Today’s subscription economy is a major driver of profitability for tech firms. It represents an economic shift for both large companies and entrepreneurs who can offer just about anything “as a service,” regardless of means or location. This shift also brings challenges and opportunities in the form of disruption. Companies are born out of these shifts, and others die. As businesses increasingly shift towards subscription and outcome-based models, understanding this paradigm becomes essential.
When it comes to navigating monumental shifts in business and technology, almost no one has as much insight as Phaneesh Murthy. The Indian tech mogul is behind the success of major IT services firms like Infosys and iGATE. He also pioneered new business models to adapt to the tech boom of the 90s and the growth of the digital economy. Murthy currently serves as the CEO and founder of Primentor, Inc., an advisory firm that mentors senior executives to develop service and outcome-based innovations to unlock growth.
Phaneesh Murthy recently spoke on the benefits and challenges of a subscription economy. He offered insight on how firms can better understand the changing digital economy and what they can do to harness its potential.
The Evolution of Service Delivery
Murthy began by speaking about a company called Corio, which was the first company to develop an “as a service”-based system back in 1998. The company had the idea to run an expensive program for midsize companies so customers didn’t have to invest in the software themselves. Customers only paid for the “shared use” provided by Corio.
“SaaS was born at that time,” Murthy said. “Now, technology makes it dramatically easier to do those kinds of things that Corio did.”
While the Corio model is familiar enough, it also demonstrates the real value of the subscription economy. In most service-based transactions, customers only pay for what they get—the outcome. This is opposed to previous models in which companies had to engineer their own outcomes with licensed software.
The Benefits of an Outcome-based Business Model
Phaneesh Murthy was one of the first tech entrepreneurs to embrace the outcome-based model that is the foundation of the subscription economy. He explains that this model is highly efficient because it pushes service providers to innovate. If a company only gets paid for the outcomes it delivers, it will seek to deliver as many outcomes as efficiently as possible. This results in lower costs and improved revenues for the company and the customer.
As an example, Murthy spoke about his time developing a service-based software solution to improve the way US mortgage brokers offer loans.
“In those days, it cost roughly about $2,300, $2,400 to process a loan,” Murthy said. “I was able to reduce the cost of delivery to about 1,000 bucks for the banks, and my model was very simple. It’s 1,000 bucks for a funded loan, so if you get value, I get value. If you don’t get value, I don’t get value.”
By only charging for funded loans, banks paid only for a positive outcome. This incentivized Murthy to encourage as many funded loans as possible within the bank’s guidelines. By developing new processes and closer engagement he was able to increase the banks’ loan rates from 40% to 60%.
“We were already doing all of the work for 100 loans, but we were getting paid for 40,” Murthy said. “Now, we’re getting paid for 60. The bank was doing work for 100 loans, but they were getting value out of 40. Now, they were getting value out of 60.”
Murthy emphasized that in this way, a subscription-based economy represents an evolution of the seller-buyer dynamic. Customers and service providers now act as partners seeking mutual benefit and collaborative growth over time.
The Rise of Microservices and Cloud Platforms
Today, there is enough computing power to offer just about anything as a service through the cloud, according to Phaneesh Murthy. Platforms like Google, Microsoft, and Amazon have embraced this, turning their entire business architectures into interconnected microservices. Murthy observes, “The advantage of a platform that Google, Microsoft, and Amazon offer is… you can take any kind of microservice and actually have it available to somebody.”
This shift paves the way for businesses to offer specialized solutions without building them from the ground up. But it also empowers individual developers who can now turn their ideas into profitable microservices by using other microservices.
“I can put together so many microservices available on these platforms and actually make my service a full service without having to build and write a whole lot of code, and that’s the magic,” Murthy said.
Challenges in the “As a Service” Landscape
But it’s not all smooth sailing. Large, entrenched IT companies will face major problems if they are unable to adapt to new economic models.
“The people who are going to get whacked in this are really the IT service providers,” Murthy warns. He feels that these companies are bloated with thousands of employees, while subscription-based companies may only require a few employees. This is because modern microservices are highly automated. As a result, SaaS companies will benefit from more agility, greater innovation, and lower costs.
Murthy believes that we are in the midst of a technological discontinuity similar to the last disruption in the mid-90s when internet services began to boom. This discontinuity has birthed industry giants like Amazon and forced Microsoft to innovate and achieve SaaS prosperity. But it may also spell the end for many IT service providers that are too rigid to change.
Developing a Mindset for Success
Phaneesh Murthy’s vision is not just about technology. In fact, he is more of a businessman than an IT professional. For Murthy, achieving success in the subscription economy isn’t about creating the best software. It’s about changing your mindset. “A lot of us were born in the age where we thought, if you win, I lose, and if I win, you lose,” he said. But future business models will create shared value, where true partnership yields mutual benefits.
Thousands of microservices will connect businesses with incredible intricacy, and because these services strive to efficiently deliver the best possible outcomes, service providers will always have an incentive to innovate.
Phaneesh Murthy’s Closing Thoughts
Phaneesh Murthy believes that the evolution of the “as a service” economy has just begun. The ability of developers to offer solutions is still limited by computing power, but once quantum computing becomes a reality, Murthy predicts that the types of services being offered will greatly expand.
“Stable quantum computing will be coming as a service, which will allow you to be able to do anything in terms of processing that you want,” he said. “Can I then offer intelligence as a service? It’s a fascinating world.”