<div>Information technology (IT) outsourcing contracts are traditionally of two types — time-and-materials (T&M) and fixed price (FP). IT service companies consider T&M contracts a relic from the past. The accepted wisdom is that FP contracts or other outcome-based pricing methods are the way to go as a company moves up the value chain.<br /><br />Industry body Nasscom even tracks the percentage of FP contracts in its quarterly review called Research and Intelligence. In its most recent December 2014 issue, it claims that revenues from FP contracts for the top IT services companies were at an all-time high of 48 per cent during both the quarters ending June 2014 and September 2014.<br /><br />Last month, at the Goldman Sachs Investor conference on February 10, Infosys Chief Executive Officer Vishal Sikka described T&M contracts as “hell” and disclosed that such contracts still constituted 58 per cent of Infosys’ revenues. In reply to a specific query from Goldman Sachs analyst Rishi Jhunjhunwala, he had said: “My endeavour is to see that more and more of our business goes in that direction of fixed price...away from the time and materials hell that the industry has been in.”<br /><br />In January, while announcing the third quarter results, Wipro’s outgoing Executive Director & Chief Financial Officer Suresh Senapaty said, “During the quarter...the share of fixed price contracts increased to over 55 per cent of engagements — a reflection of the maturity of Wipro’s customer engagement model.”<br /><br />There has been at least one high profile ambush against T&M contracts by the Indian IT industry. In 2012, iGate reportedly rolled out a high-decibel print ad campaign in the US and UK called ‘Conspiracy Uncovered’ which described T&M contracts as the “No.1 enemy of mega corporations”.<br /><br />But in his testimony before the United States Senate judiciary committee on Tuesday (March 17) during a hearing on immigration, Jack (Jay) B Palmer Jr., a former principal consultant at Infosys, gave another dimension to the T&M versus FP debate. Palmer said Infosys asked him to rewrite T&M contracts into FP contracts because they allowed the company to mask the illegal employment of B-1 visa holders in the US.<br /><br />B-1 is a non-immigrant visa that allows foreign nationals to temporarily enter the United States for business purposes, though such visa holders are not allowed to perform skilled or unskilled labour.<br /><br />FP is not for everyone<br /><br />To put things in context, we have to dive a bit more into both methods of pricing IT outsourcing contracts. In their book, A Guide to IT Contracting: Checklists, Tools, and Techniques, Michael R Overly and Matthew A. Karlyn define T&M contracts as “a professional service engagement in which the contractor will be paid an hourly or daily rate, plus expenses”. In contrast, they say that in fixed price contracts a “contractor will perform services for a specified fee, regardless of the actual time and expense required to complete the work”.<br /><br />They note that companies which outsource work (referred to as the ‘customer’ or ‘client’) to IT services companies (known as ‘contractor’) do not prefer T&M contracts because they will be expected to “aggressively manage the project and require frequent reports from the contractor detailing hours spent, fees incurred, and expenses”.<br /><br />In contrast, despite all the talk about going up the value chain, many IT services firms do not prefer FP contracts because they do not have the skill sets to adequately understand the hidden costs involved, a senior IT professional in a mid-tier technology services company told Deccan Herald. <br /><br />Even if the costs escalate manifold, the terms of the FP contract will bind them to accepting the agreed upon fixed price. But in T&M contracts, the outsourcing provider will be paid for the hours of work done even if the costs exceed the original estimate. There are exceptions. The authors say some companies subject service providers “to an overall fee cap that cannot be exceeded without the customer’s prior written authorisation”.<br /><br />Others impose risk-sharing. The authors say that if the T&M “final fees are more than 10 percent greater than the original estimate, and the excess is not attributable to the customer’s actions or inactions, the excess fees should be split 50/ 50 between the parties”.<br /><br />But IT servicing biggies prefer FP or other outcome-based pricing contracts because they have the analytical skill sets and the tools to adequately understand the scope of a project, and accordingly take a call on the price. FP projects provide for them the flexibility to control costs by deploying the right number of personnel and improve margins.<br /><br />Another dimension of FP projects<br /><br />Going by Palmer’s testimony, FP projects provided yet another advantage. This is what he said in his testimony, “In order for Infosys’ scheme to work, the US contracts had to be written as FP contracts and not as T&M contracts. The reasoning is that on an FP contract, a customer is charged a lump sum for labor. The people who are actually doing the ‘work’ do not have to be named to the customer but they are named on internal labor spreadsheets in order to come up with a cost and price.<br /><br />“There were some customers such as Baker Hughes that wanted to see the names of the staff and Infosys did furnish these names and some of the people named were illegal. On a T&M contract, the people doing the actual work must be named along with their hourly rate. This is when the proverbial cat came out of the bag. It became increasingly evident of the widespread and intentional illegal activities. There were emails and requests for me to rewrite T&M contracts to FP contracts and I would not do it.”<br /><br />There has not been much public debate on this aspect of FP contracts. To be sure, it was not the first time that such allegations have been raised. Conversion of a T&M contract into an F&P contract was one of the allegations laid against Infosys jointly by the US Attorney Office for the Eastern District of Texas, the US Department of State, and the US Department of Homeland Security. <br /><br />The allegations made under Clause II.E.3.d of the $34-million settlement dated October 30, 2013, says: “For example, on or about September 29, 2009, in a series of emails between Infosys employees, Infosys directed its employees to convert a ‘time and materials contract’ — a contract that disclosed the names and billing rates of all individuals working on a project — to a ‘fixed price contract’ — a contract that disclosed only the total price for services performed. <br /><br />This change allowed and was intended by Infosys to conceal the fact that B-1 visa holders were performing jobs that involved skilled or unskilled labor that were otherwise required to be performed by United States citizens or require legitimate H-1B visa holders.”<br /><br />Infosys had denied these specific allegations. “All changes made to contracts or proposed contracts between Infosys and its clients, including that described in Part II.E.3.d, were made to comply with internal company guidelines and rules regarding billing practices; all were agreed to by both Infosys and its clients; and none were made to deceive as to activities performed by B-1 visa holders. In addition, Infosys did not engage in any improper billing of its clients in connection with projects involving B-1 visa holders,” it said in its reply.<br /><br />When contacted over Palmer’s latest testimony, an Infosys spokesperson provided this response: “In October 2013, Infosys reached a settlement with the US Attorney's Office for the Eastern District of Texas regarding our alleged violation of US visa regulations. This settlement removes the uncertainty of prolonged litigation and allows us to continue to focus on delivering measurable results for our clients. Most importantly, the settlement will not have any impact on our eligibility to garner federal contracts or for accessing US visa programs in the future.”<br /><br />Shivendra Singh, vice president (global trade development), Nasscom, had this to say, “As you may be aware, as an association Nasscom does not comment on an individual company issue. Having said that, the nature of contract is a continuously evolving process which is very much based on the agreement between the client and the service provider.”<br /><br />Palmer left Infosys in 2013. Reports citing John M Bales, the US Attorney for the Eastern District of Texas, had earlier said that he stood a chance to receive up to 25 per cent of the $34-million settlement proceeds. Though Palmer was not a party to the settlement, his lawsuit against Infosys was the trigger for the federal investigation.<br /><br />The role of ‘scoping’ SoW<br /><br />The authors cited above do mention the availability of a process for transforming a T&M contract into an FP contract and vice versa. It’s called ‘scoping’ SoW. For starters, what’s an SoW? The authors say that “in IT outsourcing contracts, there will be an overarching professional services contract”. Attached to this will be multiple statements of work (SoWs) which give a “written description of the services, milestones, deliverables, project schedule, and fees associated with professional services to be rendered” by an IT outsourcing provider.<br /><br />This is how contracts are transformed: “If a particular project cannot be well defined from the outset and the contractor is not comfortable proceeding on a fixed-fee basis, the parties may consider entering into an initial ‘scoping’ SoW in which the contractor will be given a defined period of time to better scope the services necessary to complete the project. At the end of the scoping phase, the parties will either agree on a fixed fee, agree on further time and materials work, or terminate the agreement.”<br /><br />A senior IT professional told Deccan Herald that services companies operate under a Master Services Agreement on major accounts with existing clients. “This agreement could be under a T&M model, but there could be other projects under the Master Agreement which follow an FP model based on specific SoWs. Scoping is done for any new project. But a scoping mistake will not typically affect the service provider in case of T&M projects.” <br /><br />The availability of such established processes to transform the nature of contracts is certainly a boon for mid-tier Indian IT service providers which are yet to gain mastery over the pricing of contracts. Industry leaders too should handhold them and work with them to close any loopholes to avoid the recurrence of allegations made by Palmer and the US government agencies. Only then can they build upon the admirable contributions made by the Indian IT service industry.<br />Price matters <br /><em>Fixed Price Contracts </em> <br /><br />Contractor will perform services for a specified fee, regardless of the actual time and expense required.<br /><br />IT biggies prefer FP contracts because they have the skill sets and the tools to understand the scope of a project<br /><br />FP projects provide biggies the flexibility to control costs by deploying the right number of personnel <em>Time and Materials Contracts </em><br />Contractor will be paid an hourly or daily rate, plus expenses.<br /><br />Small IT service providers may prefer T&M since they lack the ability to price an FP contract<br /><br />In T&M, the contractor will be paid for the hours of work done even if the costs exceed the original estimate</div>
<div>Information technology (IT) outsourcing contracts are traditionally of two types — time-and-materials (T&M) and fixed price (FP). IT service companies consider T&M contracts a relic from the past. The accepted wisdom is that FP contracts or other outcome-based pricing methods are the way to go as a company moves up the value chain.<br /><br />Industry body Nasscom even tracks the percentage of FP contracts in its quarterly review called Research and Intelligence. In its most recent December 2014 issue, it claims that revenues from FP contracts for the top IT services companies were at an all-time high of 48 per cent during both the quarters ending June 2014 and September 2014.<br /><br />Last month, at the Goldman Sachs Investor conference on February 10, Infosys Chief Executive Officer Vishal Sikka described T&M contracts as “hell” and disclosed that such contracts still constituted 58 per cent of Infosys’ revenues. In reply to a specific query from Goldman Sachs analyst Rishi Jhunjhunwala, he had said: “My endeavour is to see that more and more of our business goes in that direction of fixed price...away from the time and materials hell that the industry has been in.”<br /><br />In January, while announcing the third quarter results, Wipro’s outgoing Executive Director & Chief Financial Officer Suresh Senapaty said, “During the quarter...the share of fixed price contracts increased to over 55 per cent of engagements — a reflection of the maturity of Wipro’s customer engagement model.”<br /><br />There has been at least one high profile ambush against T&M contracts by the Indian IT industry. In 2012, iGate reportedly rolled out a high-decibel print ad campaign in the US and UK called ‘Conspiracy Uncovered’ which described T&M contracts as the “No.1 enemy of mega corporations”.<br /><br />But in his testimony before the United States Senate judiciary committee on Tuesday (March 17) during a hearing on immigration, Jack (Jay) B Palmer Jr., a former principal consultant at Infosys, gave another dimension to the T&M versus FP debate. Palmer said Infosys asked him to rewrite T&M contracts into FP contracts because they allowed the company to mask the illegal employment of B-1 visa holders in the US.<br /><br />B-1 is a non-immigrant visa that allows foreign nationals to temporarily enter the United States for business purposes, though such visa holders are not allowed to perform skilled or unskilled labour.<br /><br />FP is not for everyone<br /><br />To put things in context, we have to dive a bit more into both methods of pricing IT outsourcing contracts. In their book, A Guide to IT Contracting: Checklists, Tools, and Techniques, Michael R Overly and Matthew A. Karlyn define T&M contracts as “a professional service engagement in which the contractor will be paid an hourly or daily rate, plus expenses”. In contrast, they say that in fixed price contracts a “contractor will perform services for a specified fee, regardless of the actual time and expense required to complete the work”.<br /><br />They note that companies which outsource work (referred to as the ‘customer’ or ‘client’) to IT services companies (known as ‘contractor’) do not prefer T&M contracts because they will be expected to “aggressively manage the project and require frequent reports from the contractor detailing hours spent, fees incurred, and expenses”.<br /><br />In contrast, despite all the talk about going up the value chain, many IT services firms do not prefer FP contracts because they do not have the skill sets to adequately understand the hidden costs involved, a senior IT professional in a mid-tier technology services company told Deccan Herald. <br /><br />Even if the costs escalate manifold, the terms of the FP contract will bind them to accepting the agreed upon fixed price. But in T&M contracts, the outsourcing provider will be paid for the hours of work done even if the costs exceed the original estimate. There are exceptions. The authors say some companies subject service providers “to an overall fee cap that cannot be exceeded without the customer’s prior written authorisation”.<br /><br />Others impose risk-sharing. The authors say that if the T&M “final fees are more than 10 percent greater than the original estimate, and the excess is not attributable to the customer’s actions or inactions, the excess fees should be split 50/ 50 between the parties”.<br /><br />But IT servicing biggies prefer FP or other outcome-based pricing contracts because they have the analytical skill sets and the tools to adequately understand the scope of a project, and accordingly take a call on the price. FP projects provide for them the flexibility to control costs by deploying the right number of personnel and improve margins.<br /><br />Another dimension of FP projects<br /><br />Going by Palmer’s testimony, FP projects provided yet another advantage. This is what he said in his testimony, “In order for Infosys’ scheme to work, the US contracts had to be written as FP contracts and not as T&M contracts. The reasoning is that on an FP contract, a customer is charged a lump sum for labor. The people who are actually doing the ‘work’ do not have to be named to the customer but they are named on internal labor spreadsheets in order to come up with a cost and price.<br /><br />“There were some customers such as Baker Hughes that wanted to see the names of the staff and Infosys did furnish these names and some of the people named were illegal. On a T&M contract, the people doing the actual work must be named along with their hourly rate. This is when the proverbial cat came out of the bag. It became increasingly evident of the widespread and intentional illegal activities. There were emails and requests for me to rewrite T&M contracts to FP contracts and I would not do it.”<br /><br />There has not been much public debate on this aspect of FP contracts. To be sure, it was not the first time that such allegations have been raised. Conversion of a T&M contract into an F&P contract was one of the allegations laid against Infosys jointly by the US Attorney Office for the Eastern District of Texas, the US Department of State, and the US Department of Homeland Security. <br /><br />The allegations made under Clause II.E.3.d of the $34-million settlement dated October 30, 2013, says: “For example, on or about September 29, 2009, in a series of emails between Infosys employees, Infosys directed its employees to convert a ‘time and materials contract’ — a contract that disclosed the names and billing rates of all individuals working on a project — to a ‘fixed price contract’ — a contract that disclosed only the total price for services performed. <br /><br />This change allowed and was intended by Infosys to conceal the fact that B-1 visa holders were performing jobs that involved skilled or unskilled labor that were otherwise required to be performed by United States citizens or require legitimate H-1B visa holders.”<br /><br />Infosys had denied these specific allegations. “All changes made to contracts or proposed contracts between Infosys and its clients, including that described in Part II.E.3.d, were made to comply with internal company guidelines and rules regarding billing practices; all were agreed to by both Infosys and its clients; and none were made to deceive as to activities performed by B-1 visa holders. In addition, Infosys did not engage in any improper billing of its clients in connection with projects involving B-1 visa holders,” it said in its reply.<br /><br />When contacted over Palmer’s latest testimony, an Infosys spokesperson provided this response: “In October 2013, Infosys reached a settlement with the US Attorney's Office for the Eastern District of Texas regarding our alleged violation of US visa regulations. This settlement removes the uncertainty of prolonged litigation and allows us to continue to focus on delivering measurable results for our clients. Most importantly, the settlement will not have any impact on our eligibility to garner federal contracts or for accessing US visa programs in the future.”<br /><br />Shivendra Singh, vice president (global trade development), Nasscom, had this to say, “As you may be aware, as an association Nasscom does not comment on an individual company issue. Having said that, the nature of contract is a continuously evolving process which is very much based on the agreement between the client and the service provider.”<br /><br />Palmer left Infosys in 2013. Reports citing John M Bales, the US Attorney for the Eastern District of Texas, had earlier said that he stood a chance to receive up to 25 per cent of the $34-million settlement proceeds. Though Palmer was not a party to the settlement, his lawsuit against Infosys was the trigger for the federal investigation.<br /><br />The role of ‘scoping’ SoW<br /><br />The authors cited above do mention the availability of a process for transforming a T&M contract into an FP contract and vice versa. It’s called ‘scoping’ SoW. For starters, what’s an SoW? The authors say that “in IT outsourcing contracts, there will be an overarching professional services contract”. Attached to this will be multiple statements of work (SoWs) which give a “written description of the services, milestones, deliverables, project schedule, and fees associated with professional services to be rendered” by an IT outsourcing provider.<br /><br />This is how contracts are transformed: “If a particular project cannot be well defined from the outset and the contractor is not comfortable proceeding on a fixed-fee basis, the parties may consider entering into an initial ‘scoping’ SoW in which the contractor will be given a defined period of time to better scope the services necessary to complete the project. At the end of the scoping phase, the parties will either agree on a fixed fee, agree on further time and materials work, or terminate the agreement.”<br /><br />A senior IT professional told Deccan Herald that services companies operate under a Master Services Agreement on major accounts with existing clients. “This agreement could be under a T&M model, but there could be other projects under the Master Agreement which follow an FP model based on specific SoWs. Scoping is done for any new project. But a scoping mistake will not typically affect the service provider in case of T&M projects.” <br /><br />The availability of such established processes to transform the nature of contracts is certainly a boon for mid-tier Indian IT service providers which are yet to gain mastery over the pricing of contracts. Industry leaders too should handhold them and work with them to close any loopholes to avoid the recurrence of allegations made by Palmer and the US government agencies. Only then can they build upon the admirable contributions made by the Indian IT service industry.<br />Price matters <br /><em>Fixed Price Contracts </em> <br /><br />Contractor will perform services for a specified fee, regardless of the actual time and expense required.<br /><br />IT biggies prefer FP contracts because they have the skill sets and the tools to understand the scope of a project<br /><br />FP projects provide biggies the flexibility to control costs by deploying the right number of personnel <em>Time and Materials Contracts </em><br />Contractor will be paid an hourly or daily rate, plus expenses.<br /><br />Small IT service providers may prefer T&M since they lack the ability to price an FP contract<br /><br />In T&M, the contractor will be paid for the hours of work done even if the costs exceed the original estimate</div>
