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Quest for an Optimum Commercial Model for S&P Platforms

Am I paying the right price?

In a world where labor cost arbitrage has become commoditized, companies are progressively looking at technological transformations to help streamline business processes while keeping an eagle's eye on managing risks.

Business Platforms provide businesses with the most prominent dual benefit:

·         Man power reduction

·         Better quality through automation and hence through minimal human intervention

 

Business Platforms are expected to bring in greater compliance and thus help the management team in better governance by allowing them to concentrate on the core business issues.

The big question now is would all of this come at an affordable cost? An offshoot of this question is, does technology really contribute meaningfully to the bottom-line?

To answer the above questions, multiple models have been propounded by various market participants.

Some of the prevalent models are:

OpEx model / On Demand / Pay-as-you-go model - This is the most popular model in the industry today. Clients are charged based on the usage.

E.g.: Charge based on number of professional users for Sourcing and based on percentage of Spend for Procurement

CapEx model / Hosted model / On Premise model: Some companies choose to go this route when they're on the lookout for heavy customizations to suit the specific requirements of their organization.

Fixed Price model: A price or Total Contract Value (TCV) would be frozen for deal term leaving no scope for fluctuations in the price. Thus, clients would have a clear view of the projected cash flow for the complete term of the contract

Some of the other prominent models are:

·         Metered Pricing

·         Perpetual Licensing

·         Term licensing and AMCs

·         Self-funded deals

·         Co-creation

 Let's look at what these models should aim to do.

Avoiding sub-zero cash flow in Year 1:

The expectation of a CFO from any project or an activity is to ensure that the net flow of cash is positive for all the years with this rule applying particularly to the first year of the contract. Cash flow in the first year suffers generally due to bulky investments necessitated by the initiation a transformational project.

An ideal platform Pricing should hence cater to reducing the capital expenditure by

1.     Offering to charge on a transactional basis or charge based on usage.

2.     Amortizing the one-time cost over the deal term

3.     Offering to adjust the payment with productivity benefits, etc.

Flexibility in dealing with volume fluctuations

The pricing proposal should offer a fair degree of flexibility in dealing with fluctuations in volumes to avoid constantly revisiting the pricing proposal

Some of the prominent ways to counter this are to have:

1.     A tiered pricing model where different price point is offered for various tiers of volume

2.     Additional Resource Charge (ARC) and Reduced Resource (RRC) Credit methodology.

3.     Minimum volume commitment

Payouts linked to Milestones and SLAs

There are generally two main phases in the life of any Platform deal.

·         Deployment or Transition Phase

·         Steady State Phase

Milestone based payments especially during deployment/transition is an optimum model as the payment can be linked to the vendors delivering in accordance with a predetermined plan. Thus delays in delivery or non-compliance to the deadlines are bound to attract penalties. This ensures superior quality of service which is bound by time.

For the Steady State Phase, creation of an 'At Risk' amount with an overall pool percentage and metric-wise pool percentages goes a long way towards ensuring quality delivery within the specified time limits

Productivity Benefits and Gain Share Model

Since a Platform offering is a packaged solution of technology and services, productivity benefits and gain share models can be applied on the services part.

There are various ways of calculating productivity benefits and Gain share options and these calculations are scenario and company specific.

 

While there might be other factors that affect profitability, above are the most important aspects and hence should be given utmost priority during commercial negotiations.

Let's look at each of these aspects in detail in the subsequent posts.

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