It was an audacious move in the business of information technology (IT). In October 2012, Phaneesh Murthy, president & CEO of iGate, a $780 million (Rs 4,295 crore) IT solutions and services company in Fremont, California, started a $4-million advertising campaign, which takes a dig at decades-old time-and-materials (T&M) pricing—the pyramid model in IT parlance—which put large Indian tech companies in the outsourcing lexicon of North America.
Traditionally, IT companies have billed clients on the number of software professionals and the time spent on offshore projects. For two decades, the T&M model has harnessed India’s abundant supply of software engineers, who work from offshore locations. Murthy is on a crusade to break that tradition, and differentiate iGate from the Big Three—Tata Consultancy Services (TCS), Infosys, and Wipro.
Through ads published in leading business dailies in the U.S., iGate is promoting a business-outcomes model, called iTOPS (integrated technology and operations). “I will charge clients on achieving business goals, not for the effort (time and material),” says Murthy. Though his brand of pricing is also a decade old, companies have been averse to articulating their stand on it openly. Murthy has raised a point everybody has been seeing. He spoke to Fortune India about how it is also a key part of his plan to build iGate. Edited excerpts:
You now sell something diametrically opposite to the time-and-materials (T&M) model. But you started off at Infosys by selling just this ...
The idea was to sell India. There were only two companies [Patni and TCS], or maybe three [Wipro] that were operating in the U.S. from India. We had to build a market for India rather than compete [with each other]. I used to approach CIOs. I also built a sales team at Infosys, comprising professionals from industries such as tea, soaps and shampoos, banking, and hardware—a motley crew. But we were not there to sell software, we wanted to build relationships. At the end of the day, we wanted to show clients that we were the right partner for their businesses. It worked. We were a bunch of MBAs taking on project managers from TCS and Wipro. Over a period, however, everybody became sophisticated.
What percentage of American engagements did you begin to get off-shored by the mid-1990s?
Seventy percent of their projects—the whole idea was to have a high percentage of offshore delivery. The biggest leap of faith a customer was taking was his willingness to pay us for a set of people he couldn’t see, at a variable cost. He was being billed at $25 an hour based on just trust. It was a massive effort on the customer’s part.
So, what is your selling proposition? What are their questions, considering they have become used to the T&M model?
The outcomes pricing message is to a business leader because we want to transform his business outcome. So, it is a CXO audience. Second, we have to understand how to get to a metric. This is a core skill: where and how to get to a metric, so that a client and a vendor pull in the same direction. With hourly staff, both pull in opposite directions. Third, how do we price this transformation? In the T&M model, the customer takes all the risks.
Can you quantify the risks?
The risks are in terms of vendor estimation of costs and resources, quality or rework required in a project, etc. In the T&M model, the vendor doesn’t lose anything, the client does. In a fixed price model, some of the project risks related to productivity and quality move to the vendor, and some stay with the customer. In the business-outcomes model, in addition to these risks, some others move to the vendor, such as how he plans for different flows of transactions. So if a client says he will give the vendor business for 100,000 transactions a month, but didn’t specify that 90,000 of them will come on the first day of the month, staffing risks move to the vendor; he has to have a plan for that. What does he do with the staff for the rest of the month?
In business outcomes, the vendor also bets on the client’s success. When an insurance player plans to launch a new policy, I have to believe that I can grow per policy the client will sell. That is the risk I am taking. So, if you look at the risk transfer, the outcomes model has the most risks. While the client focusses on the business flow, I do the heavy lifting to facilitate that flow.
The T&M model is reliable, and one knows the project source and its growth across a time horizon ...
[That is] reliable growth for vendors ... not their clients. It is a bums-on-seats model. Outcomes is much more complex, and that is the reason why others cannot move to this model. Culturally, these [Indian IT] companies derive their premium from being able to predict what their revenue and margins will be, based on the people they are going to hire. In the outcomes model, you have to start predicting your clients’ businesses. That’s a cultural change.
Why should the iGate board back such risks? How are you hedging for a company that has struggled to touch a billion dollars in revenue?
As a principle, the board is supportive of a differentiator strategy. Secondly, if one looks at it objectively, it is up to the CEO to build a strategy, and deliver results. That iGate has been the highest earnings growth company leaves very little doubt as to whether what I am doing is working or not. Also, there are enough shareholders on the board, who have become wealthy from where the iGate stock price was when I joined it. Personal wealth helps a lot during this [support].
Has iGate been able to execute on business outcomes, like the big IT folks have with the T&M model?
We have been doing it since 2005. Customers don’t always like to reveal their names in our testimonials. But one of the easiest ones to talk about where the client is comfortable with disclosure is the Residential Tenancies Bond Authority in Australia. We did the pricing on per-tenant bonds, and built an entire technology infrastructure for it. All the innovations came from our side because it was priced on business outcomes. We are seeing growth in banking, financial services, health care and insurance, whose business models are around technology and processes.
Tell us about your U.S. design arm.
My consulting and solutions team [the design arm of iGate] has almost 100 people, all based in the U.S. They have 20 years’ experience in their respective industries. The largest teams within these are in banking, financial services, insurance, and health care.
Are you focussing on banking, financial services, and insurance (BFSI)? Can you ignore growth in retail
and manufacturing?
When you are of significant scale, you cannot be in one industry because it is prone to ups and downs. We will be diversified. But in BFSI, you end up with a lot of solutions. The IP that we build could make us unbeatable. On the other hand, we may not have built such IP in manufacturing.
The basis of competitive advantage in each category will evolve for us differently, based on investments. Today, 80% to 85% of our investments are in BFSI and health care. I can demonstrate the final outcome in these two industries [finance and health care].
What does iGate have to show so far to BFSI clients?
We built a neat mobile application in insurance recently. It is called the first notice of loss. If you have the app loaded on your iPhone or Android phone, it can help you file an insurance claim after an accident. It has pre-installed your insurance policy and card details on the phone, and will automatically guide you through the claims process. If your car is usable, it will notify you about the nearest insurance company-certified mechanic to drive to. If it is not usable, the app will direct you to a tow truck, instruct you to take pictures of the damaged spot, and upload the data to the claims database of the insurance company. What we’ve done is eliminate the call centre interface, waiting in queue, and so on.
My sense is, like mobility, there are big-ticket changes to processes that can be done because of gadgets. I am looking to improve my clients’ channels to their customers using cloud and social analytics. In health care, we are using analytics in our overall product to help clients prevent and deal with fraud. We are integrating it into our services.
To put your plan in perspective, between 1991 and 2001, Indian IT companies differentiated with the T&M model to get noticed in the U.S. You were part of that. Now you seek to differentiate iGate from that pack. Does it mean, as a U.S.-headquartered vendor whose 80% revenue comes from clients in North America, you want to go back to becoming a local player?
When I went to the U.S. in the early ’90s, consulting companies said offshore delivery wouldn’t work. When asked, they said they had many people at client locations with intimate knowledge of processes and systems. “They have great relationships with clients. They are our assets.” I said if this was their primary asset, I’ll change the value of programming work to $25 an hour. When we did that, these people who were considered assets suddenly became millstones around their neck because they were creating a high cost.
What would it have cost them?
For every hour, $80 to $100. We dropped this value to $25 an hour. Today, all IT companies say they have 150,000 to 200,000 people who are their major assets. In that backdrop, I am trying to deliver services through IP and technology. Basically, [I want to] take what a company thought were its assets all these days, and convert them into liabilities.
Infosys, TCS, and Cognizant have somewhat differentiated themselves from an IBM or Accenture. By differentiating iGate from Indian IT, are you not just one more growing tech firm in the U.S.?
Our operating model is different. If you see our average age of experience, iGate’s is more than TCS, Infosys, and Wipro, because when they chase dollars per hour, they optimise cost per hour by hiring freshers, basic graduates, and people from developing locations. If they optimise for pricing on business outcomes, they have to get out of the cost-per-hour mindset. The average age of a software professional in my company is more than that for big IT companies. I need to price based on cost per outcome. It is too powerful a model not to work. Will people fight it? Yes! Every incumbent does. And incumbents can get blindsided. TCS used to be nervous about Infosys in the ’90s. It is probably what Infosys feels about Cognizant today. That is the beauty of this industry.
What’s your Plan B if it doesn’t deliver? If it had as much value as you claim, TCS, Infosys, and Wipro would have already converted from their bread-and-butter T&M model.
It is not just their bread and butter. I am assuming all their training programmes are centred on how to look for billable hours. My Plan B is that we will be like any other IT services company. Plan A is to become a super-special IT services company based on business outcomes, create disproportionate and extraordinary value because iGate would have changed an industry. If that doesn’t work, we will be one of the also-rans until we come up with the next idea for massive transformation. The outcomes idea is something I have developed since 2002.
Can you live with a peer like TCS, which is expected to clock $20 billion in revenue by 2017, by when you aspire to be a $3 billion company, and bring outcomes-based pricing into the mainstream?
Yes. I don’t have a problem with people being significantly bigger. I just want to be a leader in a certain space. The IT services offshore space is gone from us. So the idea is to carve out a niche—when anybody turns around and asks if iGate is the best in integrated deals. That is what I am looking for. We will be built on an outsourcing model, rather than a consulting or advisory model. We want to be able to tell a client that we will do this for you. And when you get your outcome, pay me so much. We have about 300 clients after merging Patni with iGate, 100 of whom can potentially move to business-outcomes pricing.
If you were an outcomes convert by 2003, then why did you acquire Patni, considering it was one of the first companies that propagated the T&M model?
The principal reason was iGate’s overexposure to banking and financial services. It hurt us in 2009. The idea was to diversify. The second reason was to cross a threshold beyond which we would get invited rather than shut out of larger deals. That has worked well. From September 2011, we have found ourselves in two very large deals, each over $200 million in revenue of which one is in North America. In March last year, we entered a deal worth over $100 million. We have closed one of the $200 million deals; the revenue will start showing from January 2013. We have achieved the objective of being shortlisted for such deals. Of the $3 billion revenue target for 2017, 30% will come from outcomes-based solutions.
How does being in the Silicon Valley help your business?
If you compare the education system in the U.S. and ours, the emphasis on concepts is high in India, whereas the emphasis on application of concepts is more there. So, if you put them together, the Indian guy will be able to rattle off the concept with greater depth and clarity. The American guy can apply the same in a superior manner. That is why the U.S. people are more creative.
My youngest son, who is in the 11th grade in the U.S., had a project. He had to drop an egg from the second storey, and it had to land without cracking. For this, they provided him with a limited quota of sticks and other materials, and unlimited options. In the process of applying these concepts, he is learning about wind velocity and the forces to oppose gravity. In India, we learn it in theory, but there it is a fun project. Unfortunately, I don’t see enough of this even in premier institutes such as the IITs, where I studied.
Also, there is no stigma of failure in the U.S. Among venture capitalists, if you are a first-time success, they write you a cheque. But if you are a first-time failed entrepreneur, they still consider you better than being a first-time entrepreneur.
