Friday, September 29, 2006

Success based pricing - TCS moves

This piece from ET is on how TCS is moving to success based pricing of its services. These type of structures are typically used by the Accentures and other consulting companies.

Most of the Indian software industry operates on the basis of a fixed hourly rate, referred to in industry parlance as time and material pricing (or a single fixed price contract). In contrast, in a typical outsourcing contract, consulting firms like Accenture tend to promise clients a specific quantum of process improvement, cost reduction and revenue enhancement. If these outcomes are reached, the software firm gets to share a part of the upside.

Success based pricing is not without its risks and it is quite a bold step to take. Until now, most companies follow a milestone based pricing for large projects which means that on every milestone (like builders), customers have to pay. But there is no guarantee that the work will be completed (exactly like builders) or that bugs will be fixed beyond a point. With success based pricing, there is a greater committment on the part of the service provider.

TCS, I have always believed is the leader of Indian IT. They were the leaders who started it all, they explored new markets first, got into new businesses and now they are changing the game with their pricing too.

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