How to design a transparent Application Management Services pricing model

Best Practice 2: Your IT Outsourcing Contract should be transparent and granular – and this should show in the pricing model

Transparence and granularity in an Application Maintenance contract directly translates to a price per application. An ideal model goes further and prices the service depth required on the application.

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Let’s look at transparency and granularity from various viewpoints to understand the needs of the design.

Viewpoint: Application Business owner

  • In the midst of signing a maintenance contract for an Application portfolio, the effect of the contract on an application should not be lost.
  • While a total price might make perfect business sense from the perspective of portfolio management, there are business owners who use and sponsor these applications. The pricing structure should be able to translate the costs and benefits of the entire portfolio bundling program to an individual application.
  • Else such an overall program could be stalled by the business department which feels that the costs to its applications have not been correctly allotted.

Viewpoint: Application Maintenance Contract Manager

  • A granular pricing structure – which means applications are either priced individually or according to a scheme that is laid down – greatly eases the job of a contract manager.
  • Granularity should go beyond just price for application and also model the various ebbs and tides that the service could take. Explore all the dimensions of your service whether it is service depth or service time e.g. some applications might need only level 2 support, other applications might need 24/7 support.
  • The more granular your model, the less discussion the contract manager would have while discussing portfolio changes during the contract duration.

Viewpoint: IT Procurement

  • Valuable procurement bandwidth can be saved if all service conditions are laid clear and separately priced in the form of factors.
  • Procurement can then concentrate on the larger ticket items and leave the management of the pricing to the contract manager of the application portfolio.

Viewpoint: CIO

  • A CIO will normally highlight the overall savings that have been achieved through the clustering of applications into an overall application portfolio.
  • However, he also has to demonstrate these savings to individual business departments – and showcase the overall benefit that they have achieved by taking part in the clustering program. He needs their support.
  • A transparent and granular pricing system serves such a cost allocation in a seamless manner. No more clumsy Excel sheets as an after-thought.

Effort put ahead of the curve in defining a transparent and granular pricing system, calibrating your application portfolio against it, and signing contracts based on this pricing system will go a long way in keeping the contract and change management smooth and frictionless.

Next –  Best Practice 3 : Encourage the right Behavior – stay tuned!

 

In this series, see also:

Best Practice 1: How to design a scalable IT Outsourcing contract

For a background of this topic, see:

The hidden inflexibility in IT Outsourcing Contracts
Are outsourcing pricing models skewed towards service provider needs
Do Standard Application Pricing Models really cover today’s needs?

photo credit: marcomagrini via photopincc

Falling Rupee: IT Service Providers should not yield to temptation

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Last night, the Indian Rupee (INR) touched 89 Rs. to a EUR. IT Offshore Account Managers running contracts in Europe and the USA will be elated.

This would mean a direct positive impact on the margin and the degressive prices baked into your software contract is no longer giving you sleepless nights. As most IT software service contracts are highly offshore leveraged (ratios like 60-70% offshore are not uncommon) – this directly translates to a huge positive to the financials of the contract. Is this the time to recover the financials on your engagement?

One is now tempted to play with the two most important cost-drivers in an IT software contract:

  • The headcount of the team
  • The pyramid of the team

Headcount of the Team
If your IT Offshore contract had a price degression, you would have been forced to optimize the software operation and reduce headcount. You might be able to maintain a higher team with the current INR rate.  Nevertheless, take this opportunity and demonstrate how you are continuing to optimize the operation to your client with operational KPIs. Keep the pressure. One need not fear a higher bench in these times. The falling Rupee can only increase the pressure to offshore.

Pyramid of the Team
On the contrary – now is the time to actually consolidate your team. One need not bow down to the pressure of leveraged team pyramids. Use this opportunity to retain the senior part of your team and strengthen the know-how.  Capture this in the form of internal presentations within your team. Translate this into artifacts that you can use when the tables turn.

 Do not hesitate to demonstrate the value you are creating
You need not do this behind closed curtains. Use these two levers and showcase the benefits to your client. Use the falling Rupee to strengthen your relationship – and it will be remembered when times get rough.  It is often said that software delivery is the best lead to future sales.

How do you see the opportunity of the falling INR in your software operation?

What impact does the falling Rupee have on your Offshoring contract?

Like others, I have been watching the devaluation of the Rupee in the last weeks with a growing interest.

While my personal opinion is that the Rupee must now be left alone to find its own level and I am not alone, the professional side of me wonders what this might be doing to existing IT offshoring contracts, and running offshore contract negotiations.

This is a tempting time for both sides of the table – the service provider as well as the service buyer.

The service provider sees an immediate opportunity to improve margins. Some might also use this to slink away from tough performance improvement related targets that have been financially cast in stone without actually taking the measures to improve the service performance. Global service buyers purchasing IT Offshore services will be tempted to negotiate payment in local currency.

Both sides need to proceed with caution.

Service providers will gain the trust of their clients if:

  • They proactively pass on some of this benefit to their clients in the form of additional pro bono services.
  • They should also go ahead with the promised performance improvements even though it is now possible to slip on these without having any financial impacts.
  • Now is also the time to go soft on COLA clause negotiations.

IT Offshore Service buyers should not highlight the devaluation and fall into the temptation of paying services in local currency. The Rupee has shown before that it can bounce back equally fast and bite. However, they should very carefully measure any promised improvements in service performance through KPIs and track this to progress. Remember:

  • In running negotiations, push back on random COLA increases in rates year on year.
  • Build additional KPIs to track performance improvement, and do not rely only on decreasing price over time.
  • Use the opportunity to explore Rupee devaluation situations with your potential service provider.
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