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WHITE PAPER




        Best fit IT pricing
        models with mutual
        benefits for service
        providers and customers.
Executive summary
 Executive summary
Information Technology (IT) has shown rapid growth in the last two decades, opening upup the need for
   Information Technology (IT) has shown rapid growth in the last two decades, opening the need
foraarobust pricing model to meet changing expectations. Increasingly, customers are looking for benefits beyond cost
      robust pricing model to meet changing expectations. Increasingly, customers are looking for
benefits beyond cost savings and service improvements. emergence of pricing models beyond traditional ones such as
   savings and service improvements. This has led to the This has led to the emergence of pricing
models beyond traditional onesFixed as time and material (T&M) and fixed price (FP).
  Time and Material (T&M) and such Price (FP).

This white paper discusses various pricing models with their characteristics, risk comparators, pros and cons and best
  This white paper discusses various pricing models with their characteristics, risk comparators, pros
and cons and best fit customercovers some examples some examples of thetried out in Mindtree. out
  fit customer engagement. It engagement. It covers of the pricing models pricing models tried It also covers the due
in Mindtree. required to decide thediligence required to decidegiven situation, with mutual benefits for both customer and
   diligence It also covers the due best fit pricing model for a the best fit pricing model for a given
situation, with mutual benefits for both customer and service provider.
   service provider.




Contents
A background on pricing models                                 03

The best fit pricing model                                     03

Mutually beneficial pricing models                             03

Linear pricing models                                          03

a. Dedicated team                                              03

b. Time and material (T&M)                                     03

c. Fixed price (FP)                                            04

Non-linear pricing models                                      04

a. Hybrid model                                                04

b. Managed services model                                      05

c. Outcome based model                                         05

d. Transaction based model                                     08

Which pricing model suits a given engagement?                  08

Examples of tried and tested Mindtree pricing models           08

Due diligence to identify best fit pricing model               14

Conclusion                                                     21




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A background on pricing models                                       Some linear pricing models are described below:
A pricing model for an IT service refers to the contractual          a) Dedicated team: The dedicated team model works as
agreement between a service provider and a service gainer.           a dedicated service provider for a period of time. This
The agreement is formed based on the type of service the             team acts as the virtual extension of the client’s in-house
parties engage in. Today, pricing models in the IT industry          development team. The customer takes the onus of getting
have matured from the traditional T&M and FP models to               work done effectively from the team. Advantages of this
the modest managed services / outcome based models. An               model include knowledge retention and the flexibility of
inevitable progression as the IT industry went from simply           utilizing the team for different requirements. Monthly bills
understanding customer needs and services, to establishing           are raised based on the number of resources dedicated
innovative, non-linear and agile pricing models. In an effort        every month.
to build more sustaining relationships and getting to the
next level of a mutually beneficial partnership.                     Figure 01 shows the pros and cons of using the dedicated
                                                                     team pricing model.
The best fit pricing model
For a pricing model to be successful, it should strike the           b) Time and Material (T&M): The T&M model works best for
right balance between the customer’s expectations of                 customers who want a flexible and agile project execution.
quality, timeliness and price, and the service provider’s cost       Here they play a greater role in the development of the
and operational efficiency. Customer engagements may not             software product or solution. This model works best when
be successful with one type of pricing model every time. It’s        requirements change frequently and is generally used for
a journey for both the parties to go agile based on best fit         product development projects. In this model the customer
for the scoped services and engagement models.                       carries virtually all the related risks of scope, quality of
                                                                     deliverables and project management. Therefore the
Mutually beneficial pricing models                                   margins for T&M players are the lowest. There are no risks
Many pricing models are currently practiced by the IT                and no investments by service providers.
industry. From the traditional T&M and FP, to more talented
ones like managed service / outcome-based models. At a               The service provider assigns a team to the customer and
higher level, pricing models can be divided into linear and          the actual time spent by the team on the project is billed.
non-linear categories.                                               Monthly invoicing is pro-rata, based on the total hours
                                                                     spent on the project and the rates for the skill sets involved.
Linear pricing models
Linear pricing models are based purely on the relationship           Traditionally, service providers are paid basis the number of
between time and material (effort and rate). The service             person hours spent on writing code. So, to maximize their
provider is paid based on the resource provided or the               revenue, service providers try to maximize the hours spent
effort spent for the required duration of agreed time.               and number of people used to write the code. Customers


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

  Pros                                                              Cons

  Simple to understand and implement                                Lack of ownership from service providers

  Can be effectively used to compare prices across                  Low level of team motivation due to lack of career
  service providers                                                 mentoring

                                                                    No time / effort commitment from the customer in the
  Knowledge retention
                                                                    utilization of resources from service providers

  Flexibility to utilize the team for different requirements        Not closely related to customer’s business need
  as needed                                                         or outcome

  Low risk model for both service provider and customer             No incentive for service providers to be efficient




White paper                                                                                                                         03
on the other hand, want to reduce the total cost of                Non-linear pricing models
development and therefore want to minimize billed hours.           Non-linear pricing models decouple the relationship
This creates misaligned incentives between customers and           between time and material (effort and rate). Normally
service providers.                                                 T&M and FP do not offer much scope for modification
                                                                   and changes. Service providers have realized the need
Figure 02 shows the pros and cons of using the Time and            to be flexible to satisfy their customers. This has led to
Material (T&M) pricing model.                                      innovations in pricing models that suit varying needs.
                                                                   Some non-linear pricing models are mentioned below:
c) Fixed Price (FP): The fixed price model is ideal for small
and medium level projects with clear and well-defined              a) Hybrid model: The hybrid model uses T&M techniques
requirements. In this model, the service provider and              to estimate costs for projects that do not have clear-cut
the customer both carry some scope-related risk. But, as           goals or detailed and complete requirements initially. It
per the agreed contract, any change in the scope would             then allows customers to pay a fixed price based on the
result in a change in the price. Fixed price models allow          estimation. This hybrid pricing model has the best features
customers to pay a fixed price for a project that is agreed        of both the models – T&M and FP, as mentioned above. It
upon by both the parties. The fixed price could be split           allows service providers to deploy resources as in the T&M
and paid on milestones. This model works where the scope           model, but most of the project is executed according to the
and specifications of the project are crystal clear from           FP model. Hence, the project has a smooth workflow and
the very beginning and system requirements have been               well-aligned processes.
defined clearly. In this model, it is very important to discuss
everything and make an estimation of the appropriate cost          Hybrid is the best pricing model for bigger, longer and
of the project at the very beginning.                              ongoing projects with unclear objectives at the start. Here
                                                                   input and feedback is needed in the beginning, but delivery
It is certainly a low-risk option for the customer, as the FP      can be perfected over time to ensure that all customer
model ensures that the project is done and delivered within        requirements are successfully met. This model is a great
a specific time and budget. The FP project plan specifies          middle ground for professionals who like hourly payments
costs, timelines and deliverables in unambiguous terms             and customers who prefer to make a one-time payment
and is ideal for customers with set goals, detailed project        for the project. The hybrid pricing model helps customers
specifications and a limited budget.                               optimize budgets without compromising on the quality of
                                                                   product or application. It also gives the service provider a
The pros and cons of using the FP model is shown in                controlled environment with shared risks in operations.
figure .03.


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


  Pros                                                            Cons

  Simple to understand and implement                              Lack of ownership from service providers

  Can be effectively used to compare price across                 Low level of team motivation due to lack of
  service providers                                               career mentoring

  Knowledge retention                                             Through scaled estimated efforts, service providers can
                                                                  try for increased billing

  Flexibility to utilize the team for different requirements      Not closely related to customer’s business need
  as needed                                                       or outcome

  Low risk model for service provider and moderate risk           No incentive for service providers to be efficient
  model for client




White paper                                                                                                                     04
Figure 04 shows the pros and cons of the hybrid                     associated with such an approach is that the service
pricing model.                                                      provider may decide to allocate shared resources, which
                                                                    could result in delivery issues
b) Managed services model: The managed services                  ƒƒ This model is often adopted when work can be clearly
model offers defined service deliverables at a fixed cost.          scoped out, with clearly marked deliverables
Traditionally, value was realized according to how well it       ƒƒ For this model to work, the service provider should have
was managed by the service provider, and how well it was            an excellent understanding of the customer’s systems.
perceived by the customer. This was more qualitative in             The customer in turn should be confident enough to
nature. In the managed services model on the other hand,            hand over work to the service provider
the value-add is quantitatively measured in terms of target      ƒƒ The customer’s role is that of a reviewer with the
Service Level Agreements (SLAs). This is based on clearly           additional responsibility of contracts management and
defined parameters in project performance and quality.              budget tracking
                                                                 ƒƒ The service provider will be responsible for selection of
Customers are billed at a fixed monthly cost plus unit              resources as well as managing stakeholder expectations
cost per additional unit delivered. For customers, the           ƒƒ There will be clearly marked SLAs for each deliverable,
model helps them arrive at a predictable budget. For                with penalties applicable for non-delivery
service providers, it assures continuous fixed revenue, plus     ƒƒ Delivery of service can be performed onshore at the
additional revenue through scalability and better margins           client location, offshore or a combination of both
through repetition. Mutually agreed SLAs will be met,            ƒƒ A managed services model is often adopted by
unless the service provider wishes to pay a penalty. If the         enterprises as a continuation of an existing staff
service provider meets / exceeds all agreed SLAs they are           augmentation. Adopting a managed services model
monetarily rewarded, as per the contract.                           from day one comes with lots of risks (ref. fig. 05).


Some key features of the managed services model:                 c) Outcome-based pricing model: Outcome-driven
ƒƒ The service provider takes end-to-end responsibility of       solutions are pin-pointed and positioned as delivering
   set service lines and deliverables                            specific value to the business. Outcome-based projects
ƒƒ The service provider makes the decisions and takes the        aim to deliver measurable impact on the customer’s overall
   responsibility to provide the agreed set of deliverables      business results. The basic philosophy is to align the
ƒƒ Budgets are mostly fixed for the entire piece of work,        interests of the service provider and the customer so that
   making it more like a fixed price managed services            both work towards the same goal. In this model, the scope
   engagement. In this case, the service provider has a          is the business outcome itself. Clearly defined and fixed
   free hand in deciding how, where and with how many            outcomes which can be measured and delivered for a given
   personnel the project can be delivered. The risk              project is critical to its success. In an outcome-based

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

  Pros                                                          Cons

  Clearly scoped small / medium sized engagements               Customers have no control in resource utilization as
                                                                maximum ownership is with service provider

  Closely related to customer’s business needs with clearly     Knowledge retention is at risk as the development team
  defined objectives and milestones                             might get dispersed after project completion

  Low risk model for customers                                  High risk model for service provider

  High assurance of project completion within estimated         Difficult to compare prices across service providers as final
  budget and timelines                                          cost driven by productivity and risk assessment

  Highly motivating for service providers to be efficient and   Quality can suffer as end-to-end development is managed
  productive                                                    by the service provider




White paper                                                                                                                     05
model, resource loading, costing and pricing is a               In outcome-based projects, service providers control a
complicated exercise.                                           significant portion of the value chain affecting outcomes,
                                                                even when they are not directly under the service
The mechanism for paying the service provider varies. But       provider’s control. Hence, bringing into your sphere of
generally the payment is made in made in one lump sum           influence things not under your influence is a critical part of
when the result is achieved or over shorter milestones, so      the execution model. This is where partnership with other
that the service provider recoups its investment in time.       service providers, even competitors, will be a critical factor
                                                                in success (ref. fig. 05).
The three key elements of an outcomes-driven
project are:                                                    In this model, the customer gets rewarded by converting a
                                                                fixed cost into a truly variable cost model that scales with
ƒƒ The service provider cannot earn a direct revenue from       the business. It frees up client executives from worrying
  the customer unless the work outcome delivers value to        about issues like technology, process and people, and
  the customer                                                  allows them to focus on business outcomes – things that
ƒƒ The scope of work impacts a large chunk of the process       really matter to the business. The customer carries no risk
  that influences a business outcome, and service provider      since they pay only when they get the desired outcome. By
  can adjust / tweak some elements of the process to            having a standardized definition of input and output in an
  impact the business outcome                                   outcomes-driven model, services become more
ƒƒ Service providers need to develop competences to             like products.
  tightly define the scope of an outcome-based project to
  be successful                                                 In an outcome-based model, service providers bet on the
                                                                customer and vice versa, to make success happen. Risk
The primary driver of outcome-based pricing is the              transfers from customer to service provider, the model
process characteristics, and scope of engagement with the       progresses from T&M to outcome-based. The service
customer. As a rule of thumb, if a process directly impacts     provider should account for transference of risk and cover
measurable business outcome like revenue or cost, the           by including a risk premium in the price. The risk premium
service provider should explore a business outcome-based        increases as you progress through these models and results
pricing. More so if there are enough opportunities to impact    in increasing margins for the service provider. The ability to
the business outcome. However, the thing to remember is         measure risk and charge the appropriate risk premium is a
whether the scope of work covers the majority of elements       critical factor in the service provider’s success (ref. fig. 06).
that drive a particular outcome.


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

  Pros                                                         Cons

  Utilizes the best features of both the T&M and FP            Customer has no control in resource utilization and
  pricing models                                               maximum ownership is with service providers

  Middle ground for the customers amongst hourly payment       Shared risks between service provider
  and one-time payment                                         and customer

  Helps the customer to optimize the budget without
  compromising on the quality of deliverables

  Low risk model for both service provider and customer

  Knowledge retention




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

  Pros                                                          Cons

  Since delivery and stakeholder expectations are the           Service providers are sometimes reluctant to assume more
  service provider’s responsibility, the customer can focus     management responsibilities
  fully on their core strategic initiatives

  Service providers are more independent and have a             Culture mismatch between the customer and service
  relatively interference-free management of the project        provider can result in a lack of understanding, which
                                                                may affect deliverables

  Enables service providers to make long-term strategic         Sometimes, service providers don’t have a view of
  investments that should indirectly benefit the customer       the scope of the project or may not understand all
                                                                of the customer’s pain points, which could result in
                                                                major setbacks

  Service providers bring their best practices into the         In a multi-service provider scenario, where for instance
  project, thereby making key process improvements              one provider manages applications and the other,
                                                                infrastructure, blame games are common, with no-one
                                                                willing to assume responsibility

  SLA driven approach results in key process improvements       Re-allocation of the contract, in case of performance
  delivering significant, measurable benefits to the customer   issues or non-conformance of SLAs, might be a challenge,
                                                                given that the existing service provider will be less
                                                                cooperative

  Knowledge retention becomes more streamlined
  and sustainable


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


  Pros                                                          Cons

  Directly aligned to the customer’s business outcome           Lack of transparency in how work is performed

  Potential for higher eventual savings as labor arbitrage is   Little insight into cost of services
  replaced by productivity and synergies between tasks

  Ability to incent more innovative behavior from               Cultural resistance from both customer and
  service provider                                              service provider

  Deep appreciation of the customer’s business model,           Customer enterprises are sometimes too immature to
  operations and industry nuances                               appreciate the change management process




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d) Transaction pricing model: A transaction is a sequence            Which pricing model suits a given engagement?
of steps with defined input and output, which achieves a             The pricing model need not be intelligent enough
business purpose. Examples of transactions include invoice           to address the customer’s budget objectives, but
or payroll processing. A transaction unit is a unit of measure       has to suit the respective customer engagement. IT
with which a transaction can be measured. Examples                   engagements spread from discovery and definition types
of transaction units are ‘per pay slip’ or ‘per invoice’,            to implementation, maintenance and support. The pricing
etc. A transaction price is typically quoted as ‘price per           model that worked for one type of engagement may or may
transaction unit’. It is generally mentioned as applicable for       not work for another. It is also possible that a pricing
a specified transaction volume range.                                model that suits one client may not suit another. Naturally,
                                                                     assessing the best possible pricing model for a customer or
The transaction-based pricing model is based on the                  an engagement sometimes requires a trial (fig. 08).
number of transactions processed. Typically a base price
is provided for a specified volume band, with a negotiated           Examples of Mindtree tried and tested
increase or decrease in price as usage fluctuates around             pricing models
the specified band. In this model, the scope becomes                 Mindtree has tried out various pricing models like
very important. The scope is also slightly different from            dedicated team, T&M, FP, managed services, outcome-
conventional projects and should be defined more tightly.            based models, etc. There are various challenges, pros and
The volume of transactions and the variations in volume              cons of each of these models in various engagements and
in a day, week, month or months make a huge impact on                customer scenarios. Each of them has learnings which can
pricing and effort. Another important scope element is               be leveraged within Mindtree and across the IT industry.
the form of input. Whether the input is electronic, paper            This artifact covers some pricing models with their
form, integrated into xml, importable or already imported            differentiating factors, best suited customer scenarios,
can have a huge impact on the cost. Any change in the                benefits to customer / service providers, and value-add
assumption of proportion of the two forms of applications            perceived by the customer.
could make a huge effort and cost difference for the
service provider.                                                    There are many customer engagements with linear pricing
                                                                     models such as dedicated team, T&M and FP. Since we have
In this model, service providers take on a higher risk.              already discussed the pros and cons of these pricing models
They take on risks related to the volume of business, as the         earlier in this white paper, we will not mention anything
pricing is based on certain volume assumptions. Change               specific. Here, we will focus more on non-linear pricing
or variation in the volume can have can have a dramatic              models as they do not have a standard pricing across the IT
impact on their cost.                                                industry and they vary with customer demand and maturity,
                                                                     and their relationship with the service provider.
Figure 07 shows the pros and cons of using a
transaction-based pricing model.


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

  Pros                                                           Cons

  Closely tied to the customer’s business cycle                  May not be directly tied to the customer’s business outcome

  Enhances customer visibility into consumption pattern          Lack of transparency on how work is performed

  Encourages productivity and efficiency




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


  Dedicated team model

  ƒƒ First time engagement with the particular customer
  ƒƒ Projects of all sizes and scales with ongoing long term milestones
  ƒƒ Scope is unknown and flexibility in scope change is expected

  Time and Material (T&M) model

  ƒƒ Projects of all sizes and scales with ongoing long term milestones
  ƒƒ Scope is unknown and flexibility in scope change is expected
  ƒƒ First time engagement with the customer
  ƒƒ Uncertainty on estimated effort for completion of scoped work

  Fixed Price (FP) model

  ƒƒ Customer has a clearly defined scope, aligned to short term goals / objectives of the enterprise
  ƒƒ Customer does not want to own the risks of delivery, people and quality, but will be ready to own risks related to scope
    through change requests

  Hybrid model

  ƒƒ Best pricing model for bigger, longer and ongoing projects, which may need inputs in the beginning but can be
    perfected over time
  ƒƒ Service provider is engaging with the customer for the first time
  ƒƒ Both service provider and customer want to mitigate the risks of T&M and FP pricing models

  Managed services model

  ƒƒ Work clearly scoped out, with clearly marked out deliverables
  ƒƒ Service provider has an excellent understanding of the customer’s systems. The customer in turn is confident enough to
    hand over the work to them

  Outcome-based pricing model

  ƒƒ Clearly defined output
  ƒƒ Output aligning to business process or where direct impact can be defined
  ƒƒ For customers who want to align the service provider’s goals with their business goals


  Transaction-based pricing model


  ƒƒ Transaction volumes are known and predictable
  ƒƒ From the custome’s perspective, this model is used for business process which can be clearly defined, measured in
    discrete units
  ƒƒ Transaction volume are tied to the service provider’s cost drivers
  ƒƒ For the service provider’s perspective, this model is used in business process that are standardized, transaction
    intensive and demand-driven




White paper                                                                                                                     09
Managed services pricing model —                                        Figure 10 is a sample list of service categories applied on
Business Intelligence (BI) factory                                      this model with their pricing method.
Managed services pricing models require a thorough
understanding of the customer’s IT processes, standards                 The BI factory model has defined various service
and dependencies to execute the services. This model                    categories with floor units to be served per month.
also needs very good visibility on the pipeline work in the             The customer pays Mindtree a monthly fee of USD XXX to
customer enterprise to ensure constant work units and                   serve the agreed monthly floor value of service units. On
guaranteed revenue. Mindtree recommends implementing                    implementing additional units of service, the customer will
this model for customers where it has worked for more than              pay an additional amount, based on the agreed unit price
six months to mitigate engagement risks.                                for the service unit – complexity wise, as depicted in the
                                                                        table below (fig. 11).
Here is a case study of one of our banking clients where
we used a managed services model, known as “Business                    The salient features of this pricing model are below:
Intelligence (BI) factory” for end-to-end BI related                    ƒƒ The core team is a combination of an onsite team with
implementation. The diagram below shows the BI factory                     key technical resources offshore
model at high level (fig. 09).                                          ƒƒ The onsite team handles customer interaction,
                                                                           requirement gathering, project management, UAT
                                                                           coordination and production deployment


Fig. 09: BI factory model at high level.

  Periodic knowledge             Isolated BI              Excessive cost             High turn-around           Latency in project -
                                 application &            of administration          times for                  mode execution
                                 support terms            & operation                ad-hoc request



                                                               Report
                                                               factory


  ƒƒ End to end BI chart for SVB                                     ƒƒ Ad-hoc and piecemeal report requests
  ƒƒ 24x7 on call incident support for BI report                     ƒƒ Report scheduling, monitoring and administration
  ƒƒ Report definitions, blue print and rationalization              ƒƒ Reporting platform migration / upgrades
  ƒƒ Report development / enhancements



Fig. 10: List of service categories applied on this model with their pricing method.


 Report factory             Service line with monthly volume
 with service lines
                            Production incidents                                                                                XX

                            Enhancement                                                                                         XX

                            New report request - no universe change                                                             XX

                            New report request _ with universe change                                                           XX

                            Continuous improvement project management governance review




White paper                                                                                                                           10
ƒƒ The larger offshore team’s service offerings include                 multiple project implementations based on
   design, coding and testing for all service categories                percentage allocation
ƒƒ The offshore team can be ramped-up or ramped-down
   basis the pipeline of work. It is critical to track the future    The key are the key highlights of this engagement through
                                                                       Here highlights of this engagement through our
   work pipeline for Mindtree to plan better support for             experience so far are far (Fig at fig. 14.
                                                                       our experience so shown 14):
   peak workloads.
ƒƒ SLA driven model with risk and reward benefits                    Outcome-based pricing model — data analytics solutions
                                                                     Mindtree recommends outcome-based pricing models
The key highlights of this engagement through our                    where the customer has fixed and clearly defined outcomes,
experience so far are shown at fig. 12.                              with a standardized definition of input and output. The
                                                                     scope of work would cover most of the elements that drive
Hybrid pricing model — Microsoft offshore development track
                                 offshore development track          a particular outcome. Mindtree would work on a process
At Mindtree, we often recommend a hybrid pricing model               with direct impact on measurable business outcomes like
through a combination of T&M and FP in situations where              revenue or cost and would have enough opportunities to
the customer has long term ongoing projects. Especially              impact the outcome.
when there is a risk of scope creep in the initial stage of the
projects, or until the scope and requirements are frozen.            Fig. 15 is a case study of a banking customer where we
The diagram at fig. 13 shows a case study of a Mindtree              have used the outcome-based pricing model for their
banking customer where we have used the hybrid pricing               409A valuation CapMx outputs. In this case the customer is
model for their Microsoft-based project implementations.             charged on various stages of the outcome, with a unit cost
                                                                     and monthly billing.
The salient features of this pricing model are below:
ƒƒ Combination of a core team onsite billed on T&M, and              The stages of outcome in project 409 valuations
   a shared team offshore billed on FP pricing, for each             are shown at fig.15. Each of the outcomes goes through a
   estimated fixed price project                                     series of stages (mandatory / optional). Complexity of a
ƒƒ The onsite team handles customer interaction,                     particular stage for a defined outcome varies based on the
   requirements gathering, project management and                    inherent factors of that particular outcome.
   estimates for projects with frozen requirements
ƒƒ The larger offshore team’s service offerings include              The key highlights of this engagement through our
   project design, coding and testing and is shared across           experience so far are given in fig. 16.



Fig. 11.

  Complexity                                                        Unit cost (USD)

  Production incident                                               USD XXX

  Enhancements

  Simple                                                            USD XXX

  Medium                                                            USD XXX

  Complex                                                           USD XXX

  New report request (no universe change)

  Simple                                                            USD XXX

  Medium                                                            USD XXX

  Complex                                                           USD XXX



White paper                                                                                                                     11
Fig.12: The key highlights of our management service engagement model through our experience so far.

  Critical success         Artifacts from the Mindtree engagement
  factors

  Pricing                  Fixed monthly contract value for agreed service units; charge unit price to every additional unit of
                           service delivered

  Billing                  Monthly

  Scope                    Scope / requirements assessment and clarification within the agreed SLA based on complexity of
                           unit of work

  Best fit customer        Customer enterprise has the visibility of continuous growth and enhancements to its IT
  engagements              applications, assuring a minimum monthly floor value

  Scale and size of        Large scale and ongoing
  engagements

  Engagement               Service provider to understand the customer’s business and IT processes, nuances and
  maturity                 dependencies

  Mutual benefits          For the customer, the model is highly cost effective, cost predictive and has reduced overheads
                           of management; the customer can focus on strategic decisions and leave the operational work to
                           the service provider; for the service provider, the model is highly opportunistic on innovations,
                           optimized productivity, flexibility on shared resources and has guaranteed annuity business

  Risk                     High risk for service provider; low risk for customer


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

                            Onsite                                                                 Offsite

            ƒƒ Business requirements
                                                                                   ƒƒ Maintenance & support
            ƒƒ Analysis & technology assessment




                                                                Offshore

                                               ƒƒ Formulation of functional specification
                                               ƒƒ Architectural design coding, testing




White paper                                                                                                                       12
Transaction-based pricing model _                                     Some of the salient features of MTF model are:
Managed Test Functions (MTF)                                          ƒƒ Supports the transformation of the customer’s
In the transaction pricing model, the scope becomes very                   testing models
important. In this model, the service provider takes on               ƒƒ Focus on transaction-based pricing
a higher risk. It takes on the risks related to the volume            ƒƒ In initial stages, customer directs the testing efforts and
of business, as the pricing is based on certain volume                     benefits are based purely on resource arbitrage; there is
assumptions. Any change in the volume or variation in                      a complete focus on the resources delivering the service
volume can have a dramatic impact on cost. Mindtree                   ƒƒ Definable, repeatable and predictable “unit price” for
recommends going with a transaction-based pricing model if                 test work can be put in place for services
the volume of transactions are high and predictable in a day,         ƒƒ SLAs drive the service provider’s focus to the service
week or month timeframe.                                                   delivered; ensures reduced time to product availability.
                                                                           The service provider scales up to demand, high quality
The diagram at fig. 17 shows a case study of one of our                    test services and pre-defined and predictable costs
banking clients in which we have used our transaction-based
pricing model, “Managed Test Function (MTF)”, for                     The MTF cost model can be shown in the format at fig. 18.
end-to-end testing-related services.
                                                                      The MTF model has experimented with the combination
The MTF engagement is a hybrid combination of T&M and                 of T&M and unit priced model for the benefit of both the
the transaction-based model because the testing service               customer and the service provider.
has low clarity on some initial testing activities which need
to be priced on the T&M model. Once the scope and test                Some sample unit-based activities and T&M activities are
scenarios are clearly defined, the scope of execution of the          depicted in the tables at figures 19 and 20.
test cases is fairly known.

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


  Critical success factors       Artifacts from the Mindtree engagement

  Pricing                        T&M for initial scope definition by core team; FP for project implementation with clearly
                                 defined scope

  Billing                        Monthly

  Scope                          Started with unclear scope and requirements of project definition, later clarified and frozen
                                 for the estimation of the fixed price project

  Best fit customer              Customer enterprise has the visibility of continuous growth and enhancements to its IT
  engagements                    applications; customer does not have clarity on the scope and aims to clarify it during the
                                 initial definition phase of the project

  Scale and size of              Large scale and ongoing
  engagements

  Engagement maturity            Service provider to understand customer’s business processes and nuances

  Mutual benefits                For the customer, this model is highly cost effective, cost predictive and has reduced
                                 overheads of management; for the service provider, the model is highly opportunistic on
                                 innovations, optimized productivity, flexibility on shared resources and has guaranteed
                                 annuity business

  Risk                           Initial phase: Low risk for service provider and high risk for customer
                                 Subsequent phases: Low risk for customer and high risk for service provider



White paper                                                                                                                         13
The key highlights of this engagement through our              Some suggestions in this direction are:
experience so far are shown at fig. 21.                        ƒƒ Do due diligence on the engagement maturity with both
                                                                  customer and service provider, and assess data statistics
Due diligence to identify best fit pricing model                  to measure the risks
Most times, pricing models are decided by customers,           ƒƒ Choose the right pricing model – one that aligns both
based on experience with other service providers, or              parties’ interests. For example, in case of insurance, if
influenced by their capabilities, and sometimes the               the transaction unit is ‘no. of policies issued’, then the
maturity levels of both parties. There has to be a decision       interest of service provider and client are aligned by
framework, to help both the service provider and the              choosing the transaction-based model. As against this,
customer, to assess and finally decide on the best suitable       if the transaction unit is ‘no. of leads’, then the interest
pricing model. This is based on various parameters, like          of the client and service provider are not necessarily
engagement / service types, working experience, enterprise        aligned as more number of leads would definitely
maturity level, duration / relationship of engagement,            translate into more payment for service provider but
mutual benefit and objectives / goals of the engagement           may not translate into more policies issued and thereby,
at hand. This artifact highlights the key parameters and          premium, for client. Establish a mutually agreeable
decision making framework / guidelines to be assessed             mechanism to address volume fluctuations.
right from the start when the new customer, engagement or      ƒƒ Agree on defining and measuring SLAs during the initial
project is worked upon at the RFI or RFP stage.                   phases of the engagement and use this data for base
                                                                  lining them for the remaining term of the engagement
Due diligence for cost / benefit ratio between T&M and            Based on our experience on various pricing models
the business outcome model is a deciding factor for the           executed in Mindtree, there is a table arrived at below
customer and the service provider to decide on the model          which could be used for the initial due diligence to
to implement. The risk premium should be high enough              decide on the best fit pricing model.
to justify the risk taken, vis-a-vis the T&M model. Another
challenge is to cap the upper band — based on market           Based on our experience on various pricing models
demand (i.e. what the customer is willing to pay for the       executed in Mindtree, there is a table arrived at at fig. 22
transfer of risk) and decide whether the cap can justify the   which could be used for the initial due diligence to decide
risk taken by the service provider in the outcome model.       on the best fit pricing model.


While some challenges are real, others are more a matter of
perception. However, both can be addressed by ensuring a
collaborative effort from the service provider as well as
the customer.



Fig 15. Stages of outcome in project 409 valuations.


  Stage                                        Series                                Price

  Information checklist                        NA                                    USD XX

  Pre-management call                          A&B                                   USD XX

  Full valuation and draft opinion             A&B                                   USD XX

  Pre-management call                          C & above                             USD XX

  Full valuation and draft opinion             C & above                             USD XX

  Audit responses                              NA                                    USD XX

  Fast track projects                          NA                                    USD XX + 20% extra



White paper                                                                                                                      14
Fig. 16: The key highlights of this engagement through our experience so far.

  Critical success factors                Artifacts from the Mindtree engagement

                                          Outcome-based, stage-wise price per outcome; unit price varies based on complexity
  Pricing
                                          of stage for that outcome

  Billing                                 Monthly

  Scope                                   Clearly defined outcome elements with standardization of tasks; granular
                                          segmentation of tasks to be clear and precise

  Best fit customer engagements           Customer with fixed and clearly defined outcome and scope of work for service
                                          provider; covers majority of elements of that outcome

  Scale and size of engagements           Service provider to understand client’s business processes and nuances

  Mutual benefits                         For the customer, the model is highly cost effective, cost predictive and has reduced
                                          management overheads; for service provider, the model is highly opportunistic on
                                          innovations, optimized productivity and has guaranteed annuity business

  Risk                                    For customer – moderate; for service provider – high


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


         Staff argumentation (T&M)                  Test Centre of Excellence (TCoE)          Transaction based (MTF) model

                                                                                                          Test            Test factory
  Customer                                       Customer                                 On demand service provision
                             Test                                          Test
                                                                                                                            Core team
            Resource provision                            Service provision
                                                                                                              Work flow
                                                                                                               units
                                                                  Test
                                                                                                                            Flex team
                                                 Provider
    Provider A               Provider B                                                                                      resource
     Project A               Project B           Resource allocation                                                        utilisation
                                                                                                                  Tools        Innovation
                                                 Project A : B : C : ongoing


            Charging based on T / M                  Charging based on fixed price        Charging based on outcome and usage


  ƒƒ Customer directs the testing               ƒƒ SLAs drive the provider’s focus to       ƒƒ An extension of the TCoE model
     efforts and benefits are based                 the service delivered                   ƒƒ Focus on outcome based pricing
     purely onresiurce arbitrage                ƒƒ Very effective in delivering high        ƒƒ Definable, repeatable and
  ƒƒ Focus on the resources delivering              quality test service                      predictable “unit price” for test
     the service                                ƒƒ Supports the transformation of             work can be put in place for service          

                                                    the customer’s testing model

                                                                                                                                            

                                                      Cost benefit to customer




White paper                                                                                                                           15
Fig. 18: The MTF cost model can be shown in the format below.

                       S.N                                                        Amount
  Model                S.N    Testing          Quality          Rate               S.N     Remarks
                              service          (examples)       (examples)
                              category

  Manages services      1     CAT-A:           X units          SA / units         XA      Pre-defined list of activities
  (MTF outcome                Unit based                                                   which has a fixed unit and
  based)                      activity                                                     cost associated with it.


                                                                                           This fixed component
                                                                                           of final test estimation
                                                                                           (Business Requirements
                                                                                           Document sign off) will not
                                                                                           be changed until there is a
                                                                                           trigger for CR

  T&M                   2     CAT-B:           Y person-        $ B / P - hours     YB     Any activity which is
                              T&M              hours                                       not part of unit based
                              (Not                                                         activities, but requested
                              dedicated _                                                  and pre-approved by
                              actual effort                                                the PM
                              usage based)
                                                                                           This is a variable
                                                                                           component of final test
                                                                                           estimation, which will
                                                                                           change as and when PMs
                                                                                           request and pre-approve
                                                                                           additional activities

                        3     CAT-C:           Z onsite leads   $ C/ onsite -       ZC     Dedicated resources
                              T&M                               lead / mouth               are requested and
                              (Dedicated -                                                 pre-approved by PM
                              ODC model
                              based                                                        Lead time of four to
                              staffing)                                                    eight weeks for an onsite
                                                                                           resources depending on
                                                                                           whether the new onsite
                                                                                           person is from an existing
                                                                                           team with ready visa or
                                                                                           from an outside team




White paper                                                                                                              16
Fig. 19. Some sample unit-based activities and T&M activities are depicted in the tables below.


                                                     Unit based activities


 S.N     Service /
 S.N                      Description            Estimate             Units        Notes
         activities

 U-1    Test effort       Provides an            4 business days      75          ƒƒ Test estimation would be based on
        estimation        estimate of the                                            signed off BRD
                          testing effort for                                      ƒƒ Estimate would include total number of
                          an approved work                                           units, cost and assumptions
                          effort (per project
                          or CR)

 U-2     Test plan        Create the test        3 to 7 business      150          ƒƒ Test plan creation, new modification
         creation         plan for a work        days
                          effort (per project
                          CR)

 U-3     Test scenario    Define the test        As per agreed        3            ƒƒ Each test scenario will have an
         development      table scenarios        schedule                             average three test cases

 U-4     Test case        Design test case       As per agreed        1
         design and       based on testable      schedule
         construction     scenarios

 U-5     Test case        Modify test cases      As per agreed        0.5
         Modification                            schedule

 U-6     Test case        Execute test cases     As per agreed        0.625
         execution                               schedule

 U-7     Automation       Automation script      As per agreed        3
         script           creation               schedule
         creation

 U-8     Automation       Automation script      As per agreed        1.5
         script           modification           schedule
         modification

 U-9     Automation       Automation script      As per agreed        0.1
         script           execution              schedule
         execution

 U-10    Performance      Create and run         As per agreed        case by
         testing          performance test       schedule             case
                          cases and POC




White paper                                                                                                                  17
Automation script        as per agreed
 U-9    script                                                           0.1
                          execution                schedule
        execution

                          Create and run
        Performance                                as per agreed         case by
U-10                      performance test
        testing                                    schedule              case
                          cases and POC

U-11    Test              Test summary             1.5 business          21
        summary           report per project       days
        report            or CR

U-12    Audit session     FED and KPMG             as per agreed         0
                          test case audit          schedule


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

                                                          T & M activities
 S.N
 S.N     Service /        Description                      Estimate           Costs           Notes
         activities

  T-1    Test             Support extended during          As per             Cost = effort   The support would be extended
         Initiation /     assessment phases                agreed             spent.          on project manager’s request.
         assessment                                        schedule           $ amount as     This effort and cost estimate will
         phase                                                                per the MSA     be communicated up front and
         support                                                                              needs to be approved by the
                                                                                              project manager

  T-2    UAT support      Support extended                 As per             Cost = effort   The support would be extended
                          during UAT                       agreed             spent.          on project manager’s request.
                                                           schedule           $ amount as     This effort and cost estimate
                                                                              per the MSA     will be communicated upfront
                                                                                              and need to be approved by the
                                                                                              project manager

 T-3     Product          It normally includes             As per             Cost = effort   The support would be extended
         go live          a set of core tests of           agreed             spent.          on project manager’s request
         deployment       basic GUI functionally           schedule           $ amount as
         support          to demonstrate                                      per the MSA
                          connectivity to the
                          database, application
                          servers and printers

 T-4     MQC tool         MQC tool upgrade                 As per             Cost = effort   The support would be extended
         upgrade          related all sub activities       agreed             spent.          on SVB SQA managers request.
                                                           schedule           $ amount as     This effort and cost estimate will
                                                                              per the MSA     be communicated upfront and
                                                                                              needs to be approved by the
                                                                                              SVB SQA

 T-5     POC for tools    Any request with                 As per             Cost = effort   The support would be extended
                          approval from project            agreed             spent.          on SVB SQA approval
                          manager to evaluate              schedule           $ amount as
                                                                              per the MSA




White paper                                                                                                                        18
upgrade             all sub activities              schedule         $ amount as
                                                                                                 communicated upfront and needs
                                                                              per the MSA
                                                                                                 to be approved by the SVB SQA
                                                                              Cost = effort
                             Any request with approval
                                                             as per agreed    spent.             The support would be extended
T-5      POC for tools       from project manager to
                                                             schedule         $ amount as        on SVB SQA approval
                             evaluate
                                                                              per the MSA

T-6      Security            Performing application          As per agreed    Cost = effort      The support would be extended
         testing             vulnerability scanning          schedule         spent.             on project manager’s approval
                                                                              $ amount as
                                                                              per the MSA

T-7      SOA test            Performing SOA testing          As per agreed    Cost = effort      The support would be extended
                             using SOA testing tool          schedule         spent.             on project manager’s approval
                                                                              $ amount as
                                                                              per the MSA

T-8      KT new              Only KT for new work            As per agreed    Cost = effort      KT - existing cross training across
                             efforts involving clients       schedule         spent.             portfolios will not be billed by MTF
                             application and system that                      $ amount as
                             have not previously                              per the MSA

Key highlights of this engagement through our experience so far
 T-9    Mandatory         Status meeting on MTF       As per agreed           Cost = effort      MTF test lead will communicate
         project             (if effort extends beyond       schedule         spent.             up front and the support would
         meetings- test      1hr per test lead per                            $ amount as        be extended on project manager’s
         leads and           week), scum project status                       per the MSA        approval
         onsite program      meetings, defect triage
         manager

T-10     Test date           Create of test data when        As per agreed    case by case       The support would be extended
         preperation         the test data is not            schedule                            on project manager’s approval
                             provided (example - mock
                             test data of FAS91)


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


  Critical success factors              Artifacts from the Mindtree engagement

  Pricing                               T&M based pricing for initial test scenario scoping activities; transaction-based unit
                                        pricing for the execution of test cases

  Billing                               Monthly

  Scope                                 Unclear initial test scope and requirements; post assessment phase, clearly defined test
                                        scenarios and test cases

  Best fit customer                     Client with high volume of transactions of a similar pattern
  engagements

  Scale and size of                     Service provider to understand customer’s business processes
  engagements                           and nuances

  Mutual benefits                       For the customer, the model is highly cost effective, cost predictive and has reduced
                                        management overheads; for the service provider, the model is highly opportunistic on
                                        innovations, optimized productivity and has guaranteed annuity business

  Risk                                  For client – moderate; for service provider – high




White paper                                                                                                                            19
Fig. 22: The initial due diligence to decide on the best fit pricing model.

 Pricing      Project scope         Project    Project     Risk               Client        Service        Service    Engagement
 model                              Ct scale   duration                       budgeting     provider       provider   maturity
                                                                                            billing        margins
 Dedicated    ƒƒFlexibility         All        Ongoing     ƒƒLow risk         Fixed         Resource-      Low        Initial
 team           to change                      long term     for service      monthly       based                     engagement
                                               mile-         provider         budget
                                               stones      ƒƒLow risk for
                                                             client
 Time &       ƒƒFlexibility         All        Ongoing     ƒƒLow risk         Floating      Effort-based Moderate Initial
 Material       to change                      long term     for service      budget                                  engagement
 (T&M)                                         mile-         provider
                                               stones      ƒƒModerate
                                                             risk for
                                                             client

 Fixed Price ƒƒClearly              Small      Short       ƒƒLow risk for     Specific /    ƒƒMilestone    High       Significant
 (FP)           articulated         and        term          client           limited        based                    time spent to
                scope               medium                 ƒƒHigh risk        budget with ƒƒProject                   understand
              ƒƒ Less flexibility                            for service      predicted      completion               the
                needed for                                   provider         needs for      based                    customer’s IT
                scope changes                                                 few years                               processes
 Hybrid       ƒƒUnclear targets     Large      Ongoing     1st phase:         1st phase:    1st phase:     Moderate ƒƒInitially
 (T&M for       in initial phase               short       ƒƒLow risk         Floating      ƒƒResource-                T&M
 FP)          ƒƒInitial phase                  term          for service      budget         based                    ƒƒFP, post
                defines scope                  milestone     provider                       ƒƒEffort-                  clarity on
                for subsequent                             ƒƒHigh risk        2nd phase:     based                     customer IT
                phases                                       for client       Specific                                 processes
                                                           2nd phase:         / limited     2nd phase:                 and scope
                                                           ƒƒLow risk for     budget        ƒƒMilestone
                                                             client                          based
                                                           ƒƒHigh risk                      ƒƒProject
                                                             for service                      completion
                                                             provider                        based




 Transation   ƒƒClarity on          Large      Ongoing     ƒƒHigh risk        Budget for    Billing        Moderate Service
 - based        volume of                                    for service      a specific    based on                  provider to
 model          transaction                                  provider         transaction   transaction               understand
                range                                                         volume        volume                    customer
                                                                              band per      executed                  transaction
                                                                              agreed        in agreed                 rates
                                                                              duration      duration




White paper                                                                                                                         20
- based        volume of                                     for service      a specific     based on                   provider to
model          transaction                                   provider         transaction    transaction                understand
               range                                                          volume         volume                     customer
                                                                              band per       executed                   transaction
                                                                              agreed         in agreed                  rates
                                                                              duration       duration

Managed       ƒƒEnd to end        Large     Ongoing      ƒƒHigh risk          Budget for     Monthly        Moderate Service
services       services with                                 for service      monthly        based on                   provider to
model          deliverables                                  provider         fixed cost     delivered                  understand
                                                         ƒƒModerate           and x% of      units                      customer IT
                                                             risk for         variance                                  and business
                                                             client           cost                                      well

Outcome-      ƒƒClearly defined   Small     Ongoing      ƒƒHigh risk          Budget for     One lump       Moderate Service
based          and fixed                                     for service      estimated      sum post                   provider to
model          outcome                                       provider         outcome        result is                  understand
                                                         ƒƒModerate           volume         achieved                   client’s
                                                             risk for                                                   business
                                                             client                                                     processes
                                                                                                                        and nuances




  Conclusion
  Customers will always look for capital investment                     It should help in arriving at a price that is competitive yet
  avoidance, minimum risk, and high quality of service at               profitable, flexible, simple and easy to apply. It should be
  a low price. All this with maximum price flexibility and              representative of business realities and maximize
  transparency. On the other hand, service providers                    benefits for both the parties.
  will look for minimum operational and financial
  risk, consistent and predictable profit and revenue                   In summary, it is essential to do due diligence of each
  growth, the longest contract term possible and                        customer engagement, along with risk assessment,
  commercial viability.                                                 before deciding on the best fit pricing model for them.
                                                                        This due diligence should be based on scientific methods
  An effective pricing model is one that helps in aligning              with known parameters across the IT industry. The above
  the interests of the customer and service provider.                   table is a good guideline for such an approach.




 About the author:
 Shubha Krishnamurthy is currently employed in Mindtree as Program Director and has more than 14 years of IT
 experience in managing large scale Data Warehouse and Business Intelligence projects. She is currently managing
 delivery for all the Data Warehouse and Business Intelligence projects under banking and financial services and
 insurance industry group. Prior to Mindtree she worked in Wipro Technologies and Patni Computers as software engineer
 developing data warehouse and business intelligence applications. She holds a B.E with specialization in Electronics and
 Computer Science from S.D.M Engineering College of Technology, Dharwad.




White paper                                                                                                                             21

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Best fit IT pricing models with mutual benefits for service providers and customers

  • 1. WHITE PAPER Best fit IT pricing models with mutual benefits for service providers and customers.
  • 2. Executive summary Executive summary Information Technology (IT) has shown rapid growth in the last two decades, opening upup the need for Information Technology (IT) has shown rapid growth in the last two decades, opening the need foraarobust pricing model to meet changing expectations. Increasingly, customers are looking for benefits beyond cost robust pricing model to meet changing expectations. Increasingly, customers are looking for benefits beyond cost savings and service improvements. emergence of pricing models beyond traditional ones such as savings and service improvements. This has led to the This has led to the emergence of pricing models beyond traditional onesFixed as time and material (T&M) and fixed price (FP). Time and Material (T&M) and such Price (FP). This white paper discusses various pricing models with their characteristics, risk comparators, pros and cons and best This white paper discusses various pricing models with their characteristics, risk comparators, pros and cons and best fit customercovers some examples some examples of thetried out in Mindtree. out fit customer engagement. It engagement. It covers of the pricing models pricing models tried It also covers the due in Mindtree. required to decide thediligence required to decidegiven situation, with mutual benefits for both customer and diligence It also covers the due best fit pricing model for a the best fit pricing model for a given situation, with mutual benefits for both customer and service provider. service provider. Contents A background on pricing models 03 The best fit pricing model 03 Mutually beneficial pricing models 03 Linear pricing models 03 a. Dedicated team 03 b. Time and material (T&M) 03 c. Fixed price (FP) 04 Non-linear pricing models 04 a. Hybrid model 04 b. Managed services model 05 c. Outcome based model 05 d. Transaction based model 08 Which pricing model suits a given engagement? 08 Examples of tried and tested Mindtree pricing models 08 Due diligence to identify best fit pricing model 14 Conclusion 21 White paper 02
  • 3. A background on pricing models Some linear pricing models are described below: A pricing model for an IT service refers to the contractual a) Dedicated team: The dedicated team model works as agreement between a service provider and a service gainer. a dedicated service provider for a period of time. This The agreement is formed based on the type of service the team acts as the virtual extension of the client’s in-house parties engage in. Today, pricing models in the IT industry development team. The customer takes the onus of getting have matured from the traditional T&M and FP models to work done effectively from the team. Advantages of this the modest managed services / outcome based models. An model include knowledge retention and the flexibility of inevitable progression as the IT industry went from simply utilizing the team for different requirements. Monthly bills understanding customer needs and services, to establishing are raised based on the number of resources dedicated innovative, non-linear and agile pricing models. In an effort every month. to build more sustaining relationships and getting to the next level of a mutually beneficial partnership. Figure 01 shows the pros and cons of using the dedicated team pricing model. The best fit pricing model For a pricing model to be successful, it should strike the b) Time and Material (T&M): The T&M model works best for right balance between the customer’s expectations of customers who want a flexible and agile project execution. quality, timeliness and price, and the service provider’s cost Here they play a greater role in the development of the and operational efficiency. Customer engagements may not software product or solution. This model works best when be successful with one type of pricing model every time. It’s requirements change frequently and is generally used for a journey for both the parties to go agile based on best fit product development projects. In this model the customer for the scoped services and engagement models. carries virtually all the related risks of scope, quality of deliverables and project management. Therefore the Mutually beneficial pricing models margins for T&M players are the lowest. There are no risks Many pricing models are currently practiced by the IT and no investments by service providers. industry. From the traditional T&M and FP, to more talented ones like managed service / outcome-based models. At a The service provider assigns a team to the customer and higher level, pricing models can be divided into linear and the actual time spent by the team on the project is billed. non-linear categories. Monthly invoicing is pro-rata, based on the total hours spent on the project and the rates for the skill sets involved. Linear pricing models Linear pricing models are based purely on the relationship Traditionally, service providers are paid basis the number of between time and material (effort and rate). The service person hours spent on writing code. So, to maximize their provider is paid based on the resource provided or the revenue, service providers try to maximize the hours spent effort spent for the required duration of agreed time. and number of people used to write the code. Customers Fig. 01. Pros and cons of using the dedicated team pricing model. Pros Cons Simple to understand and implement Lack of ownership from service providers Can be effectively used to compare prices across Low level of team motivation due to lack of career service providers mentoring No time / effort commitment from the customer in the Knowledge retention utilization of resources from service providers Flexibility to utilize the team for different requirements Not closely related to customer’s business need as needed or outcome Low risk model for both service provider and customer No incentive for service providers to be efficient White paper 03
  • 4. on the other hand, want to reduce the total cost of Non-linear pricing models development and therefore want to minimize billed hours. Non-linear pricing models decouple the relationship This creates misaligned incentives between customers and between time and material (effort and rate). Normally service providers. T&M and FP do not offer much scope for modification and changes. Service providers have realized the need Figure 02 shows the pros and cons of using the Time and to be flexible to satisfy their customers. This has led to Material (T&M) pricing model. innovations in pricing models that suit varying needs. Some non-linear pricing models are mentioned below: c) Fixed Price (FP): The fixed price model is ideal for small and medium level projects with clear and well-defined a) Hybrid model: The hybrid model uses T&M techniques requirements. In this model, the service provider and to estimate costs for projects that do not have clear-cut the customer both carry some scope-related risk. But, as goals or detailed and complete requirements initially. It per the agreed contract, any change in the scope would then allows customers to pay a fixed price based on the result in a change in the price. Fixed price models allow estimation. This hybrid pricing model has the best features customers to pay a fixed price for a project that is agreed of both the models – T&M and FP, as mentioned above. It upon by both the parties. The fixed price could be split allows service providers to deploy resources as in the T&M and paid on milestones. This model works where the scope model, but most of the project is executed according to the and specifications of the project are crystal clear from FP model. Hence, the project has a smooth workflow and the very beginning and system requirements have been well-aligned processes. defined clearly. In this model, it is very important to discuss everything and make an estimation of the appropriate cost Hybrid is the best pricing model for bigger, longer and of the project at the very beginning. ongoing projects with unclear objectives at the start. Here input and feedback is needed in the beginning, but delivery It is certainly a low-risk option for the customer, as the FP can be perfected over time to ensure that all customer model ensures that the project is done and delivered within requirements are successfully met. This model is a great a specific time and budget. The FP project plan specifies middle ground for professionals who like hourly payments costs, timelines and deliverables in unambiguous terms and customers who prefer to make a one-time payment and is ideal for customers with set goals, detailed project for the project. The hybrid pricing model helps customers specifications and a limited budget. optimize budgets without compromising on the quality of product or application. It also gives the service provider a The pros and cons of using the FP model is shown in controlled environment with shared risks in operations. figure .03. Fig. 02: Pros and cons of using the Time and Material (T&M) pricing model. Pros Cons Simple to understand and implement Lack of ownership from service providers Can be effectively used to compare price across Low level of team motivation due to lack of service providers career mentoring Knowledge retention Through scaled estimated efforts, service providers can try for increased billing Flexibility to utilize the team for different requirements Not closely related to customer’s business need as needed or outcome Low risk model for service provider and moderate risk No incentive for service providers to be efficient model for client White paper 04
  • 5. Figure 04 shows the pros and cons of the hybrid associated with such an approach is that the service pricing model. provider may decide to allocate shared resources, which could result in delivery issues b) Managed services model: The managed services ƒƒ This model is often adopted when work can be clearly model offers defined service deliverables at a fixed cost. scoped out, with clearly marked deliverables Traditionally, value was realized according to how well it ƒƒ For this model to work, the service provider should have was managed by the service provider, and how well it was an excellent understanding of the customer’s systems. perceived by the customer. This was more qualitative in The customer in turn should be confident enough to nature. In the managed services model on the other hand, hand over work to the service provider the value-add is quantitatively measured in terms of target ƒƒ The customer’s role is that of a reviewer with the Service Level Agreements (SLAs). This is based on clearly additional responsibility of contracts management and defined parameters in project performance and quality. budget tracking ƒƒ The service provider will be responsible for selection of Customers are billed at a fixed monthly cost plus unit resources as well as managing stakeholder expectations cost per additional unit delivered. For customers, the ƒƒ There will be clearly marked SLAs for each deliverable, model helps them arrive at a predictable budget. For with penalties applicable for non-delivery service providers, it assures continuous fixed revenue, plus ƒƒ Delivery of service can be performed onshore at the additional revenue through scalability and better margins client location, offshore or a combination of both through repetition. Mutually agreed SLAs will be met, ƒƒ A managed services model is often adopted by unless the service provider wishes to pay a penalty. If the enterprises as a continuation of an existing staff service provider meets / exceeds all agreed SLAs they are augmentation. Adopting a managed services model monetarily rewarded, as per the contract. from day one comes with lots of risks (ref. fig. 05). Some key features of the managed services model: c) Outcome-based pricing model: Outcome-driven ƒƒ The service provider takes end-to-end responsibility of solutions are pin-pointed and positioned as delivering set service lines and deliverables specific value to the business. Outcome-based projects ƒƒ The service provider makes the decisions and takes the aim to deliver measurable impact on the customer’s overall responsibility to provide the agreed set of deliverables business results. The basic philosophy is to align the ƒƒ Budgets are mostly fixed for the entire piece of work, interests of the service provider and the customer so that making it more like a fixed price managed services both work towards the same goal. In this model, the scope engagement. In this case, the service provider has a is the business outcome itself. Clearly defined and fixed free hand in deciding how, where and with how many outcomes which can be measured and delivered for a given personnel the project can be delivered. The risk project is critical to its success. In an outcome-based Fig. 03: Pros and cons of using the FP model. Pros Cons Clearly scoped small / medium sized engagements Customers have no control in resource utilization as maximum ownership is with service provider Closely related to customer’s business needs with clearly Knowledge retention is at risk as the development team defined objectives and milestones might get dispersed after project completion Low risk model for customers High risk model for service provider High assurance of project completion within estimated Difficult to compare prices across service providers as final budget and timelines cost driven by productivity and risk assessment Highly motivating for service providers to be efficient and Quality can suffer as end-to-end development is managed productive by the service provider White paper 05
  • 6. model, resource loading, costing and pricing is a In outcome-based projects, service providers control a complicated exercise. significant portion of the value chain affecting outcomes, even when they are not directly under the service The mechanism for paying the service provider varies. But provider’s control. Hence, bringing into your sphere of generally the payment is made in made in one lump sum influence things not under your influence is a critical part of when the result is achieved or over shorter milestones, so the execution model. This is where partnership with other that the service provider recoups its investment in time. service providers, even competitors, will be a critical factor in success (ref. fig. 05). The three key elements of an outcomes-driven project are: In this model, the customer gets rewarded by converting a fixed cost into a truly variable cost model that scales with ƒƒ The service provider cannot earn a direct revenue from the business. It frees up client executives from worrying the customer unless the work outcome delivers value to about issues like technology, process and people, and the customer allows them to focus on business outcomes – things that ƒƒ The scope of work impacts a large chunk of the process really matter to the business. The customer carries no risk that influences a business outcome, and service provider since they pay only when they get the desired outcome. By can adjust / tweak some elements of the process to having a standardized definition of input and output in an impact the business outcome outcomes-driven model, services become more ƒƒ Service providers need to develop competences to like products. tightly define the scope of an outcome-based project to be successful In an outcome-based model, service providers bet on the customer and vice versa, to make success happen. Risk The primary driver of outcome-based pricing is the transfers from customer to service provider, the model process characteristics, and scope of engagement with the progresses from T&M to outcome-based. The service customer. As a rule of thumb, if a process directly impacts provider should account for transference of risk and cover measurable business outcome like revenue or cost, the by including a risk premium in the price. The risk premium service provider should explore a business outcome-based increases as you progress through these models and results pricing. More so if there are enough opportunities to impact in increasing margins for the service provider. The ability to the business outcome. However, the thing to remember is measure risk and charge the appropriate risk premium is a whether the scope of work covers the majority of elements critical factor in the service provider’s success (ref. fig. 06). that drive a particular outcome. Fig 04: Pros and cons of using the hybrid model. Pros Cons Utilizes the best features of both the T&M and FP Customer has no control in resource utilization and pricing models maximum ownership is with service providers Middle ground for the customers amongst hourly payment Shared risks between service provider and one-time payment and customer Helps the customer to optimize the budget without compromising on the quality of deliverables Low risk model for both service provider and customer Knowledge retention White paper 06
  • 7. Fig .05: Pros and cons of using a managed service model. Pros Cons Since delivery and stakeholder expectations are the Service providers are sometimes reluctant to assume more service provider’s responsibility, the customer can focus management responsibilities fully on their core strategic initiatives Service providers are more independent and have a Culture mismatch between the customer and service relatively interference-free management of the project provider can result in a lack of understanding, which may affect deliverables Enables service providers to make long-term strategic Sometimes, service providers don’t have a view of investments that should indirectly benefit the customer the scope of the project or may not understand all of the customer’s pain points, which could result in major setbacks Service providers bring their best practices into the In a multi-service provider scenario, where for instance project, thereby making key process improvements one provider manages applications and the other, infrastructure, blame games are common, with no-one willing to assume responsibility SLA driven approach results in key process improvements Re-allocation of the contract, in case of performance delivering significant, measurable benefits to the customer issues or non-conformance of SLAs, might be a challenge, given that the existing service provider will be less cooperative Knowledge retention becomes more streamlined and sustainable Fig. 06: Pros and cons of using outcome-based pricing model. Pros Cons Directly aligned to the customer’s business outcome Lack of transparency in how work is performed Potential for higher eventual savings as labor arbitrage is Little insight into cost of services replaced by productivity and synergies between tasks Ability to incent more innovative behavior from Cultural resistance from both customer and service provider service provider Deep appreciation of the customer’s business model, Customer enterprises are sometimes too immature to operations and industry nuances appreciate the change management process White paper 07
  • 8. d) Transaction pricing model: A transaction is a sequence Which pricing model suits a given engagement? of steps with defined input and output, which achieves a The pricing model need not be intelligent enough business purpose. Examples of transactions include invoice to address the customer’s budget objectives, but or payroll processing. A transaction unit is a unit of measure has to suit the respective customer engagement. IT with which a transaction can be measured. Examples engagements spread from discovery and definition types of transaction units are ‘per pay slip’ or ‘per invoice’, to implementation, maintenance and support. The pricing etc. A transaction price is typically quoted as ‘price per model that worked for one type of engagement may or may transaction unit’. It is generally mentioned as applicable for not work for another. It is also possible that a pricing a specified transaction volume range. model that suits one client may not suit another. Naturally, assessing the best possible pricing model for a customer or The transaction-based pricing model is based on the an engagement sometimes requires a trial (fig. 08). number of transactions processed. Typically a base price is provided for a specified volume band, with a negotiated Examples of Mindtree tried and tested increase or decrease in price as usage fluctuates around pricing models the specified band. In this model, the scope becomes Mindtree has tried out various pricing models like very important. The scope is also slightly different from dedicated team, T&M, FP, managed services, outcome- conventional projects and should be defined more tightly. based models, etc. There are various challenges, pros and The volume of transactions and the variations in volume cons of each of these models in various engagements and in a day, week, month or months make a huge impact on customer scenarios. Each of them has learnings which can pricing and effort. Another important scope element is be leveraged within Mindtree and across the IT industry. the form of input. Whether the input is electronic, paper This artifact covers some pricing models with their form, integrated into xml, importable or already imported differentiating factors, best suited customer scenarios, can have a huge impact on the cost. Any change in the benefits to customer / service providers, and value-add assumption of proportion of the two forms of applications perceived by the customer. could make a huge effort and cost difference for the service provider. There are many customer engagements with linear pricing models such as dedicated team, T&M and FP. Since we have In this model, service providers take on a higher risk. already discussed the pros and cons of these pricing models They take on risks related to the volume of business, as the earlier in this white paper, we will not mention anything pricing is based on certain volume assumptions. Change specific. Here, we will focus more on non-linear pricing or variation in the volume can have can have a dramatic models as they do not have a standard pricing across the IT impact on their cost. industry and they vary with customer demand and maturity, and their relationship with the service provider. Figure 07 shows the pros and cons of using a transaction-based pricing model. Fig. 07: Pros and cons of using a transaction-based pricing model. Pros Cons Closely tied to the customer’s business cycle May not be directly tied to the customer’s business outcome Enhances customer visibility into consumption pattern Lack of transparency on how work is performed Encourages productivity and efficiency White paper 08
  • 9. Fig. 08: Which pricing model suits a given engagement? Dedicated team model ƒƒ First time engagement with the particular customer ƒƒ Projects of all sizes and scales with ongoing long term milestones ƒƒ Scope is unknown and flexibility in scope change is expected Time and Material (T&M) model ƒƒ Projects of all sizes and scales with ongoing long term milestones ƒƒ Scope is unknown and flexibility in scope change is expected ƒƒ First time engagement with the customer ƒƒ Uncertainty on estimated effort for completion of scoped work Fixed Price (FP) model ƒƒ Customer has a clearly defined scope, aligned to short term goals / objectives of the enterprise ƒƒ Customer does not want to own the risks of delivery, people and quality, but will be ready to own risks related to scope through change requests Hybrid model ƒƒ Best pricing model for bigger, longer and ongoing projects, which may need inputs in the beginning but can be perfected over time ƒƒ Service provider is engaging with the customer for the first time ƒƒ Both service provider and customer want to mitigate the risks of T&M and FP pricing models Managed services model ƒƒ Work clearly scoped out, with clearly marked out deliverables ƒƒ Service provider has an excellent understanding of the customer’s systems. The customer in turn is confident enough to hand over the work to them Outcome-based pricing model ƒƒ Clearly defined output ƒƒ Output aligning to business process or where direct impact can be defined ƒƒ For customers who want to align the service provider’s goals with their business goals Transaction-based pricing model ƒƒ Transaction volumes are known and predictable ƒƒ From the custome’s perspective, this model is used for business process which can be clearly defined, measured in discrete units ƒƒ Transaction volume are tied to the service provider’s cost drivers ƒƒ For the service provider’s perspective, this model is used in business process that are standardized, transaction intensive and demand-driven White paper 09
  • 10. Managed services pricing model — Figure 10 is a sample list of service categories applied on Business Intelligence (BI) factory this model with their pricing method. Managed services pricing models require a thorough understanding of the customer’s IT processes, standards The BI factory model has defined various service and dependencies to execute the services. This model categories with floor units to be served per month. also needs very good visibility on the pipeline work in the The customer pays Mindtree a monthly fee of USD XXX to customer enterprise to ensure constant work units and serve the agreed monthly floor value of service units. On guaranteed revenue. Mindtree recommends implementing implementing additional units of service, the customer will this model for customers where it has worked for more than pay an additional amount, based on the agreed unit price six months to mitigate engagement risks. for the service unit – complexity wise, as depicted in the table below (fig. 11). Here is a case study of one of our banking clients where we used a managed services model, known as “Business The salient features of this pricing model are below: Intelligence (BI) factory” for end-to-end BI related ƒƒ The core team is a combination of an onsite team with implementation. The diagram below shows the BI factory key technical resources offshore model at high level (fig. 09). ƒƒ The onsite team handles customer interaction, requirement gathering, project management, UAT coordination and production deployment Fig. 09: BI factory model at high level. Periodic knowledge Isolated BI Excessive cost High turn-around Latency in project - application & of administration times for mode execution support terms & operation ad-hoc request Report factory ƒƒ End to end BI chart for SVB ƒƒ Ad-hoc and piecemeal report requests ƒƒ 24x7 on call incident support for BI report ƒƒ Report scheduling, monitoring and administration ƒƒ Report definitions, blue print and rationalization ƒƒ Reporting platform migration / upgrades ƒƒ Report development / enhancements Fig. 10: List of service categories applied on this model with their pricing method. Report factory Service line with monthly volume with service lines Production incidents XX Enhancement XX New report request - no universe change XX New report request _ with universe change XX Continuous improvement project management governance review White paper 10
  • 11. ƒƒ The larger offshore team’s service offerings include multiple project implementations based on design, coding and testing for all service categories percentage allocation ƒƒ The offshore team can be ramped-up or ramped-down basis the pipeline of work. It is critical to track the future The key are the key highlights of this engagement through Here highlights of this engagement through our work pipeline for Mindtree to plan better support for experience so far are far (Fig at fig. 14. our experience so shown 14): peak workloads. ƒƒ SLA driven model with risk and reward benefits Outcome-based pricing model — data analytics solutions Mindtree recommends outcome-based pricing models The key highlights of this engagement through our where the customer has fixed and clearly defined outcomes, experience so far are shown at fig. 12. with a standardized definition of input and output. The scope of work would cover most of the elements that drive Hybrid pricing model — Microsoft offshore development track offshore development track a particular outcome. Mindtree would work on a process At Mindtree, we often recommend a hybrid pricing model with direct impact on measurable business outcomes like through a combination of T&M and FP in situations where revenue or cost and would have enough opportunities to the customer has long term ongoing projects. Especially impact the outcome. when there is a risk of scope creep in the initial stage of the projects, or until the scope and requirements are frozen. Fig. 15 is a case study of a banking customer where we The diagram at fig. 13 shows a case study of a Mindtree have used the outcome-based pricing model for their banking customer where we have used the hybrid pricing 409A valuation CapMx outputs. In this case the customer is model for their Microsoft-based project implementations. charged on various stages of the outcome, with a unit cost and monthly billing. The salient features of this pricing model are below: ƒƒ Combination of a core team onsite billed on T&M, and The stages of outcome in project 409 valuations a shared team offshore billed on FP pricing, for each are shown at fig.15. Each of the outcomes goes through a estimated fixed price project series of stages (mandatory / optional). Complexity of a ƒƒ The onsite team handles customer interaction, particular stage for a defined outcome varies based on the requirements gathering, project management and inherent factors of that particular outcome. estimates for projects with frozen requirements ƒƒ The larger offshore team’s service offerings include The key highlights of this engagement through our project design, coding and testing and is shared across experience so far are given in fig. 16. Fig. 11. Complexity Unit cost (USD) Production incident USD XXX Enhancements Simple USD XXX Medium USD XXX Complex USD XXX New report request (no universe change) Simple USD XXX Medium USD XXX Complex USD XXX White paper 11
  • 12. Fig.12: The key highlights of our management service engagement model through our experience so far. Critical success Artifacts from the Mindtree engagement factors Pricing Fixed monthly contract value for agreed service units; charge unit price to every additional unit of service delivered Billing Monthly Scope Scope / requirements assessment and clarification within the agreed SLA based on complexity of unit of work Best fit customer Customer enterprise has the visibility of continuous growth and enhancements to its IT engagements applications, assuring a minimum monthly floor value Scale and size of Large scale and ongoing engagements Engagement Service provider to understand the customer’s business and IT processes, nuances and maturity dependencies Mutual benefits For the customer, the model is highly cost effective, cost predictive and has reduced overheads of management; the customer can focus on strategic decisions and leave the operational work to the service provider; for the service provider, the model is highly opportunistic on innovations, optimized productivity, flexibility on shared resources and has guaranteed annuity business Risk High risk for service provider; low risk for customer Fig.13: The hybrid pricing model at a high level. Onsite Offsite ƒƒ Business requirements ƒƒ Maintenance & support ƒƒ Analysis & technology assessment Offshore ƒƒ Formulation of functional specification ƒƒ Architectural design coding, testing White paper 12
  • 13. Transaction-based pricing model _ Some of the salient features of MTF model are: Managed Test Functions (MTF) ƒƒ Supports the transformation of the customer’s In the transaction pricing model, the scope becomes very testing models important. In this model, the service provider takes on ƒƒ Focus on transaction-based pricing a higher risk. It takes on the risks related to the volume ƒƒ In initial stages, customer directs the testing efforts and of business, as the pricing is based on certain volume benefits are based purely on resource arbitrage; there is assumptions. Any change in the volume or variation in a complete focus on the resources delivering the service volume can have a dramatic impact on cost. Mindtree ƒƒ Definable, repeatable and predictable “unit price” for recommends going with a transaction-based pricing model if test work can be put in place for services the volume of transactions are high and predictable in a day, ƒƒ SLAs drive the service provider’s focus to the service week or month timeframe. delivered; ensures reduced time to product availability. The service provider scales up to demand, high quality The diagram at fig. 17 shows a case study of one of our test services and pre-defined and predictable costs banking clients in which we have used our transaction-based pricing model, “Managed Test Function (MTF)”, for The MTF cost model can be shown in the format at fig. 18. end-to-end testing-related services. The MTF model has experimented with the combination The MTF engagement is a hybrid combination of T&M and of T&M and unit priced model for the benefit of both the the transaction-based model because the testing service customer and the service provider. has low clarity on some initial testing activities which need to be priced on the T&M model. Once the scope and test Some sample unit-based activities and T&M activities are scenarios are clearly defined, the scope of execution of the depicted in the tables at figures 19 and 20. test cases is fairly known. Fig.14: The key highlights of the hybrid pricing model through our experience so far. Critical success factors Artifacts from the Mindtree engagement Pricing T&M for initial scope definition by core team; FP for project implementation with clearly defined scope Billing Monthly Scope Started with unclear scope and requirements of project definition, later clarified and frozen for the estimation of the fixed price project Best fit customer Customer enterprise has the visibility of continuous growth and enhancements to its IT engagements applications; customer does not have clarity on the scope and aims to clarify it during the initial definition phase of the project Scale and size of Large scale and ongoing engagements Engagement maturity Service provider to understand customer’s business processes and nuances Mutual benefits For the customer, this model is highly cost effective, cost predictive and has reduced overheads of management; for the service provider, the model is highly opportunistic on innovations, optimized productivity, flexibility on shared resources and has guaranteed annuity business Risk Initial phase: Low risk for service provider and high risk for customer Subsequent phases: Low risk for customer and high risk for service provider White paper 13
  • 14. The key highlights of this engagement through our Some suggestions in this direction are: experience so far are shown at fig. 21. ƒƒ Do due diligence on the engagement maturity with both customer and service provider, and assess data statistics Due diligence to identify best fit pricing model to measure the risks Most times, pricing models are decided by customers, ƒƒ Choose the right pricing model – one that aligns both based on experience with other service providers, or parties’ interests. For example, in case of insurance, if influenced by their capabilities, and sometimes the the transaction unit is ‘no. of policies issued’, then the maturity levels of both parties. There has to be a decision interest of service provider and client are aligned by framework, to help both the service provider and the choosing the transaction-based model. As against this, customer, to assess and finally decide on the best suitable if the transaction unit is ‘no. of leads’, then the interest pricing model. This is based on various parameters, like of the client and service provider are not necessarily engagement / service types, working experience, enterprise aligned as more number of leads would definitely maturity level, duration / relationship of engagement, translate into more payment for service provider but mutual benefit and objectives / goals of the engagement may not translate into more policies issued and thereby, at hand. This artifact highlights the key parameters and premium, for client. Establish a mutually agreeable decision making framework / guidelines to be assessed mechanism to address volume fluctuations. right from the start when the new customer, engagement or ƒƒ Agree on defining and measuring SLAs during the initial project is worked upon at the RFI or RFP stage. phases of the engagement and use this data for base lining them for the remaining term of the engagement Due diligence for cost / benefit ratio between T&M and Based on our experience on various pricing models the business outcome model is a deciding factor for the executed in Mindtree, there is a table arrived at below customer and the service provider to decide on the model which could be used for the initial due diligence to to implement. The risk premium should be high enough decide on the best fit pricing model. to justify the risk taken, vis-a-vis the T&M model. Another challenge is to cap the upper band — based on market Based on our experience on various pricing models demand (i.e. what the customer is willing to pay for the executed in Mindtree, there is a table arrived at at fig. 22 transfer of risk) and decide whether the cap can justify the which could be used for the initial due diligence to decide risk taken by the service provider in the outcome model. on the best fit pricing model. While some challenges are real, others are more a matter of perception. However, both can be addressed by ensuring a collaborative effort from the service provider as well as the customer. Fig 15. Stages of outcome in project 409 valuations. Stage Series Price Information checklist NA USD XX Pre-management call A&B USD XX Full valuation and draft opinion A&B USD XX Pre-management call C & above USD XX Full valuation and draft opinion C & above USD XX Audit responses NA USD XX Fast track projects NA USD XX + 20% extra White paper 14
  • 15. Fig. 16: The key highlights of this engagement through our experience so far. Critical success factors Artifacts from the Mindtree engagement Outcome-based, stage-wise price per outcome; unit price varies based on complexity Pricing of stage for that outcome Billing Monthly Scope Clearly defined outcome elements with standardization of tasks; granular segmentation of tasks to be clear and precise Best fit customer engagements Customer with fixed and clearly defined outcome and scope of work for service provider; covers majority of elements of that outcome Scale and size of engagements Service provider to understand client’s business processes and nuances Mutual benefits For the customer, the model is highly cost effective, cost predictive and has reduced management overheads; for service provider, the model is highly opportunistic on innovations, optimized productivity and has guaranteed annuity business Risk For customer – moderate; for service provider – high Fig. 17: Case study of one of our banking clients in which we have used our transaction-based pricing model. Staff argumentation (T&M) Test Centre of Excellence (TCoE) Transaction based (MTF) model Test Test factory Customer Customer On demand service provision Test Test Core team Resource provision Service provision Work flow units Test Flex team Provider Provider A Provider B resource Project A Project B Resource allocation utilisation Tools Innovation Project A : B : C : ongoing Charging based on T / M Charging based on fixed price Charging based on outcome and usage ƒƒ Customer directs the testing ƒƒ SLAs drive the provider’s focus to ƒƒ An extension of the TCoE model efforts and benefits are based the service delivered ƒƒ Focus on outcome based pricing purely onresiurce arbitrage ƒƒ Very effective in delivering high ƒƒ Definable, repeatable and ƒƒ Focus on the resources delivering quality test service predictable “unit price” for test the service ƒƒ Supports the transformation of work can be put in place for service 
 the customer’s testing model 
 Cost benefit to customer White paper 15
  • 16. Fig. 18: The MTF cost model can be shown in the format below. S.N Amount Model S.N Testing Quality Rate S.N Remarks service (examples) (examples) category Manages services 1 CAT-A: X units SA / units XA Pre-defined list of activities (MTF outcome Unit based which has a fixed unit and based) activity cost associated with it. This fixed component of final test estimation (Business Requirements Document sign off) will not be changed until there is a trigger for CR T&M 2 CAT-B: Y person- $ B / P - hours YB Any activity which is T&M hours not part of unit based (Not activities, but requested dedicated _ and pre-approved by actual effort the PM usage based) This is a variable component of final test estimation, which will change as and when PMs request and pre-approve additional activities 3 CAT-C: Z onsite leads $ C/ onsite - ZC Dedicated resources T&M lead / mouth are requested and (Dedicated - pre-approved by PM ODC model based Lead time of four to staffing) eight weeks for an onsite resources depending on whether the new onsite person is from an existing team with ready visa or from an outside team White paper 16
  • 17. Fig. 19. Some sample unit-based activities and T&M activities are depicted in the tables below. Unit based activities S.N Service / S.N Description Estimate Units Notes activities U-1 Test effort Provides an 4 business days 75 ƒƒ Test estimation would be based on estimation estimate of the signed off BRD testing effort for ƒƒ Estimate would include total number of an approved work units, cost and assumptions effort (per project or CR) U-2 Test plan Create the test 3 to 7 business 150 ƒƒ Test plan creation, new modification creation plan for a work days effort (per project CR) U-3 Test scenario Define the test As per agreed 3 ƒƒ Each test scenario will have an development table scenarios schedule average three test cases U-4 Test case Design test case As per agreed 1 design and based on testable schedule construction scenarios U-5 Test case Modify test cases As per agreed 0.5 Modification schedule U-6 Test case Execute test cases As per agreed 0.625 execution schedule U-7 Automation Automation script As per agreed 3 script creation schedule creation U-8 Automation Automation script As per agreed 1.5 script modification schedule modification U-9 Automation Automation script As per agreed 0.1 script execution schedule execution U-10 Performance Create and run As per agreed case by testing performance test schedule case cases and POC White paper 17
  • 18. Automation script as per agreed U-9 script 0.1 execution schedule execution Create and run Performance as per agreed case by U-10 performance test testing schedule case cases and POC U-11 Test Test summary 1.5 business 21 summary report per project days report or CR U-12 Audit session FED and KPMG as per agreed 0 test case audit schedule Fig. 20: Some sample unit-based activities and T&M activities are depicted in the tables below. T & M activities S.N S.N Service / Description Estimate Costs Notes activities T-1 Test Support extended during As per Cost = effort The support would be extended Initiation / assessment phases agreed spent. on project manager’s request. assessment schedule $ amount as This effort and cost estimate will phase per the MSA be communicated up front and support needs to be approved by the project manager T-2 UAT support Support extended As per Cost = effort The support would be extended during UAT agreed spent. on project manager’s request. schedule $ amount as This effort and cost estimate per the MSA will be communicated upfront and need to be approved by the project manager T-3 Product It normally includes As per Cost = effort The support would be extended go live a set of core tests of agreed spent. on project manager’s request deployment basic GUI functionally schedule $ amount as support to demonstrate per the MSA connectivity to the database, application servers and printers T-4 MQC tool MQC tool upgrade As per Cost = effort The support would be extended upgrade related all sub activities agreed spent. on SVB SQA managers request. schedule $ amount as This effort and cost estimate will per the MSA be communicated upfront and needs to be approved by the SVB SQA T-5 POC for tools Any request with As per Cost = effort The support would be extended approval from project agreed spent. on SVB SQA approval manager to evaluate schedule $ amount as per the MSA White paper 18
  • 19. upgrade all sub activities schedule $ amount as communicated upfront and needs per the MSA to be approved by the SVB SQA Cost = effort Any request with approval as per agreed spent. The support would be extended T-5 POC for tools from project manager to schedule $ amount as on SVB SQA approval evaluate per the MSA T-6 Security Performing application As per agreed Cost = effort The support would be extended testing vulnerability scanning schedule spent. on project manager’s approval $ amount as per the MSA T-7 SOA test Performing SOA testing As per agreed Cost = effort The support would be extended using SOA testing tool schedule spent. on project manager’s approval $ amount as per the MSA T-8 KT new Only KT for new work As per agreed Cost = effort KT - existing cross training across efforts involving clients schedule spent. portfolios will not be billed by MTF application and system that $ amount as have not previously per the MSA Key highlights of this engagement through our experience so far T-9 Mandatory Status meeting on MTF As per agreed Cost = effort MTF test lead will communicate project (if effort extends beyond schedule spent. up front and the support would meetings- test 1hr per test lead per $ amount as be extended on project manager’s leads and week), scum project status per the MSA approval onsite program meetings, defect triage manager T-10 Test date Create of test data when As per agreed case by case The support would be extended preperation the test data is not schedule on project manager’s approval provided (example - mock test data of FAS91) Fig .21. Transaction-based pricing model _ Managed Test Functions (MTF), key highlights. Critical success factors Artifacts from the Mindtree engagement Pricing T&M based pricing for initial test scenario scoping activities; transaction-based unit pricing for the execution of test cases Billing Monthly Scope Unclear initial test scope and requirements; post assessment phase, clearly defined test scenarios and test cases Best fit customer Client with high volume of transactions of a similar pattern engagements Scale and size of Service provider to understand customer’s business processes engagements and nuances Mutual benefits For the customer, the model is highly cost effective, cost predictive and has reduced management overheads; for the service provider, the model is highly opportunistic on innovations, optimized productivity and has guaranteed annuity business Risk For client – moderate; for service provider – high White paper 19
  • 20. Fig. 22: The initial due diligence to decide on the best fit pricing model. Pricing Project scope Project Project Risk Client Service Service Engagement model Ct scale duration budgeting provider provider maturity billing margins Dedicated ƒƒFlexibility All Ongoing ƒƒLow risk Fixed Resource- Low Initial team to change long term for service monthly based engagement mile- provider budget stones ƒƒLow risk for client Time & ƒƒFlexibility All Ongoing ƒƒLow risk Floating Effort-based Moderate Initial Material to change long term for service budget engagement (T&M) mile- provider stones ƒƒModerate risk for client Fixed Price ƒƒClearly Small Short ƒƒLow risk for Specific / ƒƒMilestone High Significant (FP) articulated and term client limited based time spent to scope medium ƒƒHigh risk budget with ƒƒProject understand ƒƒ Less flexibility for service predicted completion the needed for provider needs for based customer’s IT scope changes few years processes Hybrid ƒƒUnclear targets Large Ongoing 1st phase: 1st phase: 1st phase: Moderate ƒƒInitially (T&M for in initial phase short ƒƒLow risk Floating ƒƒResource- T&M FP) ƒƒInitial phase term for service budget based ƒƒFP, post defines scope milestone provider ƒƒEffort- clarity on for subsequent ƒƒHigh risk 2nd phase: based customer IT phases for client Specific processes 2nd phase: / limited 2nd phase: and scope ƒƒLow risk for budget ƒƒMilestone client based ƒƒHigh risk ƒƒProject for service completion provider based Transation ƒƒClarity on Large Ongoing ƒƒHigh risk Budget for Billing Moderate Service - based volume of for service a specific based on provider to model transaction provider transaction transaction understand range volume volume customer band per executed transaction agreed in agreed rates duration duration White paper 20
  • 21. - based volume of for service a specific based on provider to model transaction provider transaction transaction understand range volume volume customer band per executed transaction agreed in agreed rates duration duration Managed ƒƒEnd to end Large Ongoing ƒƒHigh risk Budget for Monthly Moderate Service services services with for service monthly based on provider to model deliverables provider fixed cost delivered understand ƒƒModerate and x% of units customer IT risk for variance and business client cost well Outcome- ƒƒClearly defined Small Ongoing ƒƒHigh risk Budget for One lump Moderate Service based and fixed for service estimated sum post provider to model outcome provider outcome result is understand ƒƒModerate volume achieved client’s risk for business client processes and nuances Conclusion Customers will always look for capital investment It should help in arriving at a price that is competitive yet avoidance, minimum risk, and high quality of service at profitable, flexible, simple and easy to apply. It should be a low price. All this with maximum price flexibility and representative of business realities and maximize transparency. On the other hand, service providers benefits for both the parties. will look for minimum operational and financial risk, consistent and predictable profit and revenue In summary, it is essential to do due diligence of each growth, the longest contract term possible and customer engagement, along with risk assessment, commercial viability. before deciding on the best fit pricing model for them. This due diligence should be based on scientific methods An effective pricing model is one that helps in aligning with known parameters across the IT industry. The above the interests of the customer and service provider. table is a good guideline for such an approach. About the author: Shubha Krishnamurthy is currently employed in Mindtree as Program Director and has more than 14 years of IT experience in managing large scale Data Warehouse and Business Intelligence projects. She is currently managing delivery for all the Data Warehouse and Business Intelligence projects under banking and financial services and insurance industry group. Prior to Mindtree she worked in Wipro Technologies and Patni Computers as software engineer developing data warehouse and business intelligence applications. She holds a B.E with specialization in Electronics and Computer Science from S.D.M Engineering College of Technology, Dharwad. White paper 21