In the dynamic landscape of today’s business world, the pursuit of growth and scalability is a constant endeavor for entrepreneurs and business leaders. Recently, at Synergy 2023 – an event attended by the industry experts, thought leaders, and law makers – CEO Primentor, Phaneesh Murthy shared invaluable insights drawn from three decades of experience in the IT industry.
Murthy’s keynote at Synergy 2023 focused on the burning question that resonates with businesses at various stages of their journey: “How to scale from zero to a hundred million in revenue?” Drawing on his illustrious career, which includes billion-dollar growth curves at Infosys and IGATE, Murthy outlined the essential elements for achieving such ambitious results.
Navigating Discontinuities and Strategic Depth: The Essence of Great Services Companies
“Great services companies have been created because of discontinuities in the marketplace,” asserted Murthy. These could be technological, operating model, or business model shifts that companies latch onto, turning challenges into opportunities.
Reflecting on his early days at Infosys, Murthy underscored the operating model discontinuity they leveraged. The strategic decision to do the same work but faster, cheaper, and better from India laid the foundation for their success. By deploying the Global Delivery Model, Murthy helped Infosys grow its revenue from less than $2 million in 1992 to an astounding $750 million in 2002.
While this strategy worked wonders for Murthy at Infosys, he recognized the need for a different path at iGATE. His strategy there focused on the business outcomes model. The model was based on charging for outcomes rather than effort. This pivot led to iGATE’s enterprise value increasing from $70 million to a staggering $4.8 billion over a span of 11 years.
Quality of Revenue: Beyond the Bottom Line
The quality of revenue in a company is a critical factor often overlooked in the pursuit of growth. “Many of you who I met last evening and this morning all have staffing companies. That, in the financial model, would be considered as the lowest quality of revenue,” remarked Murthy. The audience nodded knowingly, realizing that while staffing might bolster cash flow, it might not contribute to strategic value.
Phaneesh Murthy also introduced the concept of the “rule of 40.” He emphasized that companies should focus on achieving an EBITDA plus growth of about 40, a magic formula that correlates with higher multiples.
He stressed that the “rule of 40” encapsulates both growth and margins. The companies that stand out are those achieving a combined EBITDA plus growth of around 40%. It’s not just about profitability; it’s about striking the delicate balance between growth and sustainable margins.
Quality of Revenue: The Gold Standard
The discussion on revenue quality deepened as Murthy dissected its components. The type of customers, the nature of contracts, the commercial construct, and the focus on newer-age services all contribute to the quality of revenue. “Your company is going to be more valuable if you’re working with large Fortune 1000 customers in long-term contracts,” he affirmed.
He challenged companies to evaluate their positions in the market – are they catering to the growing budgets of Fortune 1000 companies or the dwindling ones? The litmus test for digital services companies was growth rates. “What’s your growth? We are growing only 5, 6%. Then you’re not digital,” he quipped. The audience couldn’t help but self-assess, realizing the urgency of aligning with the trajectory of market budgets.
IP-Based Services: A Rarity with Rich Rewards
Rare for services companies, Phaneesh Murthy spoke about the prized IP-based revenue, drawn from intellectual property such as licensing fees, royalties, or other kinds of revenue-sharing arrangements. “Are your services IP-based, or do you have any IP-based revenue?” he questioned. The possession of intellectual property elevates a company’s value, creating a stickiness with customers. While acknowledging it might not fetch the multiples of product companies, having some IP sets a company apart, garnering more interesting valuations.
The Pyramid of Value: Climbing the Organizational Hierarchy
Amidst the complex landscape of IT services, Murthy presented a simplified yet profound model – the pyramid of value. According to the tech giant, if you look at the nature of services, staffing finds itself at the lowest level, while advisory services occupy the pinnacle.
The pyramid of value outlines the buyer in the organization corresponding to each level of service. So, whether your customer is a project manager or a CEO/CTO, will define the kind of company you are and what level of services you are providing.
“You have to start figuring out a way to go up from the bottom-most layer,” Murthy advised, emphasizing the need for evolution of services for sustained growth and valuation.
The Future Landscape: Opportunities and Innovation
Transitioning to the future, Murthy brought his audiences’ attention to the landscape of opportunities for service providers. He dissected the buzz around GenAI, emphasizing the need to harness its potential in driving internal productivity and service offerings. He also envisioned a large opportunity in leveraging GenAI for vertical-specific solutions, urging companies to explore collaborations with hyper scalers for transformative projects.
Two emerging services, prompt engineering, and reliability and validation engineering, caught Murthy’s attention. As AI integration burgeons, the need to train models, validate outcomes, and ensure reliability becomes paramount. Companies that align with these emerging needs will ultimately position themselves as valuable partners in the evolving market.
Embracing Change: The Leadership Imperative
The final chapter of Phaneesh Murthy’s speech addressed the elephant in the room – the fear of change. Drawing from his experiences, he delved into the psychology that often hampers businesses from transforming their IT staffing and consulting business into a solution, or a service, or a product company. “The fact is that if you want to create unnatural results, you have to do unnatural things,” he declared.
Leaders, according to Murthy, play a pivotal role in steering their organizations through transformation. He advocated for leaders to set audacious expectations, cultivate a culture of learning, and drive individual transformation. It was a rallying call for leaders to embrace the unknown, acknowledging that the fear of failure often masks the potential for unprecedented success.
Drawing on an age-old anecdote, he summed up his views on scaling from zero to a hundred million:
“The story goes, as you say, in the jungles of Africa, every morning a gazelle wakes up and it knows that it must outrun the fastest lion for it to survive that day. And every morning the lion wakes up and it knows it must outrun the gazelle for it to survive that day. So the moral of that story is – it doesn’t matter where you are in the food chain, when you wake up in the morning, you better be running.”
As the audience dispersed, the echoes of Murthy’s words lingered – a roadmap to greatness, a blueprint for navigating the complexities of the ever-evolving IT services landscape. Phaneesh Murthy, the maestro of transformation, had once again struck the chords of wisdom.
