RPT-Ex-Infosys exec aims to shake up IT industry billing model

Thu Feb 21, 2013 10:37pm EST

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    By Harichandan Arakali  and Sumeet Chatterjee
    MUMBAI, Feb 22 (Reuters) - A former Infosys Ltd 
executive is challenging the IT outsourcing industry's billing
model by charging for results instead of basing fees on the time
and labour put in by the armies of staff working for India's big
firms.
    Outcomes-based billing, growing as a share of revenue across
the industry and pursued most aggressively by iGate Corp
 Chief Executive Phaneesh Murthy, is meant to appeal to
clients with less-certain budgets in a tough economy.
    If the services don't deliver an agreed-upon result, such as
reducing the cost of processing a loan or cutting the reject
rate in an auto parts factory, the customer pays less. But the
strategy also boosts profit margins for IT companies, raising
questions about which model is better for customers.
    Murthy was a rising star at Infosys as California-based
global head of sales before leaving in 2002 after a sexual
harassment lawsuit against him and the company, which made
headlines at the time and was settled out of court.
    "If you look at the external environment, customers don't
know exactly what their revenues are going to be, what their
volumes are going to be, and therefore passing on that risk to
the vendor is a very appealing concept right now," Murthy said
in a recent telephone interview.
    Traditionally, iGate and other smaller IT outsourcers have
competed with Indian heavyweights such as Tata Consultancy
Services and Infosys on price.
    
    Murthy, 49, founded a company that was bought by iGate,
which is based in Fremont, California, but has the bulk of its
staff in India. In 2011, he teamed up with buyout firm Apax
Partners for iGate's $1.2 billion purchase Indian rival Patni
Computer Systems, which was more than twice its size.
    Murthy has been an outspoken critic of the industry's
traditional billing model, known as time-and-material. In a
marketing campaign, iGate dismissed the model as a "criminal"
practice that has "swindled" billions from large companies.
    IGate took out an advertisement in The Economist magazine in
January that read, "If this ad does not deliver results, we're
not paying The Economist", marking a rare foray into mainstream
media for an outsourcer.
    While the company's irreverent tone is striking for an
industry that tends to be staid, part of it is bluster:
Outcomes-based pricing accounts for just a single-digit share of
revenue. Most of its business is billed in the traditional way.
    Murthy wants to grow the share of outcomes-based billing at
iGate to 15-16 percent this year and 30 percent by 2017. By
comparison, the industry may earn about 22.5 percent of revenues
through that billing model by 2018, predicted Ray Wang,
principal analyst at Constellation Research based in California.
    
    BETTER DEAL?
    India's $108 billion-a-year outsourcing industry got there
by throwing hundreds of thousands of bodies at everything from
selling credit cards by phone to processing mortgages and
managing complex computer networks from remote locations.
    Peter Bendor-Samuel, chief executive of Everest Group, a
U.S. consultancy that advises clients on outsourcing, said
outcomes-based pricing is more opaque than the time-and-material
model.
    "In the short term, that creates margin opportunities. Over
the medium to long run, clients recognise that and the way they
deal with that opaqueness is to introduce competitive pricing,
and what does competitive pricing do? It compresses margins."
    "Complicated models lead to mistrust, and also complicated
models are much harder to scale," he said.
    Murthy, however, believes outcomes-based billing lends
itself to the move towards providing services through technology
and away from deploying large numbers of people. 
    If a company can deliver results with fewer people, costs
come down. Margins for outcomes-based work are 7-8 percentage
points higher than for traditional work, Murthy said.
    The time-and-material model encourages IT companies to add
people because they bill based on man hours.
    Sundararaman Viswanathan, a Bangalore-based manager at
consultancy Zinnov LLC, said iGate's campaign to push
outcomes-based billing is good for the industry: "It's a game
changer because they are forcing everyone to start talking more
openly about the pricing models."
    Analysts expect iGate's earnings to grow the fastest among
key rivals including Infosys and U.S.-based Cognizant Technology
 over three to five years at a compound average annual
rate of 19.5 percent, Thomson Reuters data showed.
    Chandrashekar Kakal, senior vice president and global head
of IT services at Infosys, said that while outcomes are
important to customers, Infosys views them as a part of its
overall offering and not as a driver of pricing.
    "Pricing model could be anything, so you keep it aside,"
Kakal said on the sidelines of an industry event on Feb. 14.
    Murthy, who still owns Infosys shares from options he
received when he worked there, argues that outcomes pricing is a
better deal for clients and enables him to answer questions he
said frequently arose at his earlier employer.
    "When I was in Infosys, while it had a great model, the four
or five questions which customers always asked me, which I
couldn't find an answer to were: you learn at our cost, you are
putting junior people on the job, you are getting paid whether
we are successful or not, you are getting paid whether the
project meets its business case or not," he said.
    But for some clients, simpler may be better.
    "I think that model which he's espousing, while attractive
or sounding attractive, is going to be increasingly hard," said
Everest's Bendor-Samuel. "If you've got a simple model operating
right next to it, the larger market will opt for simplicity."

 (Additional reporting by Patturaja Murugaboopathy in BANGALORE;
Editing by Tony Munroe and Emily Kaiser)
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