India Technology 2.0: Result Based Pricing Model
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Something is happening that could bring about a fundamental shift in the Indian IT industry: A new pricing model that may improve quality could make India more than just a low-cost outsourcing destination. As per this report, India’s largest software company, Tata Consultancy Services, has recently begun using a new model of software pricing in some of its outsourcing contracts. Using this model, pricing for the contract will not be based on the efforts made by the company, which is currently the standard method. Instead, it will be based on the end results. While this pricing model is not new — it is the one used by many the global consulting firms like IBM and Accenture, this is the first attempt by an Indian software company to try it out. What this means is that, instead of being a low value solution provider, TCS stands to become a de facto partner with its clients.
The foundation of India’s outsourcing industry is based on cost-based arbitrage, with clients being charged on efforts made, rather than the actual outcome of the efforts. The software industry operates on the basis of a fixed hourly rate, (with the client being billed at that rate for the total number of man hours spent in fulfilling the work required). Therefore the results- or success-based pricing model can change the very dynamics of the entire industry.
So how does the pricing model actually work? Basically, the company would have to promise its clients a specific quantum of process improvement, cost reduction and revenue enhancement. If these outcomes are reached, the firm gets to share a part of the increased profit. As the report says, the contract can be one of two types. One, where the price is decided and the amount you make depends upon how well the cost is contained at your end. The second variety works like a sales commission, where revenue depends on delivering revenue increases.
The fact that international clients are willing to get into such an arrangement inherently means that they have greater confidence in the ability of the company to deliver on guaranteed levels of performance and successful outcome.
Should this become a trend in the software industry, this could mark a fundamental shift in the way the industry works. It could help the industry stake claims to being a real solution provider rather than just a cheap human resource destination. Besides, it can also result in increased profit margins. This new pricing model is proof that the Indian software companies are now making a real effort to move up the value chain and become more than just a low cost outsourcing destination.