Late last year, when iGate placed a series of aggressive ads in leading American newspapers such as New York Times and Wall Street Journal (with captions such as “Conspiracy Uncovered”; “Mega Corporations’ No 1 enemy exposed”) to promote its own outcomes based pricing model many IT executives here were amused because the outcome based pricing came with limitations.
The traditional pricing model was simple, less complicated and easier to scale. Several customers preferred the simplicity of the traditional pricing model. Outcomes based pricing – where a client is charged based on business outcome rather than on the number of hours software engineers put in to write the code – would be a tough sell. But to stand out in the clutter of a scores of Indian IT companies, each indistinguishable from the other, iGate needed a bold new approach. This bold and slightly risky approach was classic Phaneesh Murthy, the then CEO, who was sacked by the board recently.
Invariably described by people who know him as a supremely confident person, Phaneesh himself both understood the enormity of the challenge and his own ability to deal with it. He told Mint last year: ”Today, everybody tells me you are not going to succeed, you don’t have the scale, we have hundreds of thousands of employees, you are in a cost-plus model… But I (want to) shift the model to one where technology does more of the work, rather than people doing more of the work. If I can achieve that objective, that will be hugely satisfactory of twice over transforming the industry.” Without Phaneesh, iGate will have to seriously reconsider its strategy.
Business historians and management gurus don’t look kindly on charisma. Those endowed with it are often impractical (which means their vision is more likely to fail than succeed), they lead their team members into a reality distortion field (there’s no feedback) and often destroy shareholder value than create it (the rare exceptions are given a lot of publicity. (The title of Rakesh Khurana’s much cited essay on charisma reads: The curse of superstar CEO).
But, charismatic CEOs are often useful for specific purpopse – to transform an organisation or an industry. (Think Steve Jobs) iGate, and in someways even Indian IT sector, was dependent on the charisma of Phaneesh Murthy.
Scale up is difficult in any business but it is even more so in IT services. With every $100 million dollar change in revenue close you have the added complexity of managing approximately 3000-4000 more people. With more people come more processes and complicated workflows. Also, clients prefer to do business with more cash rich and stable firms. In the last 15 years only Cognizant has bucked this trend to become the second largest IT services firm from India.
The bottomline is that if you fall behind on the IT services revenue treadmill you don’t get a second look.
It was expected that iGate, under Murthy, would buck the trend and go on to bigger things. That’s why Apax Partners sunk in $380 million to fund the deal with Patni. There is also a billion dollar of debt on the firm. All this was done with Phaneesh’s reputation as rainmaker.
The consolidation in many ways is still a work in progress. While industry observers tend to look at the transformation of iGate by comparing pre and post-Phaneesh Murthy days (when margins swung from negative to positive, and its revenues grew at a pace that worried competitors) a more useful timeframe is post-Patni acquisition. There the record is mixed. Its margins wavered (in the most recent quarter its gross margins dropped), it has missed its guidance, lost accounts and market share. Its share price movement (even before Phaneesh’s removal) in the last three months resembled the hump of a camel. It needed Phaneesh to take the company forward.
With him gone, all those hopes may well be history now! In the end, the business historians and management gurus are probably right about charisma.
iGate was betting too much on it.