“Risk-based billing is set to change the image of the entire IT industry, and the software industry in particular. The IT giants of the future will be those who can deliver a product according to customer needs and are willing to bet their product delivers, not those with the best sales and marketing teams selling snake oil to customers desperate for an IT solution that meets their business needs,” states a white paper by Richard Firth, CEO of MIP Holdings.
Issued almost 10 years ago, this description of a billing approach where payment is not simply a set fee that is paid irrespective of the performance of the technology, but is based on one or more of the company’s key performance indicators (KPIs), is more relevant now than ever, in light of the cloud’s increasing prevalence across business environments. And yet, many companies today are still stuck in the old models where IT is a cost centre that requires upgrade cycle after upgrade cycle.
“Our vision was one of IT providers as partners in a relationship, where the service provider needs to get close to its customer and to understand its business well enough to be able to make a difference. It is only by knowing what makes the business tick that risk-based billing can work, and the company can be charged according to KPIs,” says Firth. “This concept won us a Computerworld award, and makes good business sense.”
MIP has proved the validity of risk-based billing, having used it across its businesses with great success. “There have been many attempted solutions at providing customers with a better IT service. None of these had ever gone as far as to put the burden on the vendors to deliver or suffer some form of discomfort when projects fail or business applications fail to deliver as promised, until we introduced our billing model, and this commitment to guaranteed delivery, reliability, availability and service have been instrumental in our growth and success,” Firth explains.
Progress Software’s SaaS offering came about as consequence of MIP’s risk-based billing model, and has subsequently become the worldwide distribution model for Progress Software. The company has posted phenomenal growth using this model, receiving 25% of its worldwide revenue from South Africa – a relatively small IT market in comparison to the USA or Europe.
“This approach makes sense when you have a cloud-based service. If the service you are offering is KPI-based, why not offer a similar billing mechanism?” asks Firth, explaining that the growth of the cloud has provided a platform for the ideas put forward in the white paper to move forward. “These days, database players are starting to look at their business models and evaluate how they can share revenue and risk with their partners. A database means nothing without an application to run on it, so where are the financial metrics being measured – at the database level, or at the application level? If they are based on the database level, customers should ask themselves why.
“Providing the IT as a service on a risk-based contract means the IT provider is in a partnership with each client. If the client succeeds, the provider makes more money; if not, the provider shares the pain. In simple terms, the IT provider invests in its customer’s revenue generation instead of trying to move product and make revenue from the client.”
While this approach may seem logical, and MIP’s success backs up the value offered, the company is still encountering resistance from customers who prefer the tried and tested – and more inefficient – models. “Many South African companies have accepted our approach on the basis of our outcomes, but there is still opposition to trying something new, particularly in Africa. This is about turning IT into a non-capital investment, where there are no additional charges for operating system updates or hardware replenishments, simply a monthly fee. Risk-based billing is all about service delivery, and is the future,” Firth concludes.