Optimizing Prices of Outsourced Services

How to make benchmarking work for you?

June 2013
The outsourcing industry has witnessed a multitude of
changes over the last two years that have altered the pricing
dynamics radically

Three reasons why your prices might not be

reflective of the current market rates:

1 Significant fluctuations in macro-economic

factors

2 Decline in premium for specialized and

language-based skills

3 Increased competitive intensity between

outsourcing service providers

Though your prices might have been competitive when they were originally
contracted, if they have not been calibrated with benchmarks in the last 12
months, you could be overpaying by up to 15%
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Favorable trends in macro-economic factors: depreciation of
Indian Rupee, decline in inflation
1

Currency of the most prominent offshore location (i.e., India) has depreciated
significantly against $, €, and £
Depreciation between
Yearly average forex conversion rates (Indexed)
2011-2013
120
14% (USD:INR)
10% (GBP:INR)
8% (EUR:INR)

95
2011 2012 2013YTD

Inflation in most delivery locations across the globe has reduced

Decline in inflation rate
Annual consumer price inflation between 2011-2013
10%
India (3%)
Brazil (2%)
5% Romania (2%)
Philippines (3%)
Poland (4%)
0%
2011 2012 2013YTD

These macro-economic changes have led to downward price revision in majority of the contracts in 2013

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Decline in premium for specialized and language-based skills
2

Skills earlier deemed as “highly specialized” are getting commoditized leading to lower price premiums
Actual IT-ADM deal example: Comparison of specialized skill premium across years in the same deal
2011 2013
18% 12%

Generic skills Specialized skills Generic skills Specialized skills

(C, C++, Java) (ERP) (C, C++, Java) (ERP)

Increased availability of talent has led to decline in language-based price premiums

Actual FAO deal example: Comparison of language premium across years in the same deal (delivery center in Poland)
2011 2013
29% 20%

Base language Premium lanaguage Base language Premium lanaguage

(Polish, English, (French, Spanish, (Polish, English, (French, Spanish,
German) Italian) German) Italian)

The decline in premium for “specialized” skills in ITO and language-based skills in BPO has created a price
negotiation opportunity for buyers

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Competitive intensity at all time high, amid indications of
lower growth in the market
3

Revenue growth of outsourcing service providers declined significantly during 2011-2012

Revenue growth (Y-o-Y) – Global providers Revenue growth (Y-o-Y) – Indian providers
average average

30% 30%
25%

20%
20%

10% 9% 12%
10%
-0.4%
0%
2011 2012
0%
-10% 2011 2012

Decline in service providers’ growth rates has led to increased competition and pricing aggression. In
the last 6 months, price benchmarking has helped our clients to reduce their outsourcing spend by up
to 15%

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There is a large number of organizations that offer “price
benchmarks.” Ironically, there is a large number of reasons
why those benchmarks can be erroneous
Benchmarkers providing “off-the-shelf” and “quick and
dirty” metrics fail to give buyers any negotiation
leverage. Here are some questions you should ask before
selecting your benchmarking service provider:
1. Does the benchmarker offer first-hand, contemporary, and
best-in-class data repository?
2. Does the normalization process account for accurate
nomenclatures, proxies, inflation, forex changes, etc.?
3. Beyond the metrics that highlight variances, are you
getting context that is essential for decision making?
4. Does the output include the resource unit details in order
to ensure apples-to-apples comparison?
5. Does the benchmarker have a pressure-tested approach
to render guidance for less mature functions/locations?
6. Is the benchmarking only reflective of past pricing or does
it provide forward looking guidance on price expectations?
7. Does the benchmarker have exposure to buy and supply
sides of sourcing mandates; are the credentials robust?

Everest Group has a dedicated Price Benchmarking team that has tested and refined its value
proposition for each of the above on 100+ benchmarking engagements

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Does the benchmarker offer first-hand, contemporary, and
best-in-class data repository?
Everest Group’s Value Proposition #1: Pricing data sourced from live-deals

Does not
Evaluation of multiple live global deals include any
purchased, third-  We use CLEAN deal-data from
party, or survey- ~50 ITO deals and ~80 BPO deals
based data (<2 years old), each with its set of
participating service provider pricing
(i.e., multiple price per deal)

 Deal data comprises of only service

provider BAFO (final-bid) pricing
totaling to over ~10,000 price points
across roles and locations

 Extensive coverage of key delivery

locations across the globe

 Pricing for Tier-1 and Tier-2 Global

as well as Indian service providers

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Does normalization account for accurate nomenclatures,
proxies, inflation, forex changes, etc.?
Everest Group’s Value Proposition #2: Comprehensive normalization of data
Everest Group’s normalization process

1 Understand 2 Map client 3 Identify accurate 4 Normalize 5 Exclude

client’s nomenclatures proxies in data outliers
sourcing to standards databases
environment

Inputs from Finalized Filtered Normalized Final

client sourcing benchmark dataset for dataset for benchmarks
and user groups nomenclatures benchmarking benchmarking for client

Understand key Buyer/service provider Isolate deal data points Pre-2013 data is  Perform analysis to
characteristics such as nomenclatures tend to with characteristics that normalized to factor cluster similar skills
 Role or resource unit differ in terms of match client’s forex and inflation for price analysis
descriptions descriptions, SLAs etc. requirements including: movements in service  Remove the low and
 Volumes of roles / Everest Group maps  Buyer industry delivery location in order high end price
resource units these nomenclatures to  Deal size/scope to reflect current pricing outliers to preserve
 Delivery locations its standardized format  Role/resource units trend data accuracy
 Service levels for apples-to-apples  Volumetrics  Retain the 20th
 Pricing model comparison  Delivery locations percentile to 80th
percentile values, and
calculate the median
pricing for each role

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Beyond the metrics that highlight variances, are you getting
context that is essential for decision making?
Everest Group’s Value Proposition #3: Contextualized benchmarks
As Everest Group derives its benchmarks from live deals that it has advised on, it can provide the additional context behind
numbers to help drive focused price negotiations

Indexed onsite rates for Project Manager role1

Median rate, base index = 100 FTE PRICING EXAMPLE
High-end 116
outlier 60%
Benchmark price range
85
73
62
57
45
Low-end
outlier

Service Service Service Service Service Service

provider 1 provider 2 provider 3 provider 4 provider 5 provider 6
Low pricing
may not always be
Benchmark  Resource up-skilling  Resource ‘force-fit’ beneficial; higher price
context  Relevant ‘value-add’  Low cost Tier-2 provider may sometimes be
 Multiple competency JD  Cross subsidization justified
1 Rates are representative of pricing from deals of similar size and scope

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Does the output include the resource unit details in order to
ensure apples-to-apples comparison?
Everest Group’s Value Proposition #4: Detailed benchmarking deliverables

Based on
final-bids from
Expected outcomes Live-deals only
 Rates for onshore, landed, and offshore delivery models
 Pricing range for each service provider category (Global and Indian service provider)
 Discrete price benchmarks for each role and location

Typical onshore pricing per FTE in U.S.

US$ per hour, 2013

Median rate
200
Role characteristics: IT Systems Analyst

Tenure: 1-3 years 150

Qualification: Bachelors degree in Engineering XX
Description: 100 XX XX
 Reviews, analyzes, and evaluates business systems
and user needs
50 XX
 Documents requirements, defines scope and
objectives, and formulates systems to parallel overall
business requirement 0
Indian service Global service
provider provider

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Does the benchmarker have a pressure-tested approach to
render guidance for less mature functions/locations?
Everest Group’s Value Proposition #5: Robust estimation process
Expected outcomes
 Insight into service provider operating costs, mark-up and pricing
 Average price estimate for a given role in a given delivery location
 Clarity on location-specific cost-side drivers (wage, real-estate inflation, resource availability etc.)

Senior Agent – Price build-up per FTE in Costa Rica Billing rate:
US$ per annum US$ 16.6/hr1

4,691 31,964
3,260 27,273
4,995 928
15,965 2,125

Salaries Administration Real estate Equipment Other direct Total direct Typical margin & Billing rate
and benefits overhead and facilities and telecom operating operating supplier corporate
expenses cost per FTE over heads
Typical utilization-based rates
US$ per hour Practical price estimate

Ground-up Utilization-based rates for Costa Rica

Benchmark Experience Pricing
benchmarking rate
role (years) Unit 85% 80% 75% 70% 65%
(100% utilization)
Snr. Agent - Hourly 16.6 19.6 20.8 22.2 23.8 25.6

1 Hourly rate built assuming 1920 annual billable hours and 100% utilization. Refer utilization-based rates for practical price estimates

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Is the benchmarking only reflective of past pricing or does it
provide forward looking guidance on price expectations?
Everest Group’s Value Proposition #6: Actionable guidance on pricing outlook
Everest Group complements its benchmarks with guidance on future pricing based on assessment of key cost and price drivers

Demand-side analysis Pricing cues

Analysis of key demand Assessment of overall industry

parameters: sentiment related to pricing
 Deal size based on service provider
 Deal volume briefings, as well as direct
 Value mix conversations with buyers and
 New deals vs. renewals services providers

Trend and future outlook for blended FTE price at offshore (India)
Indexed
104
102 100
99 99 99
100 98 98
98
96
2012 H1’ 2013 H2’ 2013

Supply-side analysis Key macro-economic factors

Analysis of service provider Impact of inflation and

dynamics: forex movements on
 Resource cost operating costs in key
 Overhead cost delivery locations
 Hiring mix
 Onshore-offshore mix
 Financial performance

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Does the benchmarker have exposure to buy and supply sides
of sourcing mandates; are the credentials robust?
Everest Group’s Value Proposition #7: Established past credentials
Client category Objectives fulfilled

 Benchmark ongoing contracts for price optimization and focused negotiations

Buyer  Evaluate additional savings potential by optimizing delivery e.g., Tier-2 locations, flatter pyramids etc.
 Vet service provider bids for apples to apples comparison and optimum value for money
 Compare and validate provider pricing at multiple global delivery locations
 Rationalize outsourced skill portfolio and optimize commensurate spend
 Understand current cost-price-skills landscape as a new entrant into a sourcing geography
Service
 Understand practical price premiums associated with specific value-adds
provider
 Understand pricing trends and potential areas for price improvement
 Validate delivery and pricing models compared to industry best practices

Sample pricing advisory clients in 2009-2012

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Everest Group
Leading clients from insight to action

Everest Group locations

Dallas (Headquarters): [email protected]

+1-214-451-3000

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+1-646-805-4000

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+1-416-865-2033

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