Report From India: Look For More Pay-For-Performance Offshoring
Indian outsourcers are inking some deals that tie their pay to performance -- usually to some operations yardstick such as uptime, but in the more innovative cases, to some business measurement. One CIO talks of tying outsourcer pay to the same measurement that his bonus is. Here are a few examples I've picked up the last two weeks here in India.
Indian outsourcers are inking some deals that tie their pay to performance -- usually to some operations yardstick such as uptime, but in the more innovative cases, to some business measurement. One CIO talks of tying outsourcer pay to the same measurement that his bonus is. Here are a few examples I've picked up the last two weeks here in India.On Infosys' Bangalore campus this week, I talked with Rajesh Rao, head of Infosys' enterprise services group, about its work with an automaker that was getting too many orders from dealers for cars that it couldn't manufacture. The automaker and dealer data was out of sync, so 3% of orders had some combination of options that 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 Rao, whose group does implementation and consulting work around business software.
KPIT Cummins, a $150 million-a-year IT services company based in Pune, has seen the pay-for-performance and variable pricing deals grow the last two years, and they now make up about 20% of all deals, says President Pawan Sharma. "This usually comes in the second phase of your relationship," he says, since both the vendor and customer tend to be risk averse to start. They start with the least risky of per hour payments for enterprise software support, then might move up to the cost-plus model, then evolve to one tied to business goals. KPTI Cummins pushes for those closer deals after about 12 to 18 months working with a company: "We come to them and say 'How can I be part of your p and l?' "
Another big area of shared risk is training people. "The client trains a lot of our people," Sharma says. An outsourcing customer may want to get into a technology area that's new to both it and the outsourcing vendor. So the two companies might split the cost of training people, where the customer pays for one person and gets another at no cost, giving the customer access to a new skill while the vendor adds to its skills base.
At Infosys, 50% to 60% of deals in the enterprise services group have some kind of outcome-based pricing, Rao says. To win these deals (and write profitable contracts that have make-able goals), outsourcers better bring deep industry knowledge in autos, health care, banking, etc. "The competition is getting very differentiated, and very domain specific," Rao says. "Gone are the days when we could say our primary attribute was our global delivery model and our knowledge of SAP. Those things won't even get us invited."
Darryl West, CIO of the bank Lloyds TSB, wants to move this way -- "from SLAs to business outcomes." Speaking to India's IT service industry last week at the Nasscom conference in Mumbai, West explained that 90% of his bonus and that of his team's is tied to an annual survey of the company's end users of IT, a survey that focuses on perceptions of how IT is performing, not on IT-centric metrics such as server uptime. "My question to [outsourcers] is, 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?" West said. "Because my bonus and my team's is tied to that."
This shared risk-reward is a much riskier business model for offshore IT vendors, and could conceivably make offshore vendors' earnings more volatile if a material share of revenue gets tied to such performance standards. It also can be riskier for customers, if they're measuring the wrong outcomes. But CIOs seem keen to push in this direction.
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