best fit pricing model white paper.pdf

7/30/2019 Best Fit Pricing Model White Paper.pdf

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Best t IT pricingmodels with mutualbene ts for service

providers and customers.

WHITE PAPER


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ex cu v summ y info m on t c nology (it) s s own d g ow n l s wo d c d s, o n ng u n dfo obus c ng mod l o m c ng ng x c ons. inc s ngly, cus om s look ng fobene ts beyond cost savings and service improvements. This has led to the emergence of pricingmodels beyond traditional ones such as time and material (T&M) and xed price (FP).

t s w d scuss s v ous c ng mod ls w c c s cs, sk com o s, osand cons and best t customer engagement. It covers some examples of the pricing models tried outin Mindtree. It also covers the due diligence required to decide the best t pricing model for a givensituation, with mutual bene ts for both customer and service provider.

Con n sA background on pricing models

The best t pricing model

Mutually bene cial pricing models

Linear pricing models

. D d c d m

b. t m nd m l (t&M)

c. Fixed price (FP)Non-linear pricing models

. hyb d mod l

b. M n g d s v c s mod l

c. Ou com b s d mod l

d. t ns c on b s d mod l

Which pricing model suits a given engagement?

Examples of tried and tested Mindtree pricing models

Due diligence to identify best t pricing model

Conclusion

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ex cu v summ yinfo m on t c nology (it) s s own d g ow n l s wo d c d s, o n ng u n d foa robust pricing model to meet changing expectat ions. Increasingly, customers are looking for bene ts beyond costs v ngs nd s v c m ov m n s. t s s l d o m g nc of c ng mod ls b yond d on l on s suc sTime and Material (T&M) and Fixed Price (FP).

t s w d scuss s v ous c ng mod ls w c c s cs, sk com o s, os nd cons nd t customer engagement. It covers some examples of the pricing models tried out in Mindtree. It also covers the due

diligence required to decide the best t pricing model for a given situation, with mutual bene ts for both customer ands v c ov d .


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a b ckg ound on c ng mod lsa c ng mod l fo n it s v c f s o con c u l

g m n b w n s v c ov d nd s v c g n .t g m n s fo m d b s d on y of s v c

s ng g n. tod y, c ng mod ls n it ndus yhave matured from the traditional T&M and FP models to

mod s m n g d s v c s / ou com b s d mod ls. ann v bl og ss on s it ndus y w n f om s m ly

und s nd ng cus om n ds nd s v c s, o s bl s nginnovative, non-linear and agile pricing models. In an e ort

o bu ld mo sus n ng l ons s nd g ng o next level of a mutually bene cial partnership.

The best t pricing modelFor a pricing model to be successful, it should strike the

g b l nc b w n cus om s x c ons of qu l y, m l n ss nd c , nd s v c ov d s cosand operational e ciency. Customer engagements may notb succ ssful w on y of c ng mod l v y m . i sa journey for both the parties to go agile based on best tfo sco d s v c s nd ng g m n mod ls.

Mutually bene cial pricing modelsM ny c ng mod ls cu n ly c c d by itindustry. From the traditional T&M and FP, to more talented

on s l k m n g d s v c / ou com -b s d mod ls. a g l v l, c ng mod ls c n b d v d d n o l n nd

non-l n c go s.

L n c ng mod lsL n c ng mod ls b s d u ly on l onsbetween time and material (e ort and rate). The service

ov d s d b s d on sou c ov d d o e ort spent for the required duration of agreed time.

Som l n c ng mod ls d sc b d b low:a) Dedicated team: t d d c d m mod l wo ks s

d d c d s v c ov d fo od of m . t sm c s s v u l x ns on of cl n s n- ous

d v lo m n m. t cus om k s onus of g ngwork done e ectively from the team. Advantages of thismodel include knowledge retention and the exibility of utilizing the team for di erent requirements. Monthly bills

s d b s d on numb of sou c s d d c dv y mon .

Figure 01 shows the pros and cons of using the dedicatedm c ng mod l.

b) Time and Material (T&M): t t&M mod l wo ks b s focustomers who want a exible and agile project execution.h y l y g ol n d v lo m n of so ware product or solution. This model works best when

qu m n s c ng f qu n ly nd s g n lly us d fooduc d v lo m n oj c s. in s mod l cus om

c s v u lly ll l d sks of sco , qu l y of d l v bl s nd oj c m n g m n . t fo m g ns fo t&M l y s low s . t no sks

nd no nv s m n s by s v c ov d s.

t s v c ov d ss gns m o cus om nd c u l m s n by m on oj c s b ll d.Mon ly nvo c ng s o- , b s d on o l ou ss n on oj c nd s fo sk ll s s nvolv d.

t d on lly, s v c ov d s d b s s numb ofson ou s s n on w ng cod . So, o m x m z

v nu , s v c ov d s y o m x m z ou s s nnd numb of o l us d o w cod . Cus om s

p os Cons

S m l o und s nd nd m l m n L ck of own s f om s v c ov d s

Can be e ectively used to compare prices acrosss v c ov d s

Low l v l of m mo v on du o l ck of cm n o ng

Knowl dg n onNo time / e ort commitment from the customer in theu l z on of sou c s f om s v c ov d s

Flexibility to utilize the team for di erent requirements

s n d d

No clos ly l d o cus om s bus n ss n d

o ou com

Low sk mod l fo bo s v c ov d nd cus om No incentive for service providers to be e cient

Fig. 01. Pros and cons of using the dedicated team pricing model.

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on o nd, w n o duc o l cos of d v lo m n nd fo w n o m n m z b ll d ou s.t s c s m s l gn d nc n v s b w n cus om s nds v c ov d s.

Figure 02 shows the pros and cons of using the Time andM l (t&M) c ng mod l.

c) Fixed Price (FP): The xed price model is ideal for smalland medium level projects with clear and well-de ned

qu m n s. in s mod l, s v c ov d nd cus om bo c y som sco - l d sk. Bu , s g d con c , ny c ng n sco would

result in a change in the price. Fixed price models allowcustomers to pay a xed price for a project that is agreedupon by both the parties. The xed price could be split

nd d on m l s on s. t s mod l wo ks w scoand speci cations of the project are crystal clear from

v y b g nn ng nd sys m qu m n s v b nde ned clearly. In this model, it is very important to discuss

v y ng nd m k n s m on of o cosof oj c v y b g nn ng.

It is certainly a low-risk option for the customer, as the FPmod l nsu s oj c s don nd d l v d w n

a speci c time and budget. The FP project plan speci escos s, m l n s nd d l v bl s n un mb guous msnd s d l fo cus om s w s go ls, d l d oj c

speci cations and a limited budget.

The pros and cons of using the FP model is shown ingure .03.

Non-l n c ng mod lsNon-l n c ng mod ls d cou l l onsbetween time and material (e ort and rate). NormallyT&M and FP do not o er much scope for modi cation

nd c ng s. S v c ov d s v l z d n dto be exible to satisfy their customers. This has led to

nnov ons n c ng mod ls su v y ng n ds.Som non-l n c ng mod ls m n on d b low:

a) Hybrid model: t yb d mod l us s t&M c n qu so s m cos s fo oj c s do no v cl -cu

go ls o d l d nd com l qu m n s n lly. ithen allows customers to pay a xed price based on the

s m on. t s yb d c ng mod l s b s f u sof both the models T&M and FP, as mentioned above. It

llows s v c ov d s o d loy sou c s s n t&Mmod l, bu mos of oj c s x cu d cco d ng o FP model. Hence, the project has a smooth work ow andw ll- l gn d oc ss s.

hyb d s b s c ng mod l fo b gg , long ndongo ng oj c s w uncl obj c v s s . h

n u nd f db ck s n d d n b g nn ng, bu d l v yc n b f c d ov m o nsu ll cus om

qu m n s succ ssfully m . t s mod l s g

m ddl g ound fo of ss on ls w o l k ou ly ym n snd cus om s w o f o m k on - m ym n

fo oj c . t yb d c ng mod l l s cus om so m z budg s w ou com om s ng on qu l y of

oduc o l c on. i lso g v s s v c ov d con oll d nv onm n w s d sks n o ons.

p os Cons

S m l o und s nd nd m l m n L ck of own s f om s v c ov d s

Can be e ectively used to compare price acrosss v c ov d s

Low l v l of m mo v on du o l ck of c m n o ng

Knowl dg n on Through scaled estimated e orts, service providers cany fo nc s d b ll ng

Flexibility to utilize the team for di erent requirementss n d d

No clos ly l d o cus om s bus n ss n do ou com

Low sk mod l fo s v c ov d nd mod skmod l fo cl n

No incentive for service providers to be e cient

Fig. 02: Pros and cons of using the Time and Material (T&M) pricing model.

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Figure 04 shows the pros and cons of the hybridc ng mod l.

b) Managed services model: t m n g d s v c s

model o ers de ned service deliverables at a xed cost.t d on lly, v lu w s l z d cco d ng o ow w ll w s m n g d by s v c ov d , nd ow w ll w s

c v d by cus om . t s w s mo qu l v nn u . in m n g d s v c s mod l on o nd,

v lu - dd s qu n v ly m su d n ms of gS v c L v l ag m n s (SLas). t s s b s d on cl lyde ned parameters in project performance and quality.

Customers are billed at a xed monthly cost plus unitcost per additional unit delivered. For customers, themodel helps them arrive at a predictable budget. Forservice providers, it assures continuous xed revenue, plus

dd on l v nu oug sc l b l y nd b m g nsoug on. Mu u lly g d SLas w ll b m ,

unl ss s v c ov d w s s o y n l y. if s v c ov d m s / xc ds ll g d SLas y mon ly w d d, s con c .

Som k y f u s of m n g d s v c s mod l: t s v c ov d k s nd- o- nd s ons b l y of

s s v c l n s nd d l v bl s t s v c ov d m k s d c s ons nd k s s ons b l y o ov d g d s of d l v bl s

Budgets are mostly xed for the entire piece of work,making it more like a xed price managed services

ng g m n . in s c s , s v c ov d s f nd n d c d ng ow, w nd w ow m ny

sonn l oj c c n b d l v d. t sk

ssoc d w suc n o c s s v cov d m y d c d o lloc s d sou c s, w c

could sul n d l v y ssu sThis model is o en adopted when work can be clearly

sco d ou , w cl ly m k d d l v bl sFor this model to work, the service provider should have

n xc ll n und s nd ng of cus om s sys ms.The customer in turn should be con dent enough to

nd ov wo k o s v c ov dt cus om s ol s of v w w

dd on l s ons b l y of con c s m n g m n ndbudg ck ngt s v c ov d w ll b s ons bl fo s l c on of

sou c s s w ll s m n g ng s k old x c onst w ll b cl ly m k d SLas fo c d l v bl ,w n l s l c bl fo non-d l v y

D l v y of s v c c n b fo m d ons o client location, o shore or a combination of both

A managed services model is o en adopted byenterprises as a continuation of an existing sta

ugm n on. ado ng m n g d s v c s mod lfrom day one comes with lots of risks (ref. g. 05).

c) Outcome-based pricing model: Ou com -d v nsolu ons n- o n d nd os on d s d l v ng

speci c value to the business. Outcome-based projectsm o d l v m su bl m c on cus om s ov llbus n ss sul s. t b s c loso y s o l gn

n s s of s v c ov d nd cus om so bo wo k ow ds s m go l. in s mod l, scois the business outcome itself. Clearly de ned and xedou com s w c c n b m su d nd d l v d fo g v n

oj c s c c l o s succ ss. in n ou com -b s d

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p os Cons

Cl ly sco d sm ll / m d um s z d ng g m n s Cus om s v no con ol n sou c u l z on sm x mum own s s w s v c ov d

Clos ly l d o cus om s bus n ss n ds w cl lyde ned objectives and milestones

Knowl dg n on s sk s d v lo m n mmight get dispersed a er project completion

Low sk mod l fo cus om s h g sk mod l fo s v c ov d

h g ssu nc of oj c com l on w n s m dbudg nd m l n s

Di cult to compare prices across service providers as nalcos d v n by oduc v y nd sk ss ssm n

Highly motivating for service providers to be e cient andoduc v

Quality can su er as end-to-end development is managedby s v c ov d

Fig. 03: Pros and cons of using the FP model.


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mod l, sou c lo d ng, cos ng nd c ng s com l c d x c s .

t m c n sm fo y ng s v c ov d v s. Bu

g n lly ym n s m d n m d n on lum sumw n sul s c v d o ov s o m l s on s, so

s v c ov d cou s s nv s m n n m .

t k y l m n s of n ou com s-d v noj c :

t s v c ov d c nno n d c v nu f om cus om unl ss wo k ou com d l v s v lu o cus om

t sco of wo k m c s l g c unk of oc ssthat in uences a business outcome, and service providerc n djus / w k som l m n s of oc ss o

m c bus n ss ou com S v c ov d s n d o d v lo com nc s o

tightly de ne the scope of an outcome-based project tob succ ssful

t m y d v of ou com -b s d c ng s oc ss c c s cs, nd sco of ng g m n w

cus om . as ul of umb, f oc ss d c ly m c s

m su bl bus n ss ou com l k v nu o cos , s v c ov d s ould x lo bus n ss ou com -b s dc ng. Mo so f noug o o un s o m c bus n ss ou com . how v , ng o m mb s

w sco of wo k cov s m jo y of l m n s d v cul ou com .

in ou com -b s d oj c s, s v c ov d s con ol signi cant portion of the value chain a ect ing outcomes,

v n w n y no d c ly und s v cov d s con ol. h nc , b ng ng n o you s of

in uence things not under your in uence is a critical par t of x cu on mod l. t s s w n s w o

s v c ov d s, v n com o s, w ll b c c l f c oin success (ref. g. 05). in s mod l, cus om g s w d d by conv ng

xed cost into a truly variable cost model that scales with bus n ss. i f s u cl n x cu v s f om wo y ng

bou ssu s l k c nology, oc ss nd o l , ndllows m o focus on bus n ss ou com s ngs

lly m o bus n ss. t cus om c s no sks nc y y only w n y g d s d ou com . Byhaving a standardized de nition of input and output in anou com s-d v n mod l, s v c s b com mol k oduc s.

in n ou com -b s d mod l, s v c ov d s b on cus om nd v c v s , o m k succ ss n. r sk

nsf s f om cus om o s v c ov d , mod log ss s f om t&M o ou com -b s d. t s v cov d s ould ccoun fo nsf nc of sk nd cov

by nclud ng sk m um n c . t sk m umnc s s s you og ss oug s mod ls nd sul sn nc s ng m g ns fo s v c ov d . t b l y

m su sk nd c g o sk m um s critical factor in the service providers success (ref. g. 06).

Fig 04: Pros and cons of using the hybrid model.

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p os Cons

Utilizes the best features of both the T&M and FPc ng mod ls

Cus om s no con ol n sou c u l z on ndm x mum own s s w s v c ov d s

M ddl g ound fo cus om s mongs ou ly ym nnd on - m ym n

S d sks b w n s v c ov dnd cus om

h l s cus om o o m z budg w oucom om s ng on qu l y of d l v bl s

Low sk mod l fo bo s v c ov d nd cus om

Knowl dg n on


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p os Cons

S nc d l v y nd s k old x c ons s v c ov d s s ons b l y, cus om c n focusfully on co s g c n v s

S v c ov d s som m s luc n o ssum mom n g m n s ons b l s

S v c ov d s mo nd nd n nd v l v ly n f nc -f m n g m n of oj c

Cul u m sm c b w n cus om nd s v cov d c n sul n l ck of und s nd ng, w c

may a ect deliverables

en bl s s v c ov d s o m k long- m s g cinvestments that should indirectly bene t the customer

Som m s, s v c ov d s don v v w of sco of oj c o m y no und s nd ll

of cus om s n o n s, w c could sul nm jo s b cks

S v c ov d s b ng b s c c s n o oj c , by m k ng k y oc ss m ov m n s

in mul -s v c ov d sc n o, w fo ns ncon ov d m n g s l c ons nd o ,

nf s uc u , bl m g m s common, w no-onw ll ng o ssum s ons b l y

SLa d v n o c sul s n k y oc ss m ov m n sdelivering signi cant, measurable bene ts to the customer

r - lloc on of con c , n c s of fo m ncssu s o non-confo m nc of SLas, m g b c ll ng ,

g v n x s ng s v c ov d w ll b l sscoo v

Knowl dg n on b com s mo s ml n dnd sus n bl

p os Cons

D c ly l gn d o cus om s bus n ss ou com L ck of ns ncy n ow wo k s fo m d

po n l fo g v n u l s v ngs s l bo b g sl c d by oduc v y nd syn g s b w n sks

L l ns g n o cos of s v c s

ab l y o nc n mo nnov v b v o f oms v c ov d

Cul u l s s nc f om bo cus om nds v c ov d

D c on of cus om s bus n ss mod l,o ons nd ndus y nu nc s

Cus om n s s som m s oo mm u oc c ng m n g m n oc ss

Fig .05: Pros and cons of using a managed service model.

Fig. 06: Pros and cons of using outcome-based pricing model.

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d) Transaction pricing model: a ns c on s s qu ncof steps with de ned input and output, which achieves abus n ss u os . ex m l s of ns c ons nclud nvo co y oll oc ss ng. a ns c on un s un of m su

w w c ns c on c n b m su d. ex m l sof ns c on un s y sl o nvo c ,

c. a ns c on c s y c lly quo d s c ns c on un . i s g n lly m n on d s l c bl fo

a speci ed transact ion volume range.

t ns c on-b s d c ng mod l s b s d on numb of ns c ons oc ss d. ty c lly b s cis provided for a speci ed volume band, with a negotiatedincrease or decrease in price as usage uctuates aroundthe speci ed band. In this model, the scope becomesvery important. The scope is also slightly di erent fromconventional projects and should be de ned more tightly.t volum of ns c ons nd v ons n volum

n d y, w k, mon o mon s m k ug m c onpricing and e ort. Another important scope element is

fo m of n u . W n u s l c on c, fo m, n g d n o xml, m o bl o l dy m o dc n v ug m c on cos . any c ng n

ssum on of o o on of wo fo ms of l c onscould make a huge e ort and cost di erence for the

s v c ov d .

in s mod l, s v c ov d s k on g sk.t y k on sks l d o volum of bus n ss, s

c ng s b s d on c n volum ssum ons. C ngo v on n volum c n v c n v d m c

m c on cos .

Figure 07 shows the pros and cons of using ans c on-b s d c ng mod l.

W c c ng mod l su s g v n ng g m n ?t c ng mod l n d no b n ll g n noug

o dd ss cus om s budg obj c v s, bus o su s c v cus om ng g m n . it

engagements spread from discovery and de nition typeso m l m n on, m n n nc nd su o . t c ng

mod l wo k d fo on y of ng g m n m y o m yno wo k fo no . i s lso oss bl c ngmod l su s on cl n m y no su no . N u lly,

ss ss ng b s oss bl c ng mod l fo cus om oan engagement sometimes requires a trial ( g. 08).

ex m l s of M nd d nd s dc ng mod ls

M nd s d ou v ous c ng mod ls l kdedicated team, T&M, FP, managed services, outcome-b s d mod ls, c. t v ous c ll ng s, os ndcons of c of s mod ls n v ous ng g m n s ndcus om sc n os. e c of m s l n ngs w c c nb l v g d w n M nd nd c oss it ndus y.t s f c cov s som c ng mod ls w di erentiating factors, best suited customer scenarios,bene ts to customer / service providers, and value-add

c v d by cus om .

t m ny cus om ng g m n s w l n c ngmodels such as dedicated team, T&M and FP. Since we have

l dy d scuss d os nd cons of s c ng mod lsl n s w , w w ll no m n on ny ng

speci c. Here, we will focus more on non-linear pricingmod ls s y do no v s nd d c ng c oss it

ndus y nd y v y w cus om d m nd nd m u y,nd l ons w s v c ov d .

08

p os Cons

Clos ly d o cus om s bus n ss cycl M y no b d c ly d o cus om s bus n ss ou com

en nc s cus om v s b l y n o consum on n L ck of ns ncy on ow wo k s fo m d

Encourages productivity and e ciency

Fig. 07: Pros and cons of using a transaction-based pricing model.


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D d c d m mod l

First time engagement with the particular customerp oj c s of ll s z s nd sc l s w ongo ng long m m l s on s

Scope is unknown and exibility in scope change is expected

t m nd M l (t&M) mod l

p oj c s of ll s z s nd sc l s w ongo ng long m m l s on s Scope is unknown and exibility in scope change is expected First time engagement with the customer Uncertainty on estimated e ort for completion of scoped work

Fixed Price (FP) model

Customer has a clearly de ned scope, aligned to short term goals / objectives of the enterprise Cus om do s no w n o own sks of d l v y, o l nd qu l y, bu w ll b dy o own sks l d o sco

oug c ng qu s s

hyb d mod l

B s c ng mod l fo b gg , long nd ongo ng oj c s, w c m y n d n u s n b g nn ng bu c n bf c d ov m

Service provider is engaging with the customer for the rst time Both service provider and customer want to mitigate the risks of T&M and FP pricing models

M n g d s v c s mod l

Wo k cl ly sco d ou , w cl ly m k d ou d l v bl s Service provider has an excellent understanding of the customers systems. The customer in turn is con dent enough to

nd ov wo k o m

Ou com -b s d c ng mod l

Clearly de ned output Output aligning to business process or where direct impact can be de ned For customers who want to align the service providers goals with their business goals

t ns c on-b s d c ng mod l

t ns c on volum s known nd d c bl From the customes perspective, this model is used for business process which can be clearly de ned, measured ind sc un s

t ns c on volum d o s v c ov d s cos d v s For the service providers perspective, this model is used in business process that are standardized, transaction

n ns v nd d m nd-d v n

Fig. 08: Which pricing model suits a given engagement?

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Managed services pricing model Business Intelligence (BI) factoryM n g d s v c s c ng mod ls qu o ougund s nd ng of cus om s it oc ss s, s nd ds

nd d nd nc s o x cu s v c s. t s mod llso n ds v y good v s b l y on l n wo k n

cus om n s o nsu cons n wo k un s ndgu n d v nu . M nd comm nds m l m n ng

s mod l fo cus om s w s wo k d fo mo ns x mon s o m g ng g m n sks.

h s c s s udy of on of ou b nk ng cl n s ww us d m n g d s v c s mod l, known s Bus n ssin ll g nc (Bi) f c o y fo nd- o- nd Bi l d

m l m n on. t d g m b low s ows Bi f c o ymodel at high level ( g. 09).

Figure 10 is a sample list of service categories applied ons mod l w c ng m od.

The BI factory model has de ned various service

categories with oor units to be served per month.t cus om ys M nd mon ly f of USD XXX oserve the agreed monthly oor value of service units. On

m l m n ng dd on l un s of s v c , cus om w lly n dd on l moun , b s d on g d un c

fo s v c un com l x y w s , s d c d n table below ( g. 11).

t s l n f u s of s c ng mod l b low: t co m s comb n on of n ons m w

key technical resources o shore t ons m ndl s cus om n c on,

qu m n g ng, oj c m n g m n , Uatcoo d n on nd oduc on d loym n

10

end o nd Bi c fo SVB 24x7 on c ll nc d n su o fo Bi o Report de nitions, blue print and rationalization r o d v lo m n / n nc m n s

ad- oc nd c m l o qu s s r o sc dul ng, mon o ng nd dm n s on

r o ng l fo m m g on / u g d s

Periodic knowledge Excessive costof administration& operation

Isolated BIapplication &support terms

High turn-aroundtimes forad-hoc request

Latency in project -mode execution

Reportfactory

Fig. 09: BI factory model at high level.

r o f c o yw s v c l n s

S v c l n w mon ly volum

Con nuous m ov m n oj c m n g m n gov n nc v w

p oduc on nc d n s

en nc m n

N w o qu s - no un v s c ng

N w o qu s_ w un v s c ng

X X

X X

X X

X X

Fig. 10: L s of s v c c go s l d on s mod l w c ng m od.


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The larger o shore teams service o erings included s gn, cod ng nd s ng fo ll s v c c go sThe o shore team can be ramped-up or ramped-downb s s l n of wo k. i s c c l o ck fu u

wo k l n fo M nd o l n b su o fok wo klo ds.

SLA driven model with risk and reward bene ts

t k y g l g s of s ng g m n oug ouexperience so far are shown at g. 12.

Hybrid pricing model Microso o shore development trackAt Mindtree, we o en recommend a hybrid pricing modelthrough a combination of T&M and FP in situations where

cus om s long m ongo ng oj c s. es c llyw n s sk of sco c n n l s g of

oj c s, o un l sco nd qu m n s f oz n.The diagram at g. 13 shows a case study of a Mindtreeb nk ng cus om w w v us d yb d c ngmodel for their Microso -based project implementations.

t s l n f u s of s c ng mod l b low: Comb n on of co m ons b ll d on t&M, nd

a shared team o shore billed on FP pricing, for eachestimated xed price project

t ons m ndl s cus om n c on,qu m n s g ng, oj c m n g m n nds m s fo oj c s w f oz n qu m n s

The larger o shore teams service o erings includeoj c d s gn, cod ng nd s ng nd s s d c oss

11

Com l x y Un cos (USD)

p oduc on nc d n USD XXX

en nc m n s

S m l USD XXX

M d um USD XXX

Com l x USD XXX

N w o qu s (no un v s c ng )

S m l USD XXX

M d um USD XXX

Com l x USD XXX

Fig. 11.

mul l oj c m l m n ons b s d onc n g lloc on

h k y g l g s of s ng g m n oug

our experience so far (Fig 14):

Outcome-based pricing model data analytics solutionsM nd comm nds ou com -b s d c ng mod lswhere the customer has xed and clearly de ned outcomes,with a standardized de nition of input and output. Thesco of wo k would cov mos of l m n s d v

cul ou com . M nd would wo k on oc ssw d c m c on m su bl bus n ss ou com s l k

v nu o cos nd would v noug o o un s om c ou com .

Fig. 15 is a case study of a banking customer where wev us d ou com -b s d c ng mod l fo

409a v lu on C Mx ou u s. in s c s cus om sc g d on v ous s g s of ou com , w un cos

nd mon ly b ll ng.

t s g s of ou com n oj c 409 v lu onsare shown at g.15. Each of the outcomes goes through as s of s g s (m nd o y / o on l). Com l x y of

particular stage for a de ned outcome varies based on then n f c o s of cul ou com .

t k y g l g s of s ng g m n oug ouexperience so far are given in g. 16.

t k y g l g s of s ng g m n oug ou

experience so far are shown at g. 14.

Hybrid pricing model Microso o shore development track


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C c l succ ssf c o s

a f c s f om M nd ng g m n

p c ng Fixed monthly contract value for agreed service units; charge unit price to every additional unit of s v c d l v d

B ll ng Mon ly

Sco Scope / requirements assessment and clari cation within the agreed SLA based on complexity of un of wo k

Best t customerng g m n s

Cus om n s s v s b l y of con nuous g ow nd n nc m n s o s itapplications, assuring a minimum monthly oor value

Sc l nd s z of ng g m n s

L g sc l nd ongo ng

eng g m nm u y

S v c ov d o und s nd cus om s bus n ss nd it oc ss s, nu nc s ndd nd nc s

Mutual bene ts For the customer, the model is highly cost e ective, cost predictive and has reduced overheadsof management; the customer can focus on strategic decisions and leave the operational work tothe service provider; for the service provider, the model is highly opportunistic on innovations,optimized productivity, exibility on shared resources and has guaranteed annuity business

r sk High risk for service provider; low risk for customer

Fig.12: The key highlights of our management service engagement model through our experience so far.

Fig.13: The hybrid pricing model at a high level.

12

Formulation of functional speci cation Architectural design coding, testing

O shore

Business requirements Analysis & technology assessment

Ons

Maintenance & support

O site


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Transaction-based pricing model _

Managed Test Functions (MTF)in ns c on c ng mod l, sco b com s v y

m o n . in s mod l, s v c ov d k s on

g sk. i k s on sks l d o volumof bus n ss, s c ng s b s d on c n volum

ssum ons. any c ng n volum o v on nvolum c n v d m c m c on cos . M nd

comm nds go ng w ns c on-b s d c ng mod l f volum of ns c ons g nd d c bl n d y,

w k o mon m f m .

The diagram at g. 17 shows a case study of one of ourb nk ng cl n s n w c w v us d ou ns c on-b s dpricing model, Managed Test Function (MTF), for

nd- o- nd s ng- l d s v c s.

The MTF engagement is a hybrid combination of T&M and ns c on-b s d mod l b c us s ng s v c

s low cl y on som n l s ng c v s w c n do b c d on t&M mod l. Onc sco nd s

scenarios are clearly de ned, the scope of execution of thes c s s s f ly known.

Some of the salient features of MTF model are: Su o s nsfo m on of cus om s

s ng mod ls Focus on transaction-based pricing

In initial stages, customer directs the testing e orts andbene ts are based purely on resource arbitrage; there is

com l focus on sou c s d l v ng s v cDe nable, repeatable and predictable unit price for

s wo k c n b u n l c fo s v c s SLas d v s v c ov d s focus o s v c

delivered; ensures reduced time to product availability.t s v c ov d sc l s u o d m nd, g qu l ytest services and pre-de ned and predictable costs

The MTF cost model can be shown in the format at g. 18.

The MTF model has experimented with the combinationof T&M and unit priced model for the bene t of both thecus om nd s v c ov d .

Som s m l un -b s d c v s nd t&M c v s depicted in the tables at gures 19 and 20.

13

C c l succ ss f c o s a f c s f om h M nd ng g m n

p c ng T&M for initial scope de nition by core team; FP for project implementation with clearlyde ned scope

B ll ng Mon hly

Sco Started with unclear scope and requirements of project de nition, later clari ed and frozenfor the estimation of the xed price project

Best t customer

ng g m n s

Cus om n s h s h v s b l y of con nuous g ow h nd nh nc m n s o s it

applications; customer does not have clarity on the scope and aims to clarify it during theinitial de nition phase of the project


L g sc l nd ongo ng

eng g m n m u y S v c ov d o und s nd cus om s bus n ss oc ss s nd nu nc s

Mutual bene ts For the customer, this model is highly cost e ective, cost predictive and has reducedoverheads of management; for the service provider, the model is highly opportunistic oninnovations, optimized productivity, exibility on shared resources and has guaranteed

nnu y bus n ss

r sk in l h s : Low sk fo s v c ov d nd h gh sk fo cus omSubs qu n h s s: Low sk fo cus om nd h gh sk fo s v c ov d

Fig.14: The key highlights of the hybrid pricing model through our experience so far.


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t k y g l g s of s ng g m n oug ouexperience so far are shown at g. 21.

Due diligence to identify best t pricing model

Mos m s, c ng mod ls d c d d by cus om s,b s d on x nc w o s v c ov d s, oin uenced by their capabilities, and sometimes them u y l v ls of bo s. t s o b d c s onf m wo k, o l bo s v c ov d nd customer, to assess and nally decide on the best suitable

c ng mod l. t s s b s d on v ous m s, l kng g m n / s v c y s, wo k ng x nc , n s

m u y l v l, du on / l ons of ng g m n ,mutual bene t and objectives / goals of the engagement

nd. t s f c g l g s k y m s ndd c s on m k ng f m wo k / gu d l n s o b ss ss d

g f om s w n n w cus om , ng g m n oproject is worked upon at the RFI or RFP stage.

Due diligence for cost / bene t ratio between T&M and bus n ss ou com mod l s d c d ng f c o fo

cus om nd s v c ov d o d c d on mod lo m l m n . t sk m um s ould b g nougo jus fy sk k n, v s- -v s t&M mod l. ano

c ll ng s o c u b nd b s d on m k

d m nd ( . . w cus om s w ll ng o y fo nsf of sk) nd d c d w c c n jus fy sk k n by s v c ov d n ou com mod l.

W l som c ll ng s l, o s mo m of c on. how v , bo c n b dd ss d by nsu ng

collaborative e ort from the service provider as well as cus om .

Som sugg s ons n s d c on : Do du d l g nc on ng g m n m u y w bo

cus om nd s v c ov d , nd ss ss d s s cso m su sks

C oos g c ng mod l on l gns boparties interests. For example, in case of insurance, if

ns c on un s no. of ol c s ssu d, n n s of s v c ov d nd cl n l gn d by

c oos ng ns c on-b s d mod l. as g ns s,f ns c on un s no. of l ds, n n s

of cl n nd s v c ov d no n c ss lyaligned as more number of leads would de nitely

nsl n o mo ym n fo s v c ov d bum y no nsl n o mo ol c s ssu d nd by,

m um, fo cl n . es bl s mu u lly g blmechanism to address volume uctuations.Agree on de ning and measuring SLAs during the initial

s s of ng g m n nd us s d fo b sl n ng m fo m n ng m of ng g m nB s d on ou x nc on v ous c ng mod ls

x cu d n M nd , s bl v d b loww c could b us d fo n l du d l g nc odecide on the best t pricing model.

B s d on ou x nc on v ous c ng mod ls

executed in Mindtree, there is a table arrived at at g. 22w c could b us d fo n l du d l g nc o d c don the best t pricing model.

14

S g S s p c

info m on c ckl s Na USD XX

p -m n g m n c ll a & B USD XX

Full valuation and dra opinion a & B USD XX

p -m n g m n c ll C & bov USD XX

Full valuation and dra opinion C & bov USD XX

aud s ons s Na USD XX

Fast track projects Na USD XX + 20% x

Fig 15. Stages of outcome in project 409 valuations.


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C c l succ ss f c o s a f c s f om M nd ng g m n

p c ng Outcome-based, stage-wise price per outcome; unit price varies based on complexityof s g fo ou com

B ll ng Mon ly

Sco Clearly de ned outcome elements with standardization of tasks; granulars gm n on of sks o b cl nd c s

Best t customer engagements Customer with xed and clearly de ned outcome and scope of work for serviceprovider; covers majority of elements of that outcome

Sc l nd s z of ng g m n s S v c ov d o und s nd cl n s bus n ss oc ss s nd nu nc s

Mutual bene ts For the customer, the model is highly cost e ect ive, cost predict ive and has reducedmanagement overheads; for service provider, the model is highly opportunistic on

nnov ons, o m z d oduc v y nd s gu n d nnu y bus n ss

r sk For customer moderate; for service provider high

Sta argumentation (T&M)

Cost bene t to customer

t s C n of exc ll nc (tCoe) Transaction based (MTF) model

Cus om Cus om

p ov d

Co m

Work owun s

Flex teamsou c

u l s onr sou c lloc on

p oj c a : B : C : ongo ng

C g ng b s d on t / M Charging based on xed price C g ng b s d on ou com nd us g

r sou c ov s on

p ov d ap oj c a

p ov d Bp oj c B

S v c ov s on

On d m nd s v c ov s ont s t s

t s

t s t s f c o y

innov ontools

an x ns on of tCoe mod l Focus on outcome based pricing De nable, repeatable and

d c bl un c fo swo k c n b u n l c fo s v c

SLas d v ov d s focus o s v c d l v d

Very e ective in delivering high qu l y s s v c

Su o s nsfo m on of cus om s s ng mod l

Cus om d c s s nge orts and bene ts are based

u ly on s u c b g Focus on the resources delivering

s v c

Fig. 17: Case study of one of our banking clients in which we have used our transaction-based pricing model.

Fig. 16: The key highlights of this engagement through our experience so far.

15


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Fig. 18: The MTF cost model can be shown in the format below.

Mod lS.N

t s ngs v c

c go y

Qu l y( x m l s)

r( x m l s)

amounr m ks

M n g s s v c s(MTF outcomeb s d)

1 Cat-a:Un b s d

c v y

X un s Sa / un s Xa Pre-de ned list of activitieswhich has a xed unit andcos ssoc d w .

This xed componentof nal test estimation(Bus n ss r qu m n sDocument sign o ) will notb c ng d un l s

gg fo Cr

t&M 2 Cat-B:t&M(Nod d c d_

actual e ortus g b s d)

Y son-ou s

$ B / p - ou s YB any c v y w c sno of un b s d

c v s, bu qu s dnd - ov d by

pM

t s s v blcomponent of nal test

s m on, w c w llc ng s nd w n pMs

qu s nd - ovdd on l c v s

3 Cat-C:t&M(D d c d -ODC mod lb s dsta ng)

Z ons l ds $ C/ ons -l d / mou

ZC D d c d sou c s qu s d nd- ov d by pM

L d m of fou og w ks fo n onssou c s d nd ng on

w n w onsson s f om n x s ngm w dy v s o

f om n ou s d m

S.NS.N


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S.N S v c /c v s

D sc on es m Un s No s

U-1 Test e or ts m on

p ov d s ns m of

testing e ort forn ov d wo k

e ort (per projecto Cr)

4 bus n ss d ys 75 t s s m on would b b s d onsigned o BRD

es m would nclud o l numb of un s, cos nd ssum ons

U-2 t s l nc on

C sl n fo wo k

e ort (per projectCr)

3 o 7 bus n ssd ys

150 Test plan creation, new modi cation

U-3 t s sc n od v lo m n

De ne the testbl sc n os

as g dsc dul

3 e c s sc n o w ll v nv g s c s s

U-4 t s c sd s gn ndcons uc on

D s gn s c sb s d on s blsc n os

as g dsc dul

1

U-5 t s c s

Modi cation

Mod fy s c s s as g d

sc dul

0.5

U-6 t s c sx cu on

ex cu s c s s as g dsc dul

0.625

U-7 au om onscc on

au om on scc on

as g dsc dul

3

U-8 au om onscmodi cation

au om on scmodi cation

as g dsc dul

1.5

U-9 au om onsc

x cu on

au om on scx cu on

as g dsc dul

0.1

U-10 p fo m ncs ng

C nd unfo m nc s

c s s nd pOC

as g dsc dul

c s byc s

Fig. 19. Some sample unit-based activities and T&M activities are depicted in the tables below.

Unit based activities

S.N


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S.NS v c /

c v sD sc on es m Cos s No s

T-1 t sin on /

ss ssm ns

su o

Su o x nd d du ngss ssm n s s

as g d

sc dul

Cost = e orts n .$ moun s

MSa

t su o would b x nd don oj c m n g s qu s .This e ort and cost estimate willb commun c d u f on ndn ds o b ov d by

oj c m n g

t-2 Uat su o Su o x nd ddu ng Uat

as g d

sc dul


MSa

t su o would b x nd don oj c m n g s qu s .This e ort and cost estimatew ll b commun c d u f on

nd n d o b ov d by oj c m n g

t-3 p oducgo l vd loym nsu o

i no m lly nclud s s of co s s of

b s c GUi func on llyo d mons

conn c v y o d b s , l c ons v s nd n s

as g d

sc dul


MSa

t su o would b x nd don oj c m n g s qu s

t-4 MQC ool

u g d

MQC ool u g d

l d ll sub c v s

as

g dsc dul

Cost = e ort

s n .$ moun s

MSa

t su o would b x nd d

on SVB SQa m n g s qu s .This e ort and cost estimate willb commun c d u f on ndn ds o b ov d by SVB SQa

T-5 pOC fo ools any qu s wov l f om oj c

m n g o v lu

as g d

sc dul


MSa

t su o would b x nd don SVB SQa ov l

18

Fig. 20: Some sample unit-based activities and T&M activities are depicted in the tables below.

T & M activities

U-9 scx cu on

u om on scx cu on

s gsc dul

0.1

U-10p fo m nc

s ng

C nd unfo m nc s

c s s nd pOC

s g dsc dul

c s byc s

U-11 t ssumm y

o

t s summ yo oj c

o Cr

1.5 businessd ys

21

U-12 aud s ss on FED and KPMGs c s ud

s g dsc dul

0

S.N


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C c l succ ss f c o s a f c s f om M nd ng g m n

p c ng T&M based pricing for initial test scenario scoping activities; transaction-based unitc ng fo x cu on of s c s s

B ll ng Mon ly

Sco Unclear initial test scope and requirements; post assessment phase, clearly de ned test

sc n os nd s c s s

Best t customerng g m n s

Cl n w g volum of ns c ons of s m l n


S v c ov d o und s nd cus om s bus n ss oc ss snd nu nc s

Mutual bene ts For the customer, the model is highly cost e ective, cost predictive and has reducedmanagement overheads; for the service provider, the model is highly opportunistic on

nnov ons, o m z d oduc v y nd s gu n d nnu y bus n ss

r sk For client moderate; for service provider high

K y g l g s of s ng g m n oug ou x nc so f

19

T-6 S cu ys ng

p fo m ng l c onvuln b l y sc nn ng

as g dsc dul


MSa

t su o would b x nd don oj c m n g s ov l

t-7 SOa s p fo m ng SOa s ngus ng SOa s ng ool

as g dsc dul


MSa

t su o would b x nd don oj c m n g s ov l

T-8 Kt n w Only Kt fo n w wo ke orts involving clients

l c on nd sys m v no v ously

as g dsc dul


MSa

Kt - x s ng c oss n ng c ossportfolios will not be billed by MTF

t-9 M nd o yoj c

m ngs- sl ds ndons og mm n g

Status meeting on MTF(if e ort extends beyond1hr per test lead perw k), scum oj c s usm ngs, d f c g

as g dsc dul


MSa

MTF test lead will communicateu f on nd su o wouldb x nd d on oj c m n g s

ov l

T-10 t s don

C of s d w n s d s no

ov d d ( x m l - mocktest data of FAS91)

as g dsc dul

c s by c s t su o would b x nd don oj c m n g s ov l

Fig .21. Transaction-based pricing model _ Managed Test Functions (MTF), key highlights.


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p c ngmod l

p oj c sco p oj cC sc l

p oj cdu on

r sk Cl nbudg ng

S v cov d

b ll ng

S v cov d

m g ns

eng g m nm u y

D d c dm

Flexibility o c ng

all Ongo nglong mm l -s on s

Low skfo s v c

ov d Low sk focl n

Fixedmon lybudg

r sou c -b s d

Low in lng g m n

t m &M l(t&M)

Flexibilityo c ng

all Ongo nglong mm l -s on s

Low skfo s v c

ov d Mod

sk fo

cl n

Floatingbudg

E ort-based Mod in lng g m n

Fixed Price(FP)

Cl lycul d

sco Less exibilityn d d fosco c ng s

Sm llnd

m d um

S om

Low sk focl n h g skfo s v c

ov d

Speci c /l m dbudg w

d c dn ds fof w y s

M l s onb s d p oj c

h g Signi cantm s n o

und s nd

cus om s itoc ss s

hyb d(t&M foFP)

Uncl g sn n l s

in l s

de nes scopefo subs qu n

s s

L g Ongo ngs o

m

m l s on

1st phase:Low skfo s v c

ov d h g skfo cl n

2nd s : Low sk focl n h g skfo s v c

ov d

1st phase:Floatingbudg

2nd s :Speci c/ l m dbudg

1st phase:r sou c -b s d

E ort-b s d

2nd s : M l s onb s d p oj c

Mod in llyt&M FP, post

cl y oncus om it

oc ss snd sco

t ns on- b s dmod l

Cl y onvolum of

ns c onng

L g Ongo ng h g skfo s v c

ov d

Budg foa speci c

ns c onvolumb nd

g ddu on

B ll ngb s d on

ns c onvolum

x cu dn g d

du on

Mod S v cov d o

und s ndcus om

ns c ons

com l onb s d

com l onb s d

Fig. 22: The initial due diligence to decide on the best t pricing model.


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- b s dmod l

volum of ns c on

ng

fo s v cov d

a speci cns c on

volumb nd

g ddu on

b s d onns c on

volumx cu dn g d

du on

ov d ound s ndcus om

ns c ons

M n g ds v c smod l

end o nds v c s wd l v bl s

L g Ongo ng h g skfo s v c

ov d Mod

sk focl n

Budg fomon ly

xed costnd x% of

v nccos

Mon lyb s d ond l v dun s

Mod S v cov d o

und s ndcus om it

nd bus n ssw ll

Ou com -b s dmod l

Clearly de nedand xedou com

Sm ll Ongo ng h g skfo s v c

ov d Mod

sk focl n

Budg fos m d

ou comvolum

On lumsum os

sul sc v d

Mod S v cov d o

und s ndcl n sbus n ss

oc ss snd nu nc s

Conclus onCus om s w ll lw ys look fo c l nv s m n

vo d nc , m n mum sk, nd g qu l y of s v c a low price. All this with maximum price exibility and

ns ncy. On o nd, s v c ov d swill look for minimum operational and nancialrisk, consistent and predictable pro t and revenueg ow , long s con c m oss bl nd

comm c l v b l y.

An e ective pricing model is one that helps in aligning n s s of cus om nd s v c ov d .

i s ould l n v ng c s com v ypro table, exible, simple and easy to apply. It should be

s n v of bus n ss l s nd m x m zbene ts for both the parties.

in summ y, s ss n l o do du d l g nc of ccus om ng g m n , long w sk ss ssm n ,

before deciding on the best t pricing model for them.This due diligence should be based on scienti c methodsw known m s c oss it ndus y. t bov

bl s good gu d l n fo suc n o c .

About the author:Shubha Krishnamurthy is currently employed in Mindtree as Program Director and has more than 14 years of IT

x nc n m n g ng l g sc l D W ous nd Bus n ss in ll g nc oj c s. S s cu n ly m n g ngdelivery for all the Data Warehouse and Business Intelligence projects under banking and nancial services andinsurance industry group. Prior to Mindtree she worked in Wipro Technologies and Patni Computers as so ware engineerd v lo ng d w ous nd bus n ss n ll g nc l c ons. S olds B.e w s c l z on n el c on cs Com u Sc nc f om S.D.M eng n ng Coll g of t c nology, D w d.

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