Everest Group expert, Ross Tisnovsky, will discuss how buyers can strategically use pricing to address key issues and concerns in their outsourcing relationships and highlight best practices for improving value capture.

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Today’s webinar Upcoming webinars
How Innovations in Pricing Can Lead to FAO Growth in 2010: Key Opportunities &
Increased Value Changes
Synopsis: Date & Time:
Everest expert, Ross Tisnovsky, will discuss how April 6, 2010
buyers can strategically use pricing to address key 9:00 AM CDT/10:00 AM EDT
issues and concerns in their outsourcing
relationships and highlight best practices for Speakers:
improving value capture. Katrina Menzigian, VP-Research, Everest Group
Saurabh Gupta, Research Director, Everest
Group
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2. Q&A
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3. Introduction
Ross Tisnovsky
VP-Research
Everest Group
rtisnovsky@everestgrp.com
3
Proprietary & Confidential. © 2010 Outsourcing Center

4. How Innovations in Pricing Can
Lead to Increased Value
March 23, 2010

5. Competing buyer and supplier interests influence ITO
pricing
Buyer interests Supplier interests
Maximum price flexibility and Secure profit and revenue growth
transparency
Decreasing prices year over year Ensure revenue grows
proportionately with increased
volumes or scope
Potential capital avoidance
Minimize exposure if volume or
scopes change
Shortest economical term possible
Longest contract term possible
g
Minimize exposure to operational Minimize exposure to operational
and financial risk and financial risk
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Proprietary & Confidential. © 2010, Everest Global, Inc.

6. A well-designed pricing model should help align buyer
and supplier interests
Competitive but fair (win/win
Lower than Higher than transaction)
Competitive/Fair Customer must have competitive pricing;
market market
supplier must make a fair return; this
helps the contract stand the test of time
Predictable and flexible
Totally Anticipate change in the customer’s
All fixed Predictable/Flexible variable organization (i.e., volumes,
(i e volumes
merger/acquisitions, downsizing)
Simple and easy to use
Simple Simple/Easy to use
p y Complex The approach must be easily understood
and can b i l
d be implemented with ease b
t d ith by
both parties
Price to business outcomes
All operational All business Where possible, align billing and
metrics Outcome focused outcome contractual structures with buyer
objectives
Shared incentives
Gain Where appropriate create incentive
appropriate,
Cost plus Shared incentives sharing mechanisms to help maximize the
financial benefits for both parties
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Proprietary & Confidential. © 2010, Everest Global, Inc.

7. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

8. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Based on the
Approach Fixed price
supplier’s units of
resource input to
Baseline/ provide services
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
8
Proprietary & Confidential. © 2010, Everest Global, Inc.

9. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/
banded Based on the buyer’s Pass
units of consumption/ through
Time and volume of transaction
materials Structure in a billing period Method
Cost plus
Milestone
based
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
9
Proprietary & Confidential. © 2010, Everest Global, Inc.

10. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Based on outcome
Unit based Approach achieved by the Fixed price
supplier’s
Baseline/ contribution
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
10
Proprietary & Confidential. © 2010, Everest Global, Inc.

11. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Set price agreed to
Unit based Approach Fixed price
at deal signing
Baseline/
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
11
Proprietary & Confidential. © 2010, Everest Global, Inc.

12. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Costs from a third
party paid by the
Baseline/ supplier on client’s
banded behalf Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
12
Proprietary & Confidential. © 2010, Everest Global, Inc.

13. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/ Client pays supplier direct or
banded total costs plus an agreed Pass
mark-up to cover through
Time and If direct, the costs mark-up
materials Structure Method
covers overhead and profit
margin i Cost plus
Milestone If total cost, then mark-up
based is only profit margin
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
13
Proprietary & Confidential. © 2010, Everest Global, Inc.

14. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based Supplier provides
client direct access
Percentage Adjustment to relevant Open book
of spend
f d base segments of its
internal costing
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
14
Proprietary & Confidential. © 2010, Everest Global, Inc.

15. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based Pricing can be
periodically
Percentage recalibrated to a
Adjustment Open book
of spend
f d predetermined set of
base
external benchmarks”
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
15
Proprietary & Confidential. © 2010, Everest Global, Inc.

16. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based Pricing is adjusted
periodically based
Percentage on a predetermined
Adjustment Open book
of spend
f d set of relevant
base
inflation indices
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
16
Proprietary & Confidential. © 2010, Everest Global, Inc.

17. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone Supplier generates
based improvement ideas
whose costs and
Percentage Adjustment rewards are generally Open book
of spend
f d base split between client
and supplier
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

18. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/ Contractual mechanism to
banded reward supplier for Pass
innovation, leverage and/ through
Time and or process improvement
materials Structure Method
Responsibility is
primarily on th supplier
i il the li Cost plus
Milestone Client retains right to
based reject changes
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

19. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Pricing per unit
Unit based committed Approach Fixed price
Can also be by
Baseline/ strict unit consumed
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
based
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
19
Proprietary & Confidential. © 2010, Everest Global, Inc.

20. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/ Set amount charged as
banded long as within expected Pass
range of usage through
Time and Baseline pricing within
materials Structure Method
a narrow range with
unit-based pricing
it b d i i Cost plus
Milestone outside the range (ARC
based and RRC)
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
20
Proprietary & Confidential. © 2010, Everest Global, Inc.

21. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
Client pays for
based
supplier labor hours
at set rates and for
Percentage Adjustment Open book
materials, expenses,
materials expenses
of spend
f d base
and travel
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
21
Proprietary & Confidential. © 2010, Everest Global, Inc.

22. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/
banded Pass
through
Time and
materials Structure Method
Cost plus
Milestone
Payments made only
based
as set schedule of
Percentage activities
Adjustment Open book
of spend
f d accomplished
base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
22
Proprietary & Confidential. © 2010, Everest Global, Inc.

23. A holistic ITO pricing model evolves from the
interaction of multiple structural elements
Input Output Outcome
based based based
Unit based Approach Fixed price
Baseline/ Client pays a
banded predetermined Pass
percentage of spend or through
Time and value gained to supplier
materials Structure Can have a fixed base Method
payment with rest as
incentive Cost plus
Milestone
based Percent may vary over
time or by size
Percentage Adjustment Open book
of spend
f d base
Market Inflation Reward
Incentive
indices adjusted sharing
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

24. Client rates negotiated in a contract became
misaligned with market rates over time...
CLIENT EXAMPLE
Outsourcing context Key issue
Desktop price was moderately increasing according to the agreement
An enterprise buyer
p y and became significantly misaligned with the desktop support market
outsourced its IT rates due to advent of cheaper support technologies, e.g., remote
t d t d t f h tt h l i t
end-user support desktop management
environment
Illustration Contract price
The contract
duration was six Indexed price per desktop1
p p p Market price
years 45%
Desktop pricing opportunity
was designed to
stay relatively 128.3
83
stable over time, 115.6 120.1
120 1
109.8
after COLA 100.0100.0 105.1
adjustments
UK RPI was the 68.0
agreed index
Assets, software
and personnel all
included in pricing
2002 2003 2004 2005 2006 2007
1 Indexed to 100, UK RPI used to show effects of indexation
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

25. The solution was to ensure a price review triggered by
a market index of technology
CLIENT EXAMPLE
Solution
Link existing output-based price to
appropriate market indices that can
serve as indicators of cost
improvements. Trigger a price review Input- Output- Outcome
based based based
based on the threshold of market
indices
Alternately,
Alternately have a periodic schedule Unit-based Approach Fixed
Fi d
price
for a price review for services under
Baseline/
consideration banded Pass-
through
Time and Structure Method
Caveats materials
Cost-plus/
In more stable environments, e.g., Milestone open book
based
mainframes, the pain of adjusting
Percentage Adjustment
pricing to minor advancements in of spend base Open book
mainframe technology usually
outweighs the benefits in terms of Market Inflation Reward
Incentive
incremental savings indices adjusted sharing
Technology cycles for certain products,
e.g., PDAs and other end-user devices
are extremely rapid, and this will
prompt excessively frequent price
Source: Everest Researchservices
reviews for such Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

26. The high incidence of Scope Change Requests resulted
in reduced flexibility
CLIENT EXAMPLE
Outsourcing context Key issue
The number of trouble tickets converted to SCRs by the supplier
The buyer is a large increased exponentially over time
Fortune 500 SCRs are like mini-projects billed at high rates as “uncontracted services”
mini projects uncontracted services
enterprise with a Increasing rate of SCRs acted as a deterrent to entering further trouble
presence across tickets, constraining buyer ‘s IT users
multiple geographies
It has a complex
applications Illustration
environment, partly as Trouble tickets opened Scope change requests
a result of multiple Other tickets
acquisitions
The buyer has a
three-year application
management 75% 70% 68% 65% 66%
outsourcing contract 97% 96% 98% 90%
Acceptable
with an IT services level of
supplier scope
The deal is a fixed- 32% 35% 34% change
25% 30% requests
price contract for 3% 4% 2% 10%
maintenance of the
Month Month Month Month Month Month Month Month Month
buyer s
buyer’s applications 5 6 7 8 9 10 11 12 13
portfolio
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

27. Switching to output-based pricing prompted the
supplier to resolve tickets without resorting to SCRs
CLIENT EXAMPLE
Solution
Alternative
Switch to variable output-based approach
pricing approach, where the supplier
is paid based on the number of tickets
resolved Input- Output- Outcome
based based based
This allows the supplier to align cost of
delivery to business volume (i.e.,
tickets) Unit-based Approach Fixed
price
Alternatively, the buyer may
Baseline/
incorporate up-front transformation in banded Pass-
through
the contract. Here, there is an incentive Time and Structure Method
for the supplier to perform application materials
Cost-plus/
portfolio rationalization through a gain- Milestone open book
based
sharing arrangement, which shares the
value created with the supplier Percentage Adjustment
base Open book
of spend
Caveats
C t Market Inflation Reward
Incentive
indices adjusted sharing
Fixed price is still a preferred option for
more stable environments where
volumes are not expected to vary
significantly over time
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

28. User satisfaction declined due to mediocre first-call
resolution
ILLUSTRATIVE
Outsourcing context Key issue
Despite the supplier generally meeting expected performance levels,
An enterprise buyer business users were dissatisfied with helpdesk services
outsourced it IT
t d its
infrastructure Illustration
including helpdesk First-call resolution metrics for helpdesk operations
operations Business
The contract users’
duration was five expectation
(90%)
years
The price of 76% 76% 77% 73% 72% Acceptable
providing helpdesk level (75%)
services was linked
to the number of
calls managed by
the supplier
Technical metrics
were monitored
and tied to SLAs
2004 2005 2006 2007 2008
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

29. The buyer linked the helpdesk service price to user
volume rather than call volume
CLIENT EXAMPLE
Solution
Correct misalignment by pricing
helpdesk service by number of users
supported, rather than on a per-call
basis Input- Output- Outcome
This will incent the supplier to reduce based based based
its cost of service delivery by driving
efficiency in operations Fixed
Unit-based Approach
Higher productivity can be achieved price
by adoption of self-help tools and Baseline/
banded Pass-
more automated processes through
Time and Structure Method
materials
Caveats Cost-plus/
Milestone open book
The above fix will not apply in a based
situation where user needs fluctuate Percentage Adjustment
Open book
of spend base
greatly, for example
Move t a new OS significantly
M to i ifi tl
Market Inflation Reward
driving up call by users for indices adjusted sharing
Incentive
migration support
New security application roll-out
requiring users to seek expert help
q g p p
from service desk
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

30. The supplier was reluctant to implement the latest
technologies in an IT infrastructure environment
HYPOTHETICAL
Outsourcing context Key issue
Beyond contracted refreshes, the supplier was reluctant to bring the
A large enterprise benefits of the IT innovation (e.g., latest technologies, new support
buyer outsourced its processes) to the buyer
) t th b
infrastructure in a Illustration
transformational ITO
ITO deal economics Cost to supplier
deal
The contract had y
Cost to buyer
typical Supplier’s
characteristics of a investment in
Operational transformation Supplier’s
traditional ITO deal,
costs margin in
i.e.,
Long deal term ( steady state Effect of
>= 5 years) one-time
Supplier took transformation
over client’s IT
assets Effect of
Supplier invested ongoing
in up-front improvements
transformation of
the buyer’s IT
environment
en ironment Year 1 Year 2 Year 3 Year 4 Year 5
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

31. In order to innovate, the supplier needs to be
compensated through a combination of reward-sharing
and input-based pricing mechanisms ILLUSTRATIVE
Solution
Introduce additional pricing scheme
that shares a part of the benefits
with the supplier for an agreed
period of time, as a fair return on the Input- Output- Outcome
based based based
supplier’s investment in the
transformational activity, subject to
achievement of desired outcomes Unit-based Approach Fixed
Fi d
price
Refund supplier for additional
Baseline/
investments into innovation through banded Pass-
input-based consulting fees, etc. through
Time and Structure Method
materials
Cost-plus/
Milestone open book
based
Caveats
Percentage Adjustment
base Open book
Benefits of IT innovations are often of spend
difficult to quantify, e.g., virtualization
will drive up server utilization levels Market
indices
Inflation
adjusted
Reward
sharing
Incentive
but might lead to the increase in the
cost of server management
Source: Everest Research Institute (2009)
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Proprietary & Confidential. © 2010, Everest Global, Inc.

32. Q&A
Attendees will receive an email with a link to download today’s webinar presentation. To access a
recorded audio version of this webinar, please contact Mark Williamson,
mark.williamson@everestgrp.com
For advice or research on pricing, please contact Everest:
Ross Tisnovsky, rtisnovsky@everestgrp.com
For background information on Everest, please visit:
g ,p
www.everestgrp.com
www.everestresearchinstitute.com
Thank you for attending today
To ask a question during the Q&A session
Click th
Cli k the question mark (Q&A) button located on the floating tool bar in the bottom right of your
ti k b tt l t d th fl ti t l b i th b tt i ht f
screen. This will open the Q&A Panel
Be sure to keep the default set to “send to a Panelist”
Then, type your question in the rectangular field at the bottom of the Q&A box and click the send
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