initially it was Onsite but due to recession and Financial crisis, Offshore was preferred by clients since 2009. TCS also serves clients through its Global Development center .

Source: Company Investors Site             Website: www.tcs.com/investors 

India Outsourcing Industry- Increasing number of Fixed Price Contracts but Time & Materials Contracts still dominate for Major Vendors

The outsourcing contract is critical document in an outsourcing relationship which typically contains: scope of services, assumptions, deliverables, pricing, intellectual property and deliverable ownership, contract duration, service levels, customer responsibilities, Vendor responsibilities, conflict resolution, and termination process. There were 472 outsourcing deals struck in the third quarter of 2011 compared to 516 transactions in the second quarter of this year according to Everest Group. Indian IT Vendors constantly write contracts with clients every quarter. Indian ITO vendors contracts are based on two types of pricing Time & Materials based pricing and fixed Pricing. Most clients still negotiate for T&M or Fixed Price contracts with T&M contracts more than 51-58% of total revenue and rest is fixed price contracts. Fixed-price projects to mitigate the impact of the rising rupee and wage inflation on their profitability.

Time & Material (T&M) Contracts are the major type of contracts done by the Indian IT Vendors. In the initial days of outsourcing of work to Indian Vendors the outcomes were unknown and both vendors and clients were not sure how effectively the work will be done by the resources provided by the vendors. They were not sure about the time and resources required, hence the T&M contracts were the best options. Clients wanted to have control on the resources and track vendor resources including the approval and clearance of time-sheets and the risks totally existed with the client. In the T&M contracts the risk lies totally with the clients. People are thrown at the problem and are billed on hourly basis and there are instances of unutilized resources in this scenario. Projects can be easily ramped up or down according to the clients needs easily. These contracts are best suited when the relationships between the clients and vendors are just starting fresh and the projects or process are new with no significant view of the outcomes and their impact. As long as uncertainty exist T&M contracts will be there and despite the fact some experts believe the golden age of T&M contracts is going to end in next ten years.

Fixed price (FP) contracts are clearly defined and deliverables agreed between client and vendor. Standard IT procedures, periodic reviews of performance and phased billing are other features of FP contracts. Risk is shared between the vendor and clients and vendors have to invest in the relationship and technologies required. This is a rigid model and mid way changes are difficult to make. Clients have to be very careful in choosing the best vendors for significant ROI and the vendors too have the scope on investing on the infrastructure and technologies as they are well aware of the client needs. Both clients and Vendors have to invest in building a relationship. Fixed price contracts are being favored by the Indian ITO vendors as they can efficiently complete the work using lesser resources and do it without much interference from the clients. In the past four years Indian vendors are trying to increase the Fixed price contracts percentage to total revenues as the client IT budgets/spend are being tightened due to the financial crisis, debt crisis and economic slowdown. Indian IT vendors looking to maintain 40-40% of total revenue through fixed price contracts. Fixed-price outsource contract attracts the customers due to immediate cost reduction followed by 3-5 years of cost control. Fixed-price projects are also more short term in nature, while the time and material are long-term contracts that give longer revenue visibility for companies

Tata Consultancy Services Limited

TCS has a higher ratio of fixed prices contracts in comparison to the competition and suggest TCS is undertaking more complex and mission critical end-to-end engagements.TCS has been looking to maintain the fixed price contracts in between 40-50% which they feel is optimal. The recent recession and financial crisis has tightened the client budgets and spends which forced to look for more fixed price as it helps them in controlling the resources and do the work more efficiently. 

TCS also increased the working hours of employees so that they can increase billable hours for T&M contracts. Fixed price contracts also have higher pricing compared to T&M and carry risk for the vendors. Fixed price contracts have to be signed constantly as the existing contracts get completed overtime and if there are no signings for some time then the overall revenue gets impacted. TCS in 2011 is facing such situation where they have seen fall in fixed price signings but confident to overcome as they have good pipeline. Margins also increase with fixed price contracts.

Infosys Limited

Infosys has successfully increased its fixed price contracts since 2008. Financial crisis and subsequent recession forced Infosys to start look for ways to curb the slow revenue growth. The US clients have changed their offshore outsourcing strategy and this prompted Infosys to look for fixed price strategy. But Infosys still have major revenues coming from T&M contracts as most of its clients want to stick with T&M and there are risks involved in fixed price like if the scope of a fixed price bid is unclear, it can lead to cost overruns. The share of fixed price contracts for Infosys in 2010-11 stands at 42% as compared to 28% in 2005-06. Infosys focused on shift to fixed-price contracts as part of the bigger effort to de-link revenue growth from manpower growth and move up the value chain. In long term, Infosys expects the proportion of fixed price bids going up.

Wipro Limited

Over the last 2-3 years, Wipro have increased focus on fixed-price contracts. Wipro has been able to increase the proportion of fixed-price contracts to 45.7% in FY11 compared to just 34 percent in FY-09. Fixed-price contracts ensure better realizations compared to time and material. Wipro is also is aiming to break the “linearity”, or revenue growth linked to the number of people added, and earn better prices through fixed-price contracts. Wipro was also forced to look for more fixed price contracts to overcome the recession. Wipro has in the past couple of years have been signing more fixed price deals as these deals provide revenue visibility and reduce the pricing pressures. 

HCL Technologies Limited

HCL Tech have increased its fixed price contracts to total revenue percentage in 2011 to 42% from 30% in 2006. HCL had move to more fixed-price contracts as it offers more certainty in contract execution and revenue. Fixed-price contracts require greater planning in terms of resource allocation and utilization and definitive timelines of implementation and were more relevant in the turbulent times where clients of HCL are demanding output/outcome-based pricing with service-level agreements. In the last two years HCL has seen good traction in the fixed price deals and it is planning to do more such deals in future.

Discussion Points:

1. Are the Indian ITO vendors doing well on the Fixed Price contracts front?
2. How comfortable are clients with Fixed Price contracts and how to manage risk?
3. What will happen to T&M Contracts in future?
4. What is the optimal balance for T&M and Fixed Price contracts?