Clients want IT vendors to share business risks, too

[dhilipkumar]

Clients want IT vendors to share business risks, too

The days of plain-vanilla service contracts for IT vendors are over. As the business environment weathers the trough, clients are pushing vendors to share risks associated with the business. This has increased the exposure of Indian IT vendors to 'risk-sharing billing' and 'gain-sharing contracts'.

In the past, a few global MNCs had adopted such a business model. However, due to high risks and necessity of value innovation, not many Indian vendors took the bait. The scenario is changing, said industry observers.

According to them, two types of contract models are gaining traction. Clients are asking vendors to develop solutions that will help increase their revenues or decrease their costs. But for this, vendors are also expected to invest in projects along with their clients. Both will share the gain if the project succeeds. The gain-sharing ratio depends on the kind of projects and other factors.

"Vendors usually push for these contracts as it's a win-win situation for them. It also helps them go beyond time and material contracts and share the spoils with the client," said Siddharth Pai, partner and MD, TPI - an advisory firm.

The second type of contract - the risk-sharing model - is not so much in vogue with the vendors, but more and more clients are demanding it. This is a business outcome-oriented model where the vendor's billing rates are immaterial.

This model is riskier as vendor's revenues are directly tied in to the client's performance. The vendor is paid in proportion to the benefits availed by the client after adopting the new solutions. For instance, if the vendor's solution is supposed to reduce the overall cost of the client's operations, then the payment to the vendor will be done in proportion to the actual cost reduction obtained. Companies in the telecom, financial services, aerospace and manufacturing sector are largely adopting this model.

"The business outcome for such contracts is singularly risky and is mostly seen in end-to-end contracts and a lot of domain skills are required," said KPMG executive director Akhilesh Tuteja.

This also demands IT vendors to be more agile to understand client's business needs. "Clients are no longer looking for order takers, they require strategic advisors. As going gets tough, only those IT vendors will thrive who are ready to share the risk of new ideas and new business opportunities with clients," said Keshav Murugesh, president and COO of Nasdaq-listed, mid-sized IT firm Syntel.

While the number of clients, who prefer the risk-sharing model being on the rise, the model itself is not new to the IT industry. Multinational companies have been working on similar models with their Indian clients. For instance, Bharti Airtel, in the past, has struck multi-year, multi-million dollar service contracts with its vendors, wherein it pays vendor fees based on the volume of customer traffic and service quality.