The world of IT services usually operates on a pricing or valuation model, which is either based on a Fixed Price system or a flexible Time & Material system. Increasingly, it has been noticed that customers expect their outsourcing partners to deliver what they perceive as value for their money. With the major chunk of IT spending being driven by the business decision makers rather than the technological side, more and more CXO’s, across business lines ,are looking for pricing models that are reflective of the business value generated.
In such a scenario, the concept of outcome based pricing can be considered as a logical progression in that direction. Outcome based pricing works on the principle that you share a portion of the revenue generated or the cost savings that have been achieved. The inherent disadvantage of this system is the difficulty in measuring the outcomes, tracking and reporting. However, given the current volatile economic climate and challenges, it becomes crucial that outcome based pricing models are put into practice very soon.
Having worked closely with many clients, while providing analytics consulting for the last 8 years, I strongly feel that outcome based pricing in analytics is poised to be a reality in the near future. Analytics is one area where the majority of projects undertaken are centered on outcomes that are quantifiable.
Some of the business scenarios where analytics is generally applied are:
1. Marketing: Response model to improve the RoI of the existing campaign/promotions
2. Risk: Fraud detection model to identify and be vigilant of fraudulent transactions
3. Operations: Forecasting model to accurately predict the demand so as to reduce the inventory turns
In each of these scenarios, before you arrive at an analytical solution, you have the baseline number, which you need to improve upon. For example, if the current response rate of your marketing promotions is 1%, then that becomes your baseline number. Now if one builds an analytical model and improves the response rate to 2%, then this number is clearly quantifiable and measurable.
At Happiest minds, we have built an analytics solution, called Air Audit, specially designed for companies in the travel industry. Happiest Minds Air Audit is an analytical application which is designed to help travel agencies prevent unnecessary GDS distribution costs and inventory spoilage caused by non compliant booking practices for Airline customers.
Air Audit Solution follows an outcome based pricing model where the Airlines pay a percentage, based on the revenue leakage identified by our solution.
So we can expect some interesting times ahead for the outcome based pricing model. It is poised to come up with a plethora of solutions like Happiest Minds Air Audit, which will revolutionize the way the IT& KPO services market operates.
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