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Proposal for the Revision of the CSPI (CSPI: Corporate Services Price Index)

Hina KIKEGAWA Bank of Japane-mail: hina.kikegawa@boj.or.jp

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Outline of presentation

1. Update of the Corporate Services Price Index (CSPI) to the 2005 base: An Overview

2. Focus on issues for IT related industries (a) Selection of pricing method:

Internet based services (b) Extension of Averaged Charge-out Rates:

Survey method of Custom software services

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1.Update of the CSPI to the 2005 base

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Update of the CSPI

The 2005 base Corporate Services Price Index (CSPI) will be introduced by the end of 2009.

We have 2 key strategies.

Incorporating IT and outsourcing related services Capturing various types of prices

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Key Strategy 1

Incorporating IT and outsourcing related services

Acceleration of data transmission speed facilitated the development of internet network and the demand for related services: Internet based services

An increasing number of firms cut overhead cost by outsourcing back-office functions: Education and training services

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Key Strategy 2

Capturing various types of prices

As evident in cellular phone charges, there has been a growing trend in which various types of non-linear price schedules are provided.

Conducting price surveys, which are done by keeping services quality constant, and compiling price statistics have become increasingly difficult.

Improvements are being made to increase the accuracy of sample prices. e.g. Model pricing, Unit value method

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2. Focus on issues for IT related Industries

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2.Focus on issues for IT related Industries

In today’s presentation, two examples of our attempt to capture various types of prices will be explained.

(a) Selection of pricing method The introduction of a new item Internet-based services

raises an issue of keeping quality constant.

(b) Extension of “Averaged charge-out rates method” In Custom Software services, “Averaged charge-out rates”

method will be improved.

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(a) Selection of pricing methodInternet based services -- online shop seller fees

Online shop seller fees

Online shop seller fees vs. Real estate rental

Difference between online shop and real estate

Pricing method for “online shop seller fees”

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Online shop seller fees

To open and keep a virtual shop on an online mall, a shop seller needs to pay a fee to an administrator.

The online mall administrator offers a web page, helps to build sellers’ own pages, etc.

Online mall

administrator

Online shopseller

Consumer

Sell goods

Pay bills

Online shop sellerfees:

Transaction fee +Monthly price

"Matching"

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The price setting formula of online shop seller fees is similar to that of real estate rental (Sales space rental):

　 C ＝ A * Ｘ ( 　＋ B)

Online shop seller fees vs. Real estate rental

Online shop seller fees,　Real estate fee

Fee rate Turnover Monthly charges

Is there a difference in characteristics between online shop seller fees and real estate rental fees?

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Difference between online shop and real estate

For price survey purposes, the pricing method for this services goes as follows.

Online shop Real estate (Sales rental)

Price setting formula

Space resource Basically unlimited Limited

Principal functionProvision of opportunitiesfor sellers and buyers to

meet smoothlyProvision of space for sales

C = A * X + B

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For price survey purposes, online shop fees should be evaluated at unit value of transactions.

The surveyed prices are calculated as follows;

P ＝ C / N = (AX+B) / N 　

Pricing method for “online shop seller fees”

On-line shop seller fees

Number of transactions in

a month

Surveyed Price

c.f. P ＝ C / S = (AX+B) / S

Surveyed Price

Real estate rental

Space

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(b) Extension of “Averaged charge-out rate method”

Custom software services

What is “Averaged charge-out rates?”

Why do we apply “Averaged charge-out rates?”

Advantages and disadvantages

“Progressive completion base” price

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Custom Software Services

Custom Software Services refers to the

development of customized software for

computers, including related research,

analysis and technical support.

　 　 *Packaged Software Services is a separate item in the CSPI.

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What is “Averaged charge-out rates”?

Averaged charge-out rates are the charge-out rate for projects in a specified section of respondents.

For instance, at System Solution Section of respondent A, five projects are being carried out.

The price calculation goes as follows.

Client Deadline Number of SE

Sep. 08Bank CSafety inquiry SystemProject III

Sep. 08Bank BSettlement SystemProject II

Project

Sep. 08Bank AInternet Banking SystemProject I

Project IV Mar. 09Bank DPersonnel management System

Apr. 09Bank EExpenditure calculation systemProject V

3

6

2

5

4

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What is “Averaged charge-out rates”?

Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Project V

Project I

Project II

Project III

Project IV

Completionbase

In September, projects I to III are completed. Turnover and man-months for each project are measured in the completion month.“Averaged charge-out rates” are calculated by total turnover divided by total man-months.

Project Turnover Man-months

Project I $100,000 3SEs*3months=9

Project II $300,000 4SEs*6months=24

Project III $500,000 5SEs*9months=45

Total $900,000 78

Surveyed Price　 = $900,000/78 man-months

= $11,538/man-month

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Long-term, continuous (≈exclusive) contracts have decreased. -- The prices are usually quoted by the monthly rate per SE.

“One shot” (one off) contracts have increased.-- The prices are usually defined as a unit amount of sales divided by the number of man-months.

　

With conventional charge-out rates, constant quality prices for “one shot” contracts are difficult to measure.

Why do we apply “Averaged charge-out rates”?

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Advantages and disadvantages

Advantages

(a) Supply and demand conditions in the market are reflected flexibly.

(b) The index compiled with averaged charge-out rates tends to move proportionately with

economic fluctuations.　

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Advantages and disadvantages

* Ministry of International Trade and Industry

90.0

92.0

94.0

96.0

98.0

100.0

102.0

104.0

106.0

108.0

└ 00 └ 01 └ 02 └ 03 └ 04 └ 05 └ 06 └ 07 └ 08

（2000CY=100）

85.0

90.0

95.0

100.0

105.0

110.0Continuous contractsOne shot contractsIndices of Industrial Production* (s.a., right scale)

(2005CY=100)

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Advantages and disadvantagesDisadvantage: Index fluctuationsIndex fluctuates widely because:(a) Constant quality principle is relaxed due to the limited

availability of detailed data from respondents.

-- Rates for projects in a section is averaged instead of keeping individual project constant.

(b) Charge-out rates are measured at completion month only, due to the limited data availability from respondents.

-- In Japan, larger scale projects with skilled SEs are generally completed and the rates tend to rise at the end of fiscal year.

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“Progressive completion base” price

Jan. Feb. Mar. Apr. May. Jun. Jul. Aug. Sep. Oct. Nov. Dec.

Project V

Project I

Project II

Project III

Project IV

Progressive completionbase

Disadvantage can be resolved as follows:-- Allocating total turnover and man-months equally to each month-- Taking the average of all projects being carried out in a month

“Progressive Completion Base” price

Project Turnover / monthMan-months / month

=Number of SEs

Project I $100000 / 3 3

Project II $300000 / 6 4

Project III $500000 / 9 5

Project IV $300000 / 11 2

Project V $600000 / 9 6

Total $232,828 20

Surveyed Price per month　 = $232,828 / 20 SEs

= $11,641/SE

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“Progressive completion base” priceWith “Progressive completion base” price, constant quality principle is less relaxed.

Large sample including both completed and uncompleted projects enables us to reduce volatile fluctuations of prices.

Fluctuations of index due to sampling and data availability are addressed.

Respondents are asked to submit the number of working days of each project, additionally. BOJ conducts allocation of period.

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“Progressive completion base” price

80

100

120

140

160

180

200

05/01 02 03 04 05 06 07 08 09 10 11 12 06/01 02

（2005CY=100）

Completion base

Progressive completion base

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End

Gracias!