In my April interview with Peter Allen, partner and managing director for Global Practices at outsourcing advisory firm TPI, he stressed the importance of offshore service providers offering solutions geared toward "productivity and outcome-based measures of value, not effort-based or income-oriented measures," noting that companies no longer see inexpensive labor as an advantage in itself. He told me:
[Companies] don't want more labor; they want more cost-effective ways of getting work done. In our mind, the runway for labor arbitrage benefits is just about gone.
I remembered our conversation when I saw a list of predictions for the outsourcing industry for 2010 from outsourced services provider Luxoft. One of the predictions, which Luxoft calls a change of focus and incentives, goes right to the heart of what Allen said. Here's how Luxoft puts it:
In the current economic environment companies will shift their focus away from long-term contracts to project-based assignments that will deliver tangible results within a shorter timeframe. In the process they will also consolidate their vendor portfolios, turning to a short list of strategic vendors versus employing hundreds of different vendors. By becoming more strategic in their vendor choices, companies will be able to ensure projects are in line with company expectations and deliverables. Outsourcing providers who can link business and IT strategies and plans will come out ahead. Results will be the main focus of payment, not the effort put into each project.
Offshore services provider Wipro appears to be using this outcomes-based strategy with at least some of its clients. According to a Bloomberg piece, India's Wipro is pitching a fixed-priced, risk-reward-based fee structure. The article quotes Girish Paranjpe, co-CEO of Wipro's information technology unit:
We get a base fee for development, but the real kicker is if the product is successful. So that puts more pressure on us to design the best product.
Paranjpe credited the new price strategy with a 1.5 percent boost in profit margins at Wipro's computer services unit last quarter. It earned 40 percent of its Q2 revenue from fixed-priced contracts, with most coming from those based on agreed outcomes. Though he didn't name the customers, Paranjpe said the company booked orders from phone companies in India and the Middle East that tied prices to their subscriber growth. Wipro agrees to a set price to deliver services, but receives added compensation if and when subscriber numbers increase.
The risk for Wipro, of course, comes if it can't deliver what it has promised. If it needs to add staff to complete a project by a proposed deadline, clients won't pay more for the staff reinforcements.
Financial analysts quoted in the article welcomed the strategy. Wipro is "partnering with clients rather than running the same old customer relationships, and becoming more adaptable," wrote Joseph Foresi, an analyst with Janney Montgomery Scott, in a note to clients. He said he expects more emphasis on new pricing models.