If a customer cannot predict the gameplan of the future, he would rather pass it on to an outsourcing company. — Phaneesh Murthy, CEO of iGate
The Indian IT sector is facing troubled times. As companies such as Cognizant and Infosys that have revised their guidance downwards, questions around the traditional business model of IT companies are starting to crop up.
This has prompted some companies to take a fresh look at the way they are doing business. Phaneesh Murthy, CEO of iGate, spoke to Business Line about the company’s new business model and how companies need to make a radical mind shift going forward.
Why have you decided to adopt this outcome-based model at this point in time?
The market sentiment is starting to take a more aggressive stand and move towards outcome-based business. It is a better way of doing the same things. So, we had to come out and talk about the (outdated) old (time and materials based pricing which involves an outsourcing client to pay for the number of hours and people deployed in the project). It has got a lot of responses from our clients.
Many of our customers are interested in this model as it addresses some interesting things. Unlike the offshore industry, business outcome is not a cost play. For example, when you insure your car, you have to figure what elements of the car do you need to insure. Here, we take on a few more risks from the customers so he does not have to worry. For example, it is a ‘no risk proposition’ whereas in the time and materials based model, it is a risk for the customer.
Is it also the reason why the market demands this model now as compared with the past?
I think the market is demanding it now since there is a lot of uncertainty in business. If a customer cannot predict the gameplan of the future, he would rather pass it on to an outsourcing company.
Is it in some way like the automotive industry where the tier-I, -II and -III players and OEMs come together and the risk is shared by everybody?
If you look at the auto industry, the word time and material came from there. Then they decided to go into outcome-based model where an automaker would pay an x amount of money for say a fuel pump and will decide the quality and specifications for the product. We are trying to do exactly the same in services. Move it from time and materials to a model where we can find it appealing intuitively. When we go to buy a refrigerator, we are not concerned about the number of engineers who have worked on them, number of hours involved etc. We are just concerned about the quality of services.
Why wasn’t this attempted post Lehman crisis?
I think we often we get blind sighted by things. We have been talking about this since 2003. So, it is an interesting thing at the end of the day, the reason why different companies don’t do it is for the fact that it is fighting their existing model (time and material). They are comfortable and intellectually very lazy. They have no incentive for innovation.
So when this model comes into play, in the short term, your bottomline might get hit at least in the short term.
Yes. I agree. It is an investment. We have to build solutions before building the solutions for the customer. I have to invest in solutions before I start selling it to the customer.
What are you doing internally to have this change in mindset?
We have a different HR strategy. We have created top managers, reward them differently. Their Key Result Areas (KRAs) are different.
Could this be a gamechanger?
I don’t think many companies will do it. They will offer it, like IBM, Accenture offered offshore as an option till they committed to it a few years back. Whenever you have an asset, you have to figure how to get that asset into liability. When we started out, in the US they told us that we would not succeed. They told us that they have thousands of onsite consultants. If you believe that asset, I will reduce the value of programming work to $25 an hour. By doing this, they could not afford this cost structure anymore. If I can start delivering more value through technology that will be different instead of showing thousands of employees who could do the job.
How many of them are positive on this model?
Almost everybody. But, it may not be for all their engagements.
So, going ahead most of your revenues will come from this?
By 2017, we aim to get 30 per cent of our revenues from outcome-based model.
How has the transition and acquisition phase turned out? Any pains still?
It has been fairly smooth. It’s a little unfortunate since the markets slowed down, the market conditions impacted it. For us, the synergies have been good. Margins are good. If you see, the last few quarters, margins have been good.
While integrating Patni into iGate, did you have to right size?
No. Other than top layer of 14 executives, we did not have to do any right sizing.
Now that the acquisition has been a success, will you look more towards inorganic growth?
Our perspective is that we will grow organic apart from inorganic routes in certain platforms. We have to change our balance sheet structure. We have debt on the balance sheet and cash in some areas. We have debt in the US and cash in India.
Does Europe continue to be a tough market?
Problem with Europe is that it is always been an ‘opportunity’. Market sentiment is negative and we did not do a whole lot of things there.
You are listed on the Nasdaq. So, do you see yourself being listed on New York Stock Exchange just as another company has done?
The differences are very little. Analysts cover the same and from a tech (trading) point of view it was the same. Now, they are very similar. So, a company has to figure some other reason. Maybe, they can connect better with NYSE customers. While we are listed on Nasdaq, most of our customers are listed on NYSE.
There is not much clarity with regard to the way forward for Indian IT companies.
TCS will continue to grow. If you try and adopt the same model over the years, it will not work. Cognizant has invested in domain, onsite and it has paid off. Infosys prided itself on continuity. There is a need for change. When you start a company you have hunger. Then you become rich and cease to be hungry. At some point of time, it moves away from the founders to ‘professionals’ who are hungry. My contention is that founders did a great job to a certain point and after that you have to figure the way forward. In a lot of companies, after the founders have relinquished power, the company performs better.
To succeed in the US now than ever before, is it necessary to have more software centres in the there?
I believe it is a necessity. It is not an option. Couple of things are happening. First is that because of security and confidentiality reasons work cannot move out. Secondly, there are regulatory barrier around visas. Last year, we had a high rejection rates. It made it nerve wrecking and we will have to see how it pans out in the future. It impacts predictability in business.