IT industry veteran Phaneesh Murthy recently shared his blueprint for building high-value IT services companies during his keynote address at the annual ITServe Alliance Synergy Conference.
With over 35 years of experience leading major IT services firms like Infosys and iGATE, Murthy has engineered significant innovations that have shaped the industry’s evolution. Currently serving as CEO of his advisory firm Primentor, Murthy brought his extensive expertise to provide actionable advice to IT executives on achieving growth and profitability.
Murthy focused his presentation on value creation, breaking it into two key components: revenue quality and balancing revenue growth and profitability margins. He also highlighted future trends that provide growth opportunities.
Quality Revenue Drives Valuation
Murthy emphasized that not all revenue impacts valuation equally. He makes a distinction between “quality revenue” and other types. Quality revenue stems from core, sustainable operations and offers room for expansion. This high-value revenue drives a company’s growth potential. On the other hand, low-quality revenue from non-essential operations or one-off deals does little for valuation.
Building quality revenue requires a strategic focus on long-term Fortune 1000 contracts. Murthy highlighted multi-year engagements with large, established clients as key. This demonstrates sustainability and strengthens perceived value. Forming relationships through major contracts marks a company as a stable partner for the long haul.
Achieving the Rule of 40 for Growth and Profitability
In his presentation, Murthy introduced the “Rule of 40” as a benchmark for balance between growth and profitability. This rule refers to a combined score of over 40 for a company’s revenue growth rate plus its EBITDA margins.
While 40 is a minimum target, Murthy has seen outstanding valuations for companies achieving scores of 60 or 70 on the Rule of 40. The key is finding an equilibrium between expanding revenue rapidly and maintaining solid margins.
According to Murthy, this balance of growth and profitability is exactly what investors look for when evaluating an IT services provider. Companies lagging on either metric run the risk of stagnating valuation.
Embracing New Technologies and Services
Murthy went on to emphasize that today’s IT firms must also show the integration of new tech, as this proves their ability to sustain growth.
He specifically called out cloud migration, AI, ML, and generative AI as key investment domains. Forward-focused companies should prioritize roles like prompt and validation engineering for gen AI models. Building capabilities in these emerging areas will be strategically vital over the next few years.
Murthy advised that aligning service offerings with cutting-edge technologies like generative AI can further spur revenue growth. This tech-savvy positioning demonstrates an IT provider’s continued relevance.
The Role of Individual Performance and Innovation
Though Murthy covered high-level strategy, metrics and technologies, he also stressed that value creation fundamentally stems from individual drive and innovation.
He urged IT professionals to transform themselves through tireless effort, with Murthy noting his own 80+ hour work weeks as key to his 30+ year career. He also advocated for leadership that motivates constant improvement and change.
In Murthy’s view, IT services staff working creatively and rapidly at an individual level can spark company-wide transformation. This personal performance and ingenuity is essential for providers seeking sustained value amid industry volatility. By driving change from the ground up through dedicated individuals, firms can continually innovate.
Key Takeaways from an IT Services Veteran
Drawing on decades of experience spanning upswings, downturns and massive disruptions, Phaneesh Murthy provided a multi-faceted perspective on building an IT services firm to maximize value. His insights highlighted:
– The critical nature of quality revenue for driving growth and perception of value
– Achieving at least a Rule of 40 balance between revenue growth and profitability
– Adapting offerings to align with emerging technologies like generative AI
– Driving constant innovation and improvement at the individual level
With new technologies rapidly changing the IT services landscape, Murthy’s advice offers a roadmap for providers seeking to sustain growth and carve out a valuable position in the industry. By following his guidance, IT executives can transform their companies into higher-value organizations.
