1 Proposal for the Revision of the CSPI ( CSPI: Corporate Services Price Index) Hina KIKEGAWA Bank of Japan

2 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

3 1.Update of the CSPI to the 2005 base

4 Update of the CSPI  The 2005 base Corporate Services Price Index (CSPI) will be introduced by the end of  We have 2 key strategies. Incorporating IT and outsourcing related services Capturing various types of prices

5 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

6 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

7 2. Focus on issues for IT related Industries

8  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.

9 (a) Selection of pricing method Internet 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”

10 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.

11  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 rateTurnover Monthly charges  Is there a difference in characteristics between online shop seller fees and real estate rental fees?

12 Difference between online shop and real estate  For price survey purposes, the pricing method for this services goes as follows.

13  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

14 (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

15 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.

16 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.

17 What is “Averaged charge-out rates”?  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.

18  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”?

19 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.

20 Advantages and disadvantages * Ministry of International Trade and Industry

21 Advantages and disadvantages  Disadvantage: Index fluctuations Index 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.

22 “Progressive completion base” price  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

23 “Progressive completion base” price  With “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.

24 “Progressive completion base” price

25 End Gracias!