IFS turns in healthy results. We talk to CEO Darren Roos

Despite an anticipated slowdown in sales and implementations during 2020, IFS today reported healthy revenue numbers for the year ended 31st December 2020. From the press release:

Software revenue was MSEK 5,092, ($607 million) an increase of 26 percent versus 2019
Recurring revenue was MSEK 4,081, ($487 million_ an increase of 43 percent versus 2019
Cloud revenue increased 60 percent versus 2019
Net revenue was MSEK 7,211, ($860 million) an increase of 14 percent versus 2019
In addition, service business license revenue grew 105 percent versus 2019 while aerospace and defense license revenue grew 37 percent.

(Currency converted at the latest available mid-market rate)

One of the company's key objectives in 2020 was to gain traction in larger accounts. Looking at the logos it added, IFS succeeded with firms like Carlsberg, Panasonic, DeHavilland Aircraft Canada, and the US Navy reported as adds. In addition, IFS said that its partner ecosystem participated in 30% of implementations, while its community includes more than 5,000 active contributors.

We spoke with Darren Roos, CEO of IFS to get a sense of the willingness to invest in technology and his assessment of why IFS is succeeding. Roos started by saying that in contrast to previous years, he chose not to issue a quarterly update during the first nine months, figuring that 2020 wasn't a year to be making noise about success when so many firms were struggling. Today, he detects a change and a desire for firms to move forward.

We just stuck to our knitting. The focus throughout 2020 was to stay close to our customers, carry on doing what they needed us to do. And, and I think more importantly, just continue to execute on the strategy of focus on service and asset-centric businesses while continuing to transition customers to subscription and cloud yet still offer choice.

IFS distinguishes itself by focusing on industry verticals. Oil and gas and airlines took a significant hit but IFS found growth in telco and energy utilities where it has strength in field services. It was that industry focus with offerings those markets needed as they quickly switched to 'work from home' operations that helped IFS achieve the reported results.

Aerospace and defence grew 37% and we did a really big deal with Lockheed Martin and the US Navy, which was a standout deal for us.

During the year, IFS was not only able to add 260 'never before' greenfield customers, a creditable achievement for a company of its size, but the deals and transaction values also grew. Even so, 2020 was not without challenges.

Roos said that the company had never initiated, implemented, and then taken a customer live entirely through remote operations. Despite a drop in some productivity from remote working, Roos said that implementations went faster. He attributes that to the absence of onsite workshops and the resulting trend of implementing a product that is fit to standard. This happened because there was less willingness to hack out of the box solutions with the accompanying delays that arise. Roos explained the benefits this way:

When we manage to do a close-to vanilla implementation, the update cycle, which now runs six-monthly is no longer a large, disruptive upgrade. It's much more iterative, in a process we call evergreen. Fewer customizations significantly lightens the burden on those update cycles. So I think that's one benefit. The other thing is customers are going live much faster. So the time to value is better, the cost of ownership is significantly lower, you don't have the long regression testing cycles when you're implementing something new, or you're, you're doing an upgrade. These are value drivers customers recognize.

Compromises are necessary but in the current climate, customers are prepared to make trade-offs when they see the early value. This is a sea change in thinking but the question in my mind is whether that represents a permanent change. Right now, we cannot know the answer because intermittent and persistent lockdowns mean that 2021 is currently shaping up to be similar to 2020.

Even so, Roos believes that having once tasted value coming from a different method of working, customers are more likely to accept compromise as the price to pay for early value. That remains true once the pandemic has passed because the pandemic is not the only condition impacting business models. The pace at which new technology-led opportunities arise is staggering and firms of all shapes and sizes realize that technology really can add value. However, that's not to say implementations will remain in fit to standard mode. Here Roos puts the responsibility firmly on the systems integrators who he believes haven't done a great job in delivering what was originally intended. Describing the pre-pandemic situation, Roos says:

You'll have a software vendor who really wants the customer to go live, but to standard, because that's, frankly, how they're going to sell more software. And you've got the customer executive who wants to go fit to standard because he sees that there are benefits in time to value and cost of deployment. Then what tends to happen is that the project gets handed over to the system integrator who is billing by the hour and a set of users who frankly want what they had before. And then what tends to happen is that the parties that are are responsible for delivering the project being system integrator and the users go on their merry way and hack the application to death. And frankly, the system integrators have not done a great job of staying true to the original intent of the software. So I think that's really the problem. What's changed with COVID is that everyone's got resourcing challenges and some of the business problems need to be solved fast. And that means the system integrators are not necessarily indulging the customer users as much as they would have in the past. So I think that's, that's the key observation I've seen this year.

But a fit to standard implementation doesn't necessarily provide differentiation for the business so where does that happen? Roos argues that the combination of faster time to value and a lower operating cost are differentiators but equally, he says that having the ability to go back and extend without touching the core means that customers can safely get additional process value. Over and above that, Roos wants its customer to understand that IFS takes ultimate responsibility for projects.

We are very much on the hook, directly or indirectly, for every single project. But I think it's a case of separating delivering every project versus ownership for the customer success on every project. And in our case, it's the latter. Not the former.

My take

It is always refreshing to hear a vendor speak to value and how it is derived. In the IFS case, its value engineering approach to customer engagements coupled with a clear position that covers responsibility for customer success represents a market positioning few others can claim with authority. The fact that IFS grew as much as it did in 2020 when the conventional wisdom might suggest otherwise provides proof that Roos' strategy is working, even in the most challenging of times.

While we may never see the end of feature and function beauty parades, distinguishing yourself from both a quality and value perspective is a good thing.

The only remaining question is whether IFS can continue on that same path as it grows. As Roos explained, it is not as difficult to do so when the absolute volume of new customers is small relative to its larger competitors but then IFS has plenty of incentive to ensure that its ethos does not get diluted.