Increasing fragmentation of software development and maintenance contracts is forcing information technology (IT) companies to think different – even if it means killing the goose that lays the golden egg.
iGate, the Nasdaq-listed mid-tier IT firm, iGate, on Wednesday released a multi-million dollar ad campaign in North America (a market that delivers 60% of its revenues) against the traditional outsourcing model – called time & material (T&M), which is a contract based on time spent by software programmers and materials used to run the IT business — in favour of a more ‘client-friendly business outcome’ model.
The T&M model makes up 60% of revenues of most Indian IT firms, while for iGate, it’s more at 80%.
Phaneesh Murthy, CEO, iGate said: “The old model of IT vendors getting paid on a flawed metric of effort without any risk being shared is dying in today’s times. Corporations are now moving away from the T&M model that has curbed innovation in the IT industry.”
While the T&M model is based on charging according to number of hours and employees involved in servicing a client, the business outcome model is a non-linear model, that takes away risk from a client, wherein he only pays on a per-transaction basis.
Hemant Bhardwaj, marketing head at iGate, explains: “Since we will be taking on more risk in this model, as well as employing better talent equipped with both business and technology acumen, the services will carry a premium price tag, compared withT&M.”
However, verticals that contribute maximum revenues for software firms such as banking, finance, insurance and healthcare, are best suited for this outcome-based model, as they focus on transactions, he said.
“This is why we believe large IT companies also have the ability to shift to this model. It is only a change in mindset and willingness to take on risk, as this is the model most clients demand today.”
iGate says it is already on the verge of closing several $100 million deals on the business outcome model. The company is also targeting 30% of revenues from this model by 2017, tantamount to revenues of $1 billion, from an overall revenue target of $3 billion by that year.
In the next one year, iGate plans to set up business outcome model teams for other verticals like manufacturing, retail, media and entertainment. BFSI and manufacturing together contribute to 50% of iGate’s revenues today.
Rikesh Parikh, vice-president, markets strategy and equities, Motilal Oswal Securities, said since iGate is unable to capture significant market share, it may be trying to differentiate with this model. “However, we do not expect a widespread impact on other IT firms, as a result of the campaign,” he said.
However, in case IT companies do intend to shift to a transaction-based model, it will result in a huge loss of jobs. For iGate, too, converting to this model may hit its 30,000-odd global workforce.