Synopsis
The increasing adoption of AI is driving Indian IT firms and clients towards outcome-based contracts. While this shift aims to improve client retention and revenue scaling, it introduces significant risks of revenue fluctuations and increased litigation for IT companies due to the complex attribution of business outcomes.Listen to this article in summarized format
The growth of AI is sparking more discussions about outcome-led deals, as clients believe that business results can now be measured more accurately. On the other hand, IT service providers see it as a means to achieve client loyalty. For instance, in its latest conference call, Cognizant talked about outcome-based models 17 times.
IT companies have long touted the shift to “fixed-price” and “outcome-based” deals as signs that they have progressed beyond “per person deployed” pricing, which limited their ability to scale revenue without a corresponding increase in headcount. But truly impactful outcomes, such as growing a client’s revenue or increasing customer satisfaction score, are not just a result of better technology, and attribution becomes complicated.
“This talk about outcome-based deals has been around for a long time, but AI has increased the focus. The problem with outcomes is how they are measured and defined, because IT is not solely responsible; the business is too. Here you would have greater risk of legal complications,” Pareekh Jain, chief executive officer of Pareekh Consulting, told ET.
For IT companies, even seemingly simple deals such as managing an IT service desk were complicated to transition to a fixed-price structure, such as a “per-ticket” cost, because not all tickets had the same level of complexity and volumes fluctuated due to seasonality, which led to issues over fairness in payment.
Predicting future revenue from an outcome-based deal is also hard, said NS Kumar, chief delivery officer at Hitachi Digital.
“We (have) worked on a risk-reward model (with a client), where we were compensated based on the savings we delivered… However, outcome-based models do come sometimes with risks. For example, savings may initially be high, but can plateau over time, which impacts long-term revenue predictability. That’s why it’s important to carefully define baselines, outcome-based models and continuous improvement mechanisms,” said Kumar.
As an intermediate step, IT companies are increasingly moving to “per-transaction” cost and/or creating a flat fee per invoice processed, pricing based on “output” rather than “outcome”, which is easier to manage.
“Because of AI, clients want more outcomes, because it means providers have more skin in the game. "But it also increases our risk because we don’t control every aspect of how a business works to deliver the outcome, just the technology aspect,” an IT executive with a tier-1 service provider said. “We are talking about this to see how it works. One way is a per-transaction, per-output model.”
Even as IT companies struggle to create effective “outcome-based” contracts, clients, too, face complications, as the contracts struggle to pass their own procurement departments.
“You are seeing more output deals--number of transactions managed, fee-at-risk but the goal is to move towards outcome-based transactions. But it won't just need IT companies to be mature, but also clients' procurement departments,” said IT expert Jain.
