APR Using Gain Sharing Model

Let us re-visit a cliché – “When the going gets tough, the tough gets going”. Well, going by the turmoil that is currently engulfing the Wall Street, it seems the toughs are actually busy preventing themselves from going out of business. Cut the pun. Let us ponder on the fallouts

1. Freeze on  capital investments
2. Cap on investment in support activities: Do I hear some say “God! that includes IT”
3. Reduction of operating expenditure, wherever possible
4. Focus only on the indispensable within each of the 4 Ps - “People”, “Property”, “Product” and “Process”

Coming to the last point, apart from the first 3 Ps, the focus invariably shifts to the indispensable business processes. Key business processes can be identified based on their potential contribution to top-line and/or bottom-line growth. However with turn-around time playing a vital role in business these days, the client needs IT to transform these processes to effective growth drivers. To build this business-IT alignment, the client needs to invest in IT. But the client cannot invest in IT because it has frozen its investment in all support activities, including IT. So we have a catch-22 situation in-hand. That’s when we think of IT application portfolio rationalization (APR).

Ideally, APR serves dual purposes:
1. It can be used to trim the entire application portfolio by retiring and consolidating applications/functionalities. Thus, the client ends up reducing its IT operating expenditure.
2. APR can also be used for business-IT alignment of key business processes. This can impact the top-line if the client focuses on a revenue-enhancing business process or the bottom-line if the client focuses on process-optimization.
But how does the client finance APR? It just seeks a way out – it can perform APR using gain sharing business model (GSM).

While performing APR using GSM, the rationalization is performed by collaborating with a consultant. The consultant does an assessment of the client’s business drivers and IT applications, and identifies key business drivers and the associated business processes. The consultant thereby identifies the IT applications supporting these business processes and determines the functional extensions required to support these processes more effectively. At the same time, the consultant does a portfolio assessment and identifies the IT applications that can be consolidated or retired based on the redundancy in the system.

Thus, the consultant prepares the following business cases: -
• A business case showcasing the opportunity to trim the application portfolio and reduce operating expenditure
• A business case to enhance/modify the functionality of the IT applications to derive more business benefits out of key business processes.
Once the business case is ratified, the consultant implements the solution. The consultant performs this entire end-to-end exercise from assessment to implementation at its own cost.

Thus, the consultant would entail the entire risk of the solution’s effectiveness. Once the solution is implemented and the savings start accruing, the client would share a pre-determined percentage of the gains with the consulting partner.

The gain/profit can be computed using the following formula: -
Profit = Financial benefits from APR –Client’s cost of implementing the solution.
The client’s cost of implementation will involve the time and effort it expended in putting the changes into production. The financial benefits can be categorized under the following heads: -
1. Contribution to top-line by meeting revenue-driven goals
2. Savings from process-optimization
3. License, Infrastructure and manpower savings by consolidating/retiring IT applications

However, APR using GSM bears the following caveat: -
1. The financial benefits should be tangible. To measure business benefits, the client and the consultant must have pre-determined metrics of measurement
2. The business case ratification depends heavily on the ROI analysis to be done by the consultant.
ROI for the consultant = (X % of Foreseeable financial benefit)/ (Assessment cost+ Estimated Implementation cost)

APR using gain sharing business model is a win-win scenario for both the client and the consulting partner. The client would reward its partner only after the promised financial benefits start accruing. Thus, it would cut the flab from its application portfolio and align IT to business drivers without asking for an extra dime from business. Whereas the consulting partner can claim a reward that is proportional to the risk it inherits from proposing and implementing an APR solution at its own cost. Well, “when the going gets tough, the tough seeks a partner to get going”.

Comments

[Ninad Chavda]

Excellent Article !!!

It would be interesting and more enriching if a real life case study made available. The real question however is - How do we arrive at the % of gain share for Customer and vendor as well determination of financial benifits from APR. May be tools and methodology used to determine APR benifits would be useful.

[BPO Services]

Can u able to show a sample table of profit and ROI? also the ratios

regards
SBL - BPO Services

[Sujoy Mitra]

% of savings is determined based on the following parameters: -
1.Complexity of the project
2.No of third party vendors involved currently in supporting the existing environment
3.Effort(duration and resources) in executing the project
3.Any macro-economic factor effecting the company or the industry

Tool for financial benefit calculation:- discounted cash flow on a multi-year timeframe, typically ranging from 3 to 7 years.