Buyer Case Study
Infinite’s Risk/Reward Revenue-Sharing Model Case Study: Raising the Bar in Smart Pricing
Adrian Dominic Ho Sandra Ng
Smart Pricing has received a lot of attention in the ICT industry over the last 12 months. Smart pricing is essentially a largely demand-driven pricing model that can include usage-based and/or business outcome–based pricing. IT service providers are touting it as a key differentiator in a very competitive post-crisis environment, and organizations are demanding for more risk/reward and usage-based pricing so that their ICT partners have more accountability in each engagement and these ICT engagements are more aligned to business priorities. As a result, progressive organizations are now aligning some of their business goals and objectives more tightly with ICT, and pricing models play a critical part in determining them. Looking ahead, IDC is predicting that Smart Pricing will account for close to 50% of all ICT services transactions by 2015.
Infinite, an Indian IT services and software provider, has been one of the most aggressive services providers in this game-changing market dynamic whereby approximately 30% of its total revenue is derived from risk/reward pricing models. Its intellectual property–based revenue sharing model is certainly setting the pace in the industry where many ICT service providers are still struggling to come up with the right formula. The company believes that its approach has allowed many of its clients to realize the full value of the products by adding market-demanding and customerspecific features, porting the product to next-generation platforms and expanding the life span of these products and solutions. In many cases, it has allowed its financial top line to grow 25%–50% with an injection of investment. Most of these products and solutions are either research and development (R&D) starved due to large software investment required in the development or are no longer core or strategic to its clients and with their partnerships with Infinite, they are then able to better realign their R&D and channel resources to other parts of their business. Infinite is not only setting the pace in Smart Pricing models in the ICT industry, it has clearly raised the bar for the rest of the field.
This case study discusses Infinite’s risk/reward pricing model success and the potential long-term impact in the marketplace.
In This Buyer Case Study
This IDC Buyer Case Study focuses on Infinite, an IT services and software solution company, and reviews its key success factors in the marketplace. Leveraging IDC’s expert understanding of the competitive landscape, end-user insights, and future outlook, this document highlights company and market information tailored both to competitors and end-user organizations that are looking for risk/reward sharing models in their ICT investments.
Infinite Computer Solutions is an India-headquartered global services provider of infrastructure management services, intellectual property (IP)-leveraged solutions, and IT services. The company focuses on the telecom, media, technology, manufacturing, power, and healthcare industries. Presently, telecom is its principal vertical and this includes telecom service providers as well as networking equipment vendors. Its services portfolios span application management outsourcing, packaged application services, independent validation and verification, product development and support, and higher value-added offerings including managed platform and product engineering services. Table 1 gives a quick snapshot of Infinite.
The company was founded in 1999 and currently has 3,668 employees and has a global footprint of 16 offices across the globe including Singapore, the U.S., the U.K., India, Malaysia, and China. R&D sites are concentrated in Indian cities like Bangalore, Chennai, Hyderabad, and Gurgaon. The company is listed on the NSE and BSE and its FY10 revenue was approximately US$140 million. Infinite has a healthy mix of customers from the list of Fortune 100 companies including Alcatel Lucent, and Motorola across several verticals, but its strengths continue to be in the telecom and healthcare sectors.
Challenges and Solutions : Building Blocks for Success:
Infinite believes that there are many reasons for its success in the ICT industry. This includes building long-lasting partnerships and relationships with its existing client base. However, IDC believes that Infinite’s disruptive risk/reward pricing models have allowed it to rise above the pack and expand its engagements. In essence, these risk/reward models have fundamentally changed the way the game is being played. These collaborative engagements have allowed its clients to continue to grow by focusing on their core and strategic initiatives without having to discontinue their mature product lines or solutions. There are several crucial elements as to how Infinite has built its engagement models with clients over the last few years and worked out the company’s risk/reward models. Some of the key building blocks of the rules of engagements are discussed below.
Mature products are targets: Currently, Infinite works with organizations, examines their or their clients’ product portfolios, and identifies products or solutions that are mature and have a significant installed base. In most cases, these products and solutions require large software investments or are no longer strategic to these organizations and they are either unable to or not willing to commit significant investments in the long run to generate substantial growth. However, these products continue to be essential to many buyers, have a proven revenue generating record, and can be better streamlined via an offshoring model to India. Infinite will acquire a nontransferable IP of the solution and in most cases will include not only the IP but also the revenue or royalty that comes with it. Infinite will retain the IP to the entire enhancement to the products as a result of the additional R&D capital that is injected in the future.
The upside potential must be significant: Infinite will have to execute careful due diligence before actually making any large-scale investment. One of the guiding principles is that the product or solution must be able to deliver 20%–50% growth over the next few years with further investments. In most cases, Infinite will take over the full IP of the product in return for providing the entire life cycle of research and support of the product. This allows its clients to realign their R&D spending in exchange for a longer term profitable business model. Infinite will also look for the availability to shift most of the work offshore to its centers in India to leverage existing infrastructure that will deliver higher margins.
Risk/reward pricing models vary: Infinite has made significant progress in raising the share of its revenue that is derived from risk/reward pricing models. It currently stands at close to 30%, one of the highest if not the highest in the industry. Revenue derived or splits between Infinite and client varies from deal to deal but it is dependent on several factors. For every IP of a product that Infinite procures, there are usually three sets of revenue streams to drive growth. They are additional new sales of the product, services revenue, and annual maintenance. The combination of these three must be able to deliver an upside that ranges 25%–50% of growth. Infinite believes that in most cases the attached rates for maintenance revenue will have significant room for improvement. Revenue stream to be split or divided will also depend on who is driving the deal or fronting the buyer. The proportion of revenue that is attributed to the customer will generally be lower if the revenue upside potential is less, accounting for new investments that could refresh the product. Generally, contracts are about three years long and terms are very rarely negotiated in the middle of the contract. Terms are usually renegotiated at the end of the contract to take into account any unexpected shortfalls or upward surprises in the arrangements during the life cycle of the entire (previous) contract.
Vendors need to reengage with the buyer community: Apart from the risk/rewards models that need to be worked out, there are also many challenges that the company faces. Primary challenge would include reengaging with the end customer that for many years has dealt with its clientele base. Buyers would potentially have concerns about the change of ownership, and Infinite would need to convince them of their commitment, level of services, as well as future investments with product road map. Initial apprehension of the customers would have to be worked through for any deal of this nature to be successful.
How much to invest in the new product? Infinite would also need to do its due diligence as to what and how much investment it needs to put into these products to generate the type of growth that it is looking for. Aware that some of these products have great fluctuations in revenue, which may be difficult to forecast, the company has to factor this into its planning. However, it believes that a certain degree of market disruption is needed to compete successfully with the big boys in the industry.
Results: Smart Pricing Model Scores:-
IDC believes that this unique engagement model and smart pricing will eventually define the ICT industry over the next few years. Clearly one of the trendsetters, Infinite is setting a feverish pace in Smart Pricing that many of its competitors will have to play catch-up. With Infinite’s ambitions to move deeper into other verticals and expand its remote infrastructure management and application management business, the industry can only expect pricing models to be disrupted further.
Early evidence shows that Infinite’s unique smart pricing model has achieved sustainable returns. In today’s economic environment, organizations are looking for flexibility and agility; and as a result of this relationship, many of its existing clients are now able to realign their resources by channeling them into strategic areas of growth. This also allows its clients to reduce their risk and, in the longer term, increase in the value of offerings as R&D investment in core products as well as additional Infinite capital ploughed in will have the overall impact of enhancing the total solution or product portfolio. This has been viewed as one of the key major benefits of this type of engagements.
In addition, Infinite, with the right amount of investment, breathes new life into a mature product. In most cases, the company posts 20%–50% revenue growth, usually depending on a number of factors including how speculative the product or solution is. The determined level is naturally worked into the risk/reward model. Hence, it will ultimately determine the “payback” of the investment.
Infinite is clearly on a growth trajectory and thus, its IP-based risk/reward model has found a warm reception among some organizations. Its due diligence in selecting projects that have potential to grow with additional investments as well as looking out for projects that enable the leverage of R&D offshoring and other elements to more cost-efficient India, has allowed the provider to sustain a profitable business model. At the same time, clients are able to keep these products that are essential to some end-user organizations without committing too much investment, while satisfying the demands of their clientele base.
The traditional way of payment where an organization pays a fixed sum for a certain level of service will have to change as the economy and the marketplace in general become more dynamic and volatile. Organizations are increasingly demanding that payment should be closely linked to revenue or success to hold their partners more accountable for the investments that they are going to make. Smart pricing has caught the imagination of both ICT service providers and end-user customer organizations. ICT service providers believe that it is a competitive differential (at least for now) and end-user organizations believe that it links their partners closer to them as risk and rewards are shared. However, end-user organizations need to take note of certain key factors to successfully reap the benefits of and manage the challenges of smart pricing. Below are some factors that IDC believes will shape smart pricing over the next couple of years.
Smart pricing models will continue to evolve: Presently, the pay-per-usage model is the most popular form of smart pricing, but the true benefits will come with business-outcome-based pricing options. Risk/reward is one option, but organizations will start asking for further variations including payment based on level of customer satisfaction, business process improvement, and productivity improvements. In many of these business models, the parties essentially become business partners; and this will be the driving force for many of these relationships as both sides strive to work toward what is best for the relationships to prosper over the long term.
Organizations must stay vigilant: As smart pricing is a relatively new concept in the industry, buyers should be extra vigilant. First, smart pricing may not be a suitable model for some organizations and they need to do their due diligence to see if this model will work in their favor and help them achieve some of their corporate goals. Corporate culture, current financial system, and management buy-in are key barriers to overcome for smart pricing to work successfully. Second, end-user organizations need to develop the skills or hire external consultants to devise smart pricing models that are sustainable, not many organizations have the experience or know-how in-house. Risk/reward involves many variables and can be highly risky. Buyers must consider their service providers’ financial muscle as well as financial due diligence to partner for the long haul.
Attention to detail is important: Last, but certainly not the least, buyers should verify their service providers’ ability to provide detailed billing or usage reports to ensure accuracy when calculating payments. Otherwise, discrepancies could lead to disputes that could sour the relationship and result in early termination and disruption to the end-user organization’s business. The essence of revenue sharing or risk/reward models would demand a detailed reporting structure. These smart pricing relationships models are meant to enable the tightening of partnering between parties; and trust, respect, and full transparency are crucial elements to make it work. Prosperity, on both sides, is the leading driving force behind smart pricing and hence the right level and amount of resources and investments must be committed by both parties.
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