Big change: Patni Computer's revenue model to turn outcome based

BANGALORE: iGate Corporation, which bought Patni Computer Systems in one of the largest acquisition in the Indian IT industry, is making a big change to Patni's business model. US-based iGate is moving Patni towards an outcome-based pricing structure after the integration of the two firms were completed a few months ago.

It has set a target of getting 30% of the combined entity's revenues from an outcome-based model by 2017, the firm's chief financial officer Sujit Sircar told ET. After integrating the two companies, the next step is to de-list Patni from the bourses and start moving the company's business to an outcome-based model, Sircar said. "If there is a time and material contract which I can't convert into an outcome based contract, it doesn't excite me at all. So, we just let go off it," he added.

Under a time and material contract, outsourcing firms providing IT services are paid based on the cost of labour and material used and clients are usually billed on a per hour basis. However, under an outcome based model, companies are paid based on the outcome of a project. "It's not easy because there is a lot of shift - among people, processes and targets. Retooling is a challenge," said Sircar.

Most Indian IT companies are trying to move from a time and material pricing model to an outcome based model as it de-links revenue from headcount and helps them improve profitability. Right now, nearly 70 % of the $ 70 billion revenues generated by the Indian IT industry comes from time and material contracts.

"We had taken almost six months to convert one $5-million project into an outcome based model in iGate..But it is much easier now because we already have references. Given a chance, we would convert more and more," he added. Nearly 70% of iGate's revenues before the acquisition came from outcome based contracts.

iGate is also readying to de-list Patni for which it can raise up to $215 million in debt. The company holds 82% in Patni and needs to get the approval of 50% of the minority shareholders to buy back shares before initiating the de-listing process. "We expect the de-listing to be complete by the second quarter of 2012," said Sircar.

The price at which iGate buys Patni shares from minority shareholders, will be fixed using a reverse book building, wherein remaining shareholders of Patni will suggest the price at which they are ready to sell. iGate had taken a $770 million debt to finance the Patni acquisition and according to a pact with its creditors, it can not further raise a loan of more than $215 million again.

At the time of acquisition, iGate had said the joint firm will achieve 25% Ebitda margins within eight quarters and an operational efficiency of $25-$30 million. "We should be able to achieve this within the January-March quarter of 2013," Sircar said

[via TET]

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