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Clients want IT vendors to share risk in business
By siliconindia
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Thursday, 19 February 2009, 16:24 IST |
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Mumbai: As the current recession forces IT firms to take each step with utmost care to avert losses in business, they are asking IT vendors to share risks involved in the business. As a result, Indian IT vendors are forced to follow sharing business models such as 'risk-sharing billing' and 'gain-sharing contracts', reported The Economic Times.
Though some of the MNCs have already adopted such business models, Indian IT firms were not in favor of that due to the high risks and necessity of value innovation. But the the ongoing turbulence in the economy is forcing Indian companies also to follow such models.
According to industry observers, two types of contract models are gaining traction. Clients are asking vendors to develop solutions that will help increase their revenues or decrease their costs. But for this, vendors are also expected to invest in projects along with their clients. Both will share the gain if the project succeeds. The gain-sharing ratio depends on the kind of projects and other factors.
Siddharth Pai, partner and MD, TPI - an advisory firm opined that vendors push for these contracts as it is a win-win situation for them. It also helps them go beyond time and material contracts and share the spoils with the client.
As per the risk-sharing model, vendor's revenues are directly tied in to the client's performance. The vendor is paid in proportion to the benefits availed by the client after adopting the new solutions. For instance, if the vendor's solution is supposed to reduce the overall cost of the client's operations, then the payment to the vendor will be done in proportion to the actual cost reduction obtained. Companies in the telecom, financial services, aerospace and manufacturing sector are largely adopting this model.
"Clients are no longer looking for order takers, they require strategic advisors. As going gets tough, only those IT vendors will thrive who are ready to share the risk of new ideas and new business opportunities with clients," said Keshav Murugesh, president and COO of Syntel.