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 TataServices 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