MORE DEALS TIE PAY TO RESULTS
Indian outsourcers are inking some deals that tie their pay to a client's business outcome, like increased sales or lower costs. It's not commonplace, with just one in five customers saying they're tying outsourced project costs to business goals, our research finds. But pay-for-performance is where the most forward-thinking CIOs are pushing India's outsourcing industry.

Darryl West, CIO of one of the United Kingdom's largest banks, the 67,000-employee Lloyds TSB, wants outsourcers to measure success less on service-level agreements and instead use more relevant measures. Lloyds has started challenging its Indian outsourcers to show capabilities in higher-end work, said West, speaking last month at the Nasscom conference for India's IT services industry.

How far will outsourcers go in sharing risks and rewards? West noted that about 90% of the bonuses he and his team get are tied to a survey of Lloyds senior managers that focuses on perceptions of how IT is performing, not on IT-centric metrics such as server uptime. West's question for outsourcers: "Would you be willing to be judged on a summary like this--which is much more of a perception measure than a quantitative one--and how much of your fee would you want to tie to that? Because my bonus and my team's is tied to that."

In our survey of 430 IT pros working with Indian outsourcers, 20% cite the "ability to tie project costs to business goals" as a key benefit that would prompt them to work with an outsourcer again. Thirty-one percent cite "understanding our business and industry" as an area that's improved significantly over the past year.

At Infosys, that kind of industry knowledge is critical for it to ink pay-for-performance deals. For example, it's working with an automaker whose data was out of sync with its dealers, so that 3% of the cars that dealers ordered had options the manufacturer, which sells about 4 million vehicles a year, couldn't deliver. "We signed up to reduce errors 80%, and part of our fee is tied to that," says Rajesh Rao, associate VP and head of Infosys' enterprise services group. About half of the group's deals have some element of outcome-based pricing.

At KPIT Cummins, a $150 million-a-year IT services company based in Pune, India, pay-for-performance and variable pricing deals have grown in the past two years to about 20% of all deals, says president Pawan Sharma.

These kinds of pay-to-perform deals highlight the increasing value of industry-specific knowledge, says Infosys' Rao. That's what it takes to win these deals--and write profitable contracts that have attainable goals. Says Rao, "Gone are the days when we could say our primary attribute was our global delivery model and our knowledge of SAP," he says. "Those things won't even get us invited."