IT cos bet on risk-reward partnerships for growth

MUMBAI: Even as investors look for pointers on the pick-up in demand and pricing from the results of IT companies, there are indications that the

pricing models themselves may be changing. The recent recession and client pressure to share risk have led to the past few quarters witnessing a significant increase in the number of deals based on risk-reward partnership.

“In the past few quarters, many contracts were renegotiated. The new models are based on a risk-reward partnership, and pricing based on defined outcomes,” said Karthik Ananth, engagement manager, Zinnov Management Consulting.

According to analysts, deals based on sharing risks are becoming a lot more frequent these days. “About a quarter of all deals with an annual run rate of $30 million or more are now being negotiated on newer pricing models,” said a senior executive with one of the country’s top-10 IT exporters, requesting anonymity.

Patni Computer Services’ $40-million deal with the US-based Weyerhaeuser is learnt to be based on one such new model. HCL Technologies, which bagged a $350-million contract from Reader’s Digest, made an upfront payment to it, as part of the promised savings, pointed out an IT analyst.

More in use are outcome-based and transaction-based pricing models. Here, pricing is based on a set of results or on the number of transactions, rather than on the number of manhours spent on a project.

There are also pure risk-reward models for product engineering projects, where the vendor is paid based on how successful the product is in the market. A similar model has now emerged for large IT service projects, where the client initially covers only the costs incurred for the project. The rest of the payment to the vendor is a percentage of the profits, said Mr Ananth.