G-Special: G-Sourcing; A Reality-Check

It could be eyewash! Nothing but words!

This is how an ex-CIO turned consultant reacts to the lure of Guarantee- or performance-based services or offerings.

And he and others carrying the pinch of salt in their pockets can not be blamed for viewing this new vendor blitzkrieg as another ‘pie-in-the-sky’.

From the very intent of sharing risks, to the effective structuring of gain-sharing agreements, there’s a lot that comes under the cloud of doubt.

Doubts! Why?

Instead of the traditional approach where the client outlines what to do, and also how to do, can definitely be replaced towards performance-based contracts. The vendors or service providers may have always known a better way to do something. So why not tell them the problem, and then let them come up with as well as execute the best solution for that problem; thus paying them for results.

Eat the cake and leave the recipe part to the chefs who claim they can deliver.

Incidentally, the Bush administration, as per a Govt-technology media report, had picked the performance-based approach as its preferred method of procuring services from the private sector. Agencies were on board with the initiative, using the technique for about 45 per cent of their contracts in 2007, as against 26 per cent in 2001; as per data from the Office of Federal Procurement Policy at the Office of Management and Budget. In fact, federal organizations like Treasury Department had required all eligible service contracts to be performance-based unless explicitly exempted.

Yet, the devil, as they say, is in details.

Implementation nuances cam make or mar the very idea.

And hence, the doubts.

Between-the-lines, Between-the-rewards?

What about the eternal bugbear called Scope-creep?

What about poor user-requirement definitions?

What if the client requirements (the very basis of measurements) keep changing or turn fickle and vague, as they normally do in service contracts?

What if the very nature of work is process-driven?

What if you are still paying the service provider on an hourly basis or according to the costs he incurs?

What about the intricacies of making the bill and proposal process perfect?

Does the vendor really shoulder the risks, or is it woven inside the premiums that such contracts carry?

Risk sharing can really be a tricky area, and apart from vendors going with SaaS in a true mode, not many are willing to actually share risks, answers Prasar Sharma, an ex-CIO who has been a veteran in the Indian Banking terrain for years.

Commenting on the ‘devil’ part, he agrees that there could be too much fine-print, and one might end up spending more.

The fine print definitely has to be figured out when one gets into such a contract. One should be aware of what you are getting into, and then commit, cautions Ajit Sathe, Head of Sales - Emerging Markets, Quinnox Consultancy Services.

He also avers that there could be a high premium component in such contracts. “Yes, that is there, and there is a clear reason that risk-reward in an inherent part of such contracts.”

Observing the nature of iron-clad guarantees, Sharma notes that the tangible-intangible part should be clear in any such metric-driven contract. If reliability and risk are intangibles, a premium of two to five per cent may or may not look suitable. “If it comes with a value-addition, nothing like it.”

A good example though is that of Google Apps. As Sharma cites, even Google is a little overpriced, but then there is a 99 per cent uptime guarantee which covers all aspects of service, and even comes with a cash-back or ready-to-pay-penalty component.

Service outcome cannot be guaranteed until IT services vendors start identifying with customer pain points and creating offerings that solve real business problems, feels Divyabh Mishra, Director-Marketing, Aditi Technologies.

“We believe in selling technology solutions not services. What we offer is business value certainty and not just guaranteed service.” He says.

Now wearing the hat of a consultant to some multi-billion dollar companies, Prasar again points out that most of the clients are not able to extract much from these deals, and not many vendors are actually ready for the real flavour yet. They have yet to come across a vendor who is ready and able to wear the guarantee gear in the real sense.

In his opinion, performance-based contracts could be more of a marketing gimmick.

“The providers are still trying to position this for small- or medium-sized companies which fit the context for them. They are still standing on the lower-half threshold of the market.” Sharma stresses.

In vogue, but for how long?

According to Symphony Services’ President Gordon Brooks, the path ahead for guarantee-based outsourcing will go into a sunrise. “We are interacting with a lot of clients. Yes, some clients are ready, some are not. Thanks to habits and culture challenges. But we see more and more people orienting towards it.”

Brooks sees a lot of pent-up demand and points out how task-based or body-shopping-based never really worked.

It ‘had’ to be goal-oriented and would pick up like anything it sounds.

Lokendra Tomar, COO, APAC, Integreon finds performance-based deals as the sign of things to come, and a big theme in his business, as he would appellate it.  “We are very comfortable with this approach. In fact, we have many big clients in this area.” The visibility that a client gets, the Budgeting relevance it adds, and the ability for us to prove productivity, only add to the attractiveness of this format, he adds.

Now how much of this new tide is a marketing gimmick, stays to be seen.

In the opinion of Sathe though, this is not a model that could go forward, but rather one that ‘should’ go forward. “We are well past the time of conventional models.”

Illustrating the case of State of Virginia and the losses to the State, he says, “If they had worked out a certain component of penalties in the contract they would be better off. ROI, SLAs have always been around and performance-based contracts could be just a new jargon to it. But what is different now is that client has understood that without mapping the business requirements properly and without close monitoring, the real value of outsourcing can not be gained.”

He also emphasizes on how outsourcing has to have a partnership flavour with involvement from both the sides

Amar Karvir, Vice President,  MindTree Ltd is also confident on how the trend towards outcome based pricing or services will only grow over a period of time, more so with the higher accountability and assurance of certain quality metrics that clients can get from service providers here.

“Plus it also opens doors on further innovation as now they have to find all new ways of reaching a goal.” He adds.

“As the industry evolves we will see more variations of this.”

For MindTree the impact of the delivery side completely is not farther than six to nine months.

May be that is a horizon that will answer many unanswered questions so far and may be that is a time-window that will clearly give a verdict on whether the new style of vendors stays in fashion or not?

 The make-over till then, will only get interesting.