IT firms shifting focus from headcount to result(affects onsite and offshore head count)

Article from Business Standard:
Even while Indian IT firms are taking steps to reduce costs wherever possible, they are also making their delivery mechanisms stronger with less focus on employee addition.

“As per the traditional model, if we have 50 people working with the clients onsite, another 300 people work in offshore locations. Now, we are asking the clients to let us decide the number of people to be deployed for the project. They will explain the kind of services and levels they require, based on which we will decide our approach. We may thus deploy 10 people onsite, 20 people near-shore and 300 people offshore. And the persons deployed offshore need not be at one delivery centre, but at multiple locations,” said Suresh Vaswani, Joint CEO of Wipro’s IT business.

Firms tend to outsource work to save costs and reduce the time gap to hit the market. Increasingly, the model is shifting towards best-shoring, by which the vendors decide the location for delivery of certain components of services based on various factors such as the availability of talent and cost efficiency.

This is propelling companies such as Infosys, Wipro and TCS to sign more outcome-based price contracts, as against the earlier model, which was based on the number of people deployed in a project.

TCS, the largest IT exporter in the country, sees outcome-based pricing as part of its non-linear growth strategy rather than headcount-based pricing. The company has invested in various non-linear opportunities in areas such as software products platform, basic process outsourcing (BPO) and software as a service.

Most of the new contracts being signed by Wipro are also outcome-based price contracts. Following its acquisition of Citigroup’s captive IT arm in India, the company secured $500 million worth of contracts, a major part of which has outcome-based price components.
Infosys is vying to sign more outcome-based contracts and reduce dependence on headcount. Even though application, development and maintenance (ADM) still constitutes the largest chunk of Infosys’ overall revenue, the company is focusing on consulting and IP-based services where the margins are higher.

S Gopalakrishnan, CEO and MD, Infosys Technologies, said, “The transition to non-linear growth areas will happen slowly. We invest in the business and the future; and over time, the business changes. If you look at our business today from five years ago, more than 50 per cent of our revenues today comes from non-application development and maintenance work. It’s a significant change over the last five years, and that’s the strategy we have adopted.”

Analysts say that IT service providers prefer outcome-based pricing contracts because it rewards both the client and the service provider almost equally. “Outcome-based contracts are better from the customer’s point of view because it gives more accountability to the service provider. It is better from a service provider’s point of view because he constantly looks at innovating to deliver better service at a better cost,” said Sabyasachi Satpathy, Director & Co-founder of Mindplex Consulting, an outsourcing advisory firm.