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Photo: Priyanka Parashar/Mint
Photo: Priyanka Parashar/Mint

Pricing model based on outcome to be key for IT firms’ survival

  • This model can help small businesses to adopt technology without burning a hole in their pockets
  • IT service providers are forced to seek new ways of doing business due to the pandemic

MUMBAI : An outcome-based pricing model for new projects may just aid the survival of IT service providers, who are being forced by the economic disruption caused by the covid-19 pandemic to seek new ways of doing business, said experts.

Outcome-based models are not new to the sector, but are generally used for proof of concept before clients commit to invest in a technology or solution. The current global crisis has increased the need for businesses to have an IT backbone, while they struggle to keep the lights on. With lower capital inputs, this pricing model can help businesses efficiently to adopt technology without burning a hole in their pockets. This is more so for smaller enterprises, which are rapidly adopting technology.

Under the outcome-based model, the IT vendor commits to certain service levels in the contract. If they exceed their service levels, they get paid more than the agreed billing amount. If they default, they are penalized.

This model works when there is mutual trust and agreement between an IT vendor and a client on how to measure and report the service levels and the associated billing. The next level of maturity is to link outcome-based billing to business outcomes, rather than IT outcomes. This is gaining traction across ITeS, KPO and BPM sectors. “We can expect an increase in outcome-based pricing models (because of the pandemic), where the relationship between client and IT vendor is strong and transparent. Outcome-based models will continue to be popular in support, maintenance, and business processing types of projects where the outcomes, roles, and responsibilities can be clearly defined, governed, and reported," said Sharath Srinivasamurthy, research director, enterprise solutions and ICT practices, IDC India.

The fixed-price or transaction-based pricing model is most commonly used, apart from the time and material model that involves periodic payments for long-term IT projects based on expected resource utilization. Srinivasamurthy warned that firms should not look for an outcome-based model just because they were under financial constraints. However, the pandemic and lockdown have pushed businesses to explore the option aggressively.

“All clients are facing problems because of the pandemic and are looking for ways to reduce costs. That is why they are increasingly seeking digital solutions and outcome-based pricing models," Keshav Murugesh, group chief executive officer, WNS Global Services, said in an interview.

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