Services Industry Awakening to Three Business Models

I recently blogged about three stories of the way business is unfolding in the Indian services arena due to dramatic changes driven by automation and digital technologies. Here’s another page-turner from NASSCOM’s February conference: there are three possible or probable business models for moving forward.

The first model is the existing labor-based model in which the service providers are compensated for the labor in the form of FTEs or hours. I think this model will continue to play some role.

Second, there has been a lot of talk about charging for outcomes/results. I think that is certainly possible, although it’s very hard to do. The reason is that often the service provider is not the only factor driving the business result. Hence, you end up with a misalignment between the services rendered and results generated. This is a problem for the service provider, which may not be paid when it has done good work. But it’s also a potential problem for the service consumer paying for the services, who doesn’t want to pay for results to an entity or organization that didn’t create the results.

I acknowledge that this is certainly what the industry has been talking about – the shift from FTEs to results or outcomes – and I see that as a possibility. In fact, in some instances, it’s a good idea. But I don’t think that it will be the dominant shift.

The third alternative is a shift to a consumption-based model. The current model is built on a capacity basis; clients pay for the hours whether they use them or not. As we at Everest Group look at the new models, we think clients seem to want to move to more of a SaaS model, which is a consumption-based model. In this model, clients pay for what they use, not what they don’t use. And they pay for it, on some basis other than FTEs. Pricing could be based on seats, usage (as in data or activity), or through some other well-aligned metric that measures the usage.

And the winner is …

I don’t think that any of these three will become the dominant model. At least I don’t see signs of that yet. I believe what we’ll see becoming dominant is some combination of the three models.