The Potential Impact of Outcome-based Investment on Customer Experience

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Transcript:

Daniel Newman: Hi everyone. Welcome back to another episode of the Futurum Tech podcast. I’m your host, Daniel Newman, Principal Analyst, Founding Partner at Futurum Research. Very excited for this interview series we have today. We have Marne Martin. Marne is the Global President for the Service Management at IFS, and I’m going to bring her out in just a moment to talk about what that means. We appreciate everybody tuning into the interview series. These shows are always great as we have some of the world’s most prolific tech companies and tech executives join us here to just talk about what’s going on in the tech space. And this, for anyone out there that’s listening, was the first one I recorded in the year 2023, so very excited to kick this one off. Excited to talk about what’s going on in the market and learn a little bit more about IFS’s field service business. Marne Martin, welcome to the show.

Marne Martin: It’s awesome to be here. And again, to be the first guest in 2023 is fantastic. Happy New Year to you and everyone watching.

Daniel Newman: Absolutely. I can’t promise it’ll be the first one published. I don’t always control that, but what I can be sure to do is promise everybody that this is that first conversation. You’re hearing it first here from me. You’re going to hear it first here from Marne. I’m sure both of us are back in the chair after, I think, like you said backstage Marne, a little bit of downtime. I don’t know about you, but as an entrepreneur, I work half days all the time. It’s just which half, which 12 hours.

There was no real quiet time, but it was quieter. I did get used to sleeping past 6:00, which is a bit rare for me. But I hope you did have a good break. To start off, quick introduction. I gave everybody your title or roughly your title, but tell everybody a little bit about the daily work you do at IFS, maybe just a quick primer on IFS, because it is a big company but it’s not one that everybody always knows.

Marne Martin: IFS has been in existence since 1983, but Darren Roos, another guest I know, Darren’s been on your show, and I joined in 2018, and since then IFS has approximately quadrupled in size. And the area that I lead, I’ll talk a little bit more about that. We’ve actually grown by 1500%, which is an amazing growth since 2018. An average CAGR of organic software bookings of 100%, and we’ve done that because of what service is. If you think about all of our economies and where the transformation is coming, service revenues, whether it’s for industrial companies, industrial manufacturers, companies that have a lot of infrastructure like telco and utilities, or even just the service on everything that you buy as a consumer or a business, you can understand how this technology area is booming and also the opportunity for IFS. It’s really a great one, and globally around the world, it also gives a lot of opportunity to see how change is happening in different regions around the world, not only the economic impacts, but really the consumer relationships and the business ones.

Daniel Newman: Yeah, absolutely. IFS has been around almost as long as I have, so that’s pretty impressive.

Marne Martin: I’m a little older than you. But yes, it has been long time-

Daniel Newman: Legitimately just two years difference. But the growth, that’s impressive, Marne. I mean, 1500%, triple digit CAGR growth. And I guess I’ll start off by kind of saying the last year, I mean, in 2021 it felt like everything digital grew. ’20 was a little scary for that first quarter, but then all of a sudden once the stimulus started kicking in and once everybody went home, technology actually roared, right? We saw not just the market, but we just saw the investment in digital transformation spike. You heard things like, “Oh, it was 10 years of transformation in 10 minutes” or 10 days or 10 weeks.

In ’21, you saw that kind of continue and all of a sudden right around the end of ’21 though, you started to feel this turn the other way. And as we got back to work, we started to see the policy changing, that free money, all the printing was kind of slowed down and the economy, it didn’t slow entirely in ’22, but just the whole year I think we spent talking about that. I’m kind of interested in your sort of broader takes about the market, the economy, the growth. It sounds like you guys are doing fine, but what’s your sort of broad macro view on tech and what’s going to go on in ’22 and then what we’re going to see in ’23?

Marne Martin: I’m an economics major if you will, right? It’s always really interesting to talk about the context of that. I think what we’re seeing is definitely some differences across select industries. We definitely saw the impact to, for example, airlines, tourism, things like that, hospitality through the COVID, but other sectors did accelerate their technology investments and transformation like you said. I think also the investment in sustainability, resiliency and where growth is coming from, the companies that were caught out were the ones that had underinvested in whether you call it digital transformation or just what companies need to do to continue remaining competitive in this modern era. The ones that were behind definitely got caught out and certainly since 2020 we’ve had to get used to say the complexity of our global environment, right? I mean, COVID has become a way of life. We’ve had some, maybe not quite recessions, but some slowdowns in growth.

We’ve also faced inflationary pressures. There’s been again a war this time, Russia, Ukraine. All of this feeds into businesses needing to be more technologically advanced and more nimble. And that’s really ultimately the opportunity for IFS and what we talk about as service management. I’ll explain more of that in a moment. And companies are also looking for an opportunity where a platform vendor may have seemed easier from an IT perspective, but if it’s not giving the best of breed or what we used to call best of breed capabilities to really grow the business, to leverage IoT, leverage challenges that they have, then the opportunities for companies like IFS and certainly we’re stepping through that open door.

US has remained overall I’d say more dynamic and stronger. Certainly in Europe we saw a little bit more of an impact in this last year, but again, many of our market units and in my area, Europe as a whole grew by more than 50% last year in our software revenue. The US we grew by more than 70%. I think when you go more across Asia and what have you it’s a little bit more of a mixed bag of where some countries were slowing down some technology change, but in Europe and the US we actually had quite good years and all the most successful and larger companies in this area are seeing the need to invest.

Daniel Newman: Yeah, first of all, I can sense that you like talking economics as much as I do. There’s so much of the underpinnings of what we can expect from our business can be found if you sort of look at those macros. Micros, I didn’t have as much fun in grad school with micros as I did macro, but when we just listen every day, the wars that are going on, the possible wars that are going on, the inflationary pressures that are…What does interest rates mean for business? You got future discounting, future cash flows and values. And by the way, I’ve always admired that you guys report your earnings even though you’re private, which is one of the things I think it’s very neat that IFS provides that level of transparency so that the markets, investors and your customers, which is one of the things I think a lot of private companies can’t benefit from when you don’t disclose is they see this momentum.

Now, of course, if you guys ever see a slowdown, it’s going to be one of those like, “Oh, do we still have to report?” And I think you’ve now put yourself in a position that you do, but I actually really appreciate that because it allows, there’s no BS. They see what you’re doing, they see that you’re growing. And when you say things like we’re going 50%, 70%, when you hear CEOs of companies like SAP in Europe talking about slowing cycles, longer elongated sales, slowing growth in some areas of their business, to be able to come out and say, “Well, we’re in Europe and we’re still seeing 50% growth,” and publishing that for people, not just saying it, that’s pretty cool.

Marne Martin: To be clear, there certainly have been impacts, right?. I mean, if we hadn’t had the war in Europe, we probably would’ve…And again, I’m talking about my area.

Daniel Newman: Yeah, of course.

Marne Martin: Just to explain course, I cover the CX area, customer experience through all of the service based business. Everything from CPQ to service contracts, billing, service management, supply chain, reverse logistics. For telco and utilities, a lot of it’s around mobile workforce management, kind of the infrastructure maintenance service construction side of businesses. Those are pretty resilient businesses and they’re ones that typically either are trying to increase their competitive position, grow market share, things like that. We’re in more resilient industries at IFS, but certainly in the US we had thought maybe we would grow by more than a hundred percent, right? We are absolutely outgrowing the market and I am so proud of IFS and our teams that have done that, but we thought actually that we could grow even faster and there were deals certainly that elongated and pushed into 2023, and that’s a factor we’re seeing all over.

But we still had a really good year. And that’s why even though we’re seeing some of these impacts, I always want to celebrate the positive. Some people may accuse me of being a glass half full, but I think overall what we’re doing here at IFS is really incredible and certainly the economic cycles will impact us as well, but the fact that we really have a differentiated product that really there’s so much need for in the world economies and many of the largest companies as well, that’s something that’s benefiting IFS compared to many of the big ones. And again, I compete with SAP, Oracle, Microsoft, Salesforce every day. We also integrate our software into their software as well. We’re both competitors as well as part of that ecosystem.

Daniel Newman: These heterogeneous environments are becoming more common. It’s certainly not a winner takes all. I mean, occasionally that happens, but more and more because of the way architectures work, companies can bring in best of breed softwares and there’s a lot more integration. And that, of course, gives you opportunities to win in an area like field service where you may not win in other parts of a core ERP because that may have already been determined years ago or again, may not be something IFS…I’ve always appreciated whether it’s been talking to you or talking to Darren that IFS kind of says, “This is what we’re good at, this is where we put our effort. We’re not necessarily trying to be in every vertical market and trying to put all of our…We’re not trying to be the everything ERP for every industry.” And you’ve kind of owned that.

I think part of your growth has been somewhat tied to the fact that when you go into deals you can say, “Look, Oracle for this part of your business makes sense, but for this part of your business we want to tell you why we make sense.” And it seems like that’s kind of helped you in winning certain situations where maybe trying to get the whole business wouldn’t have been as easy to do. And I just want to reiterate one thing you said. You did talk about the different industries and some being more resilient than others.

And I have to ask you because the timing, what did you think about the whole Southwest thing? Because this has to be a great example of somewhere…This is exactly where companies like you come in and try to work with these companies to help them not have things like that happen. I mean, is this just an example of how a big company can completely get caught off guard and miss on having the right software enhancements and upgrades? And by the way, this was like implosion area. I mean, this was an epic fail for a company of that size.

Marne Martin: Southwest is an interesting example of you’d think a very sophisticated technology company, but clearly they had some technology vulnerabilities that they had not taken say the pain or the opportunity to modernize. And you saw that come up when you have outdated software that may be homegrown or maybe fit its purpose at a certain scale, but then the company grows and the software capabilities don’t grow with it. IFS has benefited also with our planning, scheduling, and optimization software that’s super sophisticated with AI and machine learning, of helping many of these problems and complex businesses as an example. But Southwest is unfortunately, as sadly as it was for passengers over the Christmas holiday, an example where the complexity wasn’t supported by the software. And if they had made decisions to replace what was or seems to be antiquated software some years ago, then they likely would’ve been in a better position this holiday season.

You definitely have companies that invest in software at different levels. Maybe they do a super job at the front end systems, but then they don’t invest in the backend systems and in the past, service type software maintenance repair operates, service management type software was underinvested in. And that’s also a cycle that many companies are accelerating now. And of course that’s partly why IFS is growing because as demonstrated in the Gartner Magic Quadrant where we’re so far in the lead even of companies much bigger than us, it’s our passion, our focus, it’s what we do. And that’s why businesses both medium, large and very large businesses are coming to IFS for us to help them solve some of these types of challenges.

Daniel Newman: Yeah. I reiterate that specialization to me has been part of where my confidence in what you’re doing has come from is that you’re not trying to proverbially boil the ocean. You really are saying, “This is what we’re great at and this is why you should work with us.” And yes, I think Southwest was always one of those that had a good front end, meaning most people that fly them and fly them regularly appreciate the app, they appreciate the tools, the booking, but the stuff in the backend was probably some sort of terminal service that was still probably an orange and black screen for…I mean, I’m being serious. That’s how different the front end and the back end can be in tying those things together, can not often be sort of bandaged and stitched in such a way where you and I don’t experience it. We book our flights, things work, but when the dominoes fell, they fell hard and fast and cascaded in a pretty significant way.

I’d like to pivot in the time we have left, I want to talk about something that I’ve been tracking pretty closely, and that’s the idea of outcome-based contracts. You look at something, we talked about a few different situations, different industries. Companies are increasingly moving to more consumption-based technology, subscription-based technology, and I think the next wave is going to be some more outcome-based investment where whether it’s hiring a service in a consulting firm, a software company or hardware and infrastructure company, they’re saying, “Look, you’re telling me you can save me money. You’re telling me you can help us increase customer satisfaction, we’ll pay you when we achieve these things with technology.” I’ve heard about it Marne, but I don’t think we’ve really seen that come to fruition. What are your thoughts on that? Are we going to move more in that direction? Is that something that IFS could become a potentially lead in or is this something you don’t really see as a real market possibility?

Marne Martin: It absolutely is the way of the future, and I’ll explain why this is also say the open door that IFS is looking to go through to help this. Outcomes-based service, and if you think about consumption-based service or what have you, there you need the service to be on, right? If you think about utilities and telcos, yes, maybe occasionally things break or there’s a national catastrophe, even like Buffalo or something like that. But overall it’s a consumption based service and the outcome is that you have the utility available to you, whether that’s telco, water, gas, or electricity, what have you. In those industries, they’re thinking more about how you can be predictive around the asset uptime, how you’re performing maintenance and service, how you’re doing more condition versus time-based. And that is a huge trend that’s driving a lot of transformation, what we’re investing in. And it ties in a little bit to the Southwest example, that when you have the complexity around what you need to service, when you need to service the people, it gets very sophisticated very fast.

And that’s also why you need technologies like IFS that really has leading AI and machine learning because it’s beyond the scale of technology that was in place in many of these companies even 10 years ago. If you look at where we think about industrial manufacturers that do service, that I think is a really interesting discussion to have because it’s not only about the technology capabilities, I’ll mention that in a moment, but it’s also about how they need to change their organizations to be more of a digital mindset related to what they’re offering. It’s not really, “Hey, I’m manufacturing this asset equipment, I’m going to sell it to you and then maybe you choose an aftermarket service contract.” They have to start thinking about, no, it’s a bundle and maybe I don’t make the money off of what I manufacture. I’m making the money off of the service, which is typically how it is today.

And then they have to start selling not from a cost plus perspective, but a value perspective. And that’s what you refer to. How do these businesses sell from the value of the outcome? Right now we know only about 16% of companies are selling off of value in outcome based services. If you think about IFS the next 10 to 20 years as we continue to invest in the software that really you can do end-to-end outcomes based service all the way from what you manufacture, service, circular economy, bring back, what have you, remanufacture, sustainability measures implemented, that’s the open door for IFS. And if we can take the 16% today to 50, 60, 70% of businesses that choose IFS to help them make that pivot because they haven’t been able to get the results from Oracle, SAP, Microsoft, Salesforce, et cetera, you know how big those other companies are, it’s a huge opportunity for IFS.

Daniel Newman: Yeah, absolutely. I’m really looking forward to seeing this materialize because I think there are a lot of opportunities and I think there’s a lot of opportunities for both technology companies to grow meaningfully by taking risk. And at the same time, obviously companies to be able to kind of co-invest with their technology partners because more and more there’s…You hear this phrase, every company’s a tech company, that kind of thing has come out. But there is some truth that the fundamental underpinnings of a business now tends to lie in its technology, whether that’s drilling for oil, whether that’s rail, so even old industries, the technology is what enables them to either grow and differentiate or eventually sort of capitulate under the pressure of modernization. And so the next wave is going to be, well, we don’t want our consultants to just come in here and charge us an arm and a leg and then walk away.

We want our consultants to come in and share in this journey with us and then the softwares and the technologies that they recommend. It’s going to be interesting to see how this materializes, but I’m watching it closely because at some point money talks, Marne. Money always talks, and if companies can do better because of these investments, then they will. As we sort of come to the end of this conversation, I do know that your role has now expanded to pick up assets as well as the service management business. Why did that fall into your purview and how do you see those things coming together, maybe changing or shifting your offering in any way?

Marne Martin: Enterprise asset management isn’t really a new thing, but when you think about how you’re driving the predictive asset and also this evolution to outcome-based service, you need to be looking at the customer experience and the marketing and sales side. I don’t mean IFS selling, but actually the business itself, whether it’s a manufacturer doing service, a telco utility, et cetera. And then you also have to carry it through to where you’re doing the actual service, right? How you’re making maintenance service decisions. In typical enterprise asset management, it’s time based maintenance, and you’ll have some sort of infrastructure risk replacement measures, et cetera. But a lot of that isn’t as smart or tailored as it should be to the outcomes that they want to deliver. It’s still a little bit rudimentary in how they’re embracing even the data points that they have, let alone how you can tie this into an overall outcome for what you want, whether that’s asset, uptime, customer experience, profitability, regulatory requirements, whatever it is.

And that’s the opportunity. Again, it’s not that EAM won’t be a thing or field service management won’t be a thing or customer experience isn’t a separate line of business, but now we’re looking at them more with integrated through lines. And this also ties to the complexity in what you spoke about of companies being digital businesses. It’s too hard for them to try and manage 20 different solutions where data models and integrations and they don’t have a way of driving this integrated outcome. Here at IFS, not only in what I’m overseeing from a management perspective, but how we’re helping companies evolve and look at even some of their historical line of business applications in new ways. It’s being driven by thinking about the customer, the asset, the people who are doing maintenance service, construction projects, what have you, as more of an integrated team to get the outcome that we want.

And also lessen the complexity of many of these businesses, which goes back to the Southwest example is if you have too much complexity and you also don’t have software fit for purpose for the size of your business, that’s when bad things happen. And certainly that’s one example. But in general, business resiliency in these economic climates is top of mind and being able to really have best in class service, the customer experience, your assets are performing the way they should be, delivering what they want for your customers, that’s really the growth strategy, not only for IFS customers, but in any economy, whether economy’s growing by 6% or contracting a few percent in real times. The businesses that differentiate themselves as good ones are the ones that invest and understand that. And I think you’ll have more C-suite and boards focusing on it in not only 2023, but in future years.

Daniel Newman: And with that, let’s do the final rapid fire question for you. What does a moment of service mean for your customers, Marne?

Marne Martin: A moment of service means are you creating this outcome with also the emotion that makes a customer a lifelong one? Okay? So for IFS, we’re also delivering a service as a technology vendor, and we want…Okay, sometimes people aren’t perfect, but you want that emotional affinity that you ideally have a customer for life and a real one because they’re getting the value, not because you’re running an artificial monetization campaign on them. For our customers, we’re creating the orchestration across customer workforce, asset, or equipment, kind of a value chain and that orchestration to deliver an outcome. In the case of Southwest, that would’ve been people making it to Christmas dinner or whatever. In the case of a business, it might be, “Hey, I have my manufacturing plant up, I’m able to deliver that last output. It got to the customers that need it because they needed to make their supply chains more resilient and move manufacturing away from China” or whatever they’re doing.

The moment of service is an orchestration of say asset equipment outcomes, but it’s also where we create that sentimentality that drives a lifelong customer experience and ideally a satisfied customer. And we bring that together in what we call moment of service. But it really, as I mentioned, tying it back to what I said before, the customer of the asset, the people in that moment of service where you’re really getting an integrated and coordinated orchestration of all of that and ideally a great experience from it. But this is something that if you look honestly at all of our businesses and all of our customers’ businesses, there’s so much opportunity to create moments of service in this way and that really will also lessen friction in their business, enable them to grow faster, be more profitable. All of this fits together and I think it’s not only a great thing that we’ll see in 2023, but really driving a lot of how software is approached and technology adoption the next 10 to 20 years.

Daniel Newman: Yeah, I think that’s a great way to end, Marne. I mean, after more than a decade of studying digital transformation and written seven books about it, I’ll tell you that customer service and experience is table stakes. It’s not actually any longer one of those things that I think there was a stat a few years back that was something like, I call it the 88 rule. It was like 80% of companies believe they’re differentiated on their customer service experience, but only 8% of customers see their vendors and suppliers-

Marne Martin: Absolutely.

Daniel Newman: …service differentiated. And that stat just stuck with me for so long because that to me says everything about the gap between companies thinking they’re really delivering on great service and consumers believing that their suppliers, vendors and hospitality, whatever they’re doing is able to deliver. Thank you so much, Marne, for spending some time and thanks for all the work that you’re doing to help enterprises around the world in different industries, deliver on the promise of customer service and field service management. I really appreciate you joining the show today.

Marne Martin: It’s absolutely a pleasure. I look forward to hopefully talking to you again and thanks for having me on.

Daniel Newman: Yeah, we’ll have to have you back soon. All right, everybody. You heard it here. Really appreciate Marne Martin there of IFS joining us on the show, talking about what we are going to see in 2023, what’s going on with service outcomes, so much more. And of course, like I said, my first conversation on the Futurum Tech podcast of 2023, it was a good one. There will be many more. I hope you hit that subscribe button and join us for more interview series of podcasts here on the Futurum Tech podcast show. But for now, you got to say goodbye. I’ll see you later. Thanks for tuning in.