Rebooting Infosys

Print edition : July 11, 2014

Outgoing executive chairman N.R. Narayana Murthy (right) with Vishal Sikka, who will take over as chief executive officer and managing director on August 1. Photo: G.R.N. Somashekar

Narayana Murthy's son Rohan Murthy, who was executive assistant to his father, at the company's 30th annual general meeting in Bangalore on June 11, 2011. Photo: G.R.N. SOMASHEKAR

K. Gopalakrishnan (left) who stepped down as executive vice-chairman on June 14 and S.D. Shibulal, the outgoing CEO and M.D. Photo: Bijoy Ghosh

In a business landscape that has changed drastically, Infosys searches for new strategies and direction as its founders step down.

INFOSYS, a true-born child of the IT services outsourcing revolution that transformed not just the Indian business landscape but the market for jobs in the last two decades, entered a decisively new phase on June 11 when it announced that its founders would hand the reins of the company over to an “outsider” for the first time since its founding in 1981. Vishal Sikka, a former board member at SAP AG, the German software company that specialises in enterprise solutions, is set to take over from Infosys’ chief executive officer and managing director S.D. Shibulal on August 1. Sikka will thus become the first non-founder CEO at Infosys.

The company also announced that executive chairman N.R. Narayana Murthy and executive vice-chairman S. Gopalakrishnan would step down on June 14. Rohan Murthy, Narayana Murthy’s son, who made an entry as a special adviser to the father, raising eyebrows given the father’s obsession with “meritocracy”, is also set to leave the company on June 14.

Infosys, which reported revenues of Rs. 50,133 crore ($8.25 billion) in 2013-14, has faced a rough business environment ever since the global financial crisis erupted in 2008. Revenue growth has slowed down significantly, illustrated by the fact that the company has underperformed relative to revenue growth registered by the industry as whole (as provided by the National Association of Software and Service Providers). But even more ominously, for a company that was regarded in industry circles as being snooty in terms of picking up business only in lines where profit margins were high, margins have been under incessant pressure in the last few years.

Corporate mythology

Although business leaders do have an important role in the success or failure of enterprises, business houses invariably tend to give too much importance to the individuals at the helm. That is how corporate legends, which contribute to the aura of a “brand”, are nurtured. Infosys is no exception to this. There is no doubt that Narayana Murthy and the six other founders of Infosys played a crucial role in building the company as a pioneer in the outsourcing space. His status as a business visionary resulted in the media rushing to him for comments on all issues, ranging from the state of the roads in Bangalore to the question of reservation of jobs and educational opportunities for the socially disadvantaged.

There is little doubt that Infosys was truly unique in that it quickly saw new opportunities for locating outsourcing services to the large companies based in the United States. It quickly scaled up operations, undertaking significant risks in the process, to establish a viable model for large corporations to outsource work to India. However, corporate mythologies tend to overly highlight the companies’ own prowesses while underplaying the fortuitous confluence of circumstances that led to the boom in outsourcing in India. First, large corporations, especially those based in the U.S., themselves promoted the wave of outsourcing as a means to cut wage costs. Companies such as GE Corporation actively encouraged the process by establishing their own arrangements for outsourcing work to India. The shipment of jobs from the U.S. to India became so great that “getting Bangalored” became a live threat to jobs in Silicon Valley.

The other crucial aspect of the process was that certain lines of business were more amenable to being outsourced than others. The wave of financial deregulation that has been happening since the Bill Clinton years, which laid the basis for the building of the bubble economy in the U.S., led to a wave of financial “innovation”. The new and ever-more-complex financial products launched in the banking and insurance sectors created new opportunities for outsourcers in India. The time difference between India and the U.S., and the large pool of English-educated talent that could process the back-end work in India were added advantages.

The unhinging

Most Indian outsourcers, including the Big Three—Tata Consultancy Services, Infosys and Wipro in that order—depended heavily on financial services for their revenues. In 2013-14, for instance, Infosys earned more than one-third of its revenues from outsourced work for the banking, financial services and insurance sectors.

Even more significantly, revenues from North America accounted for 60 per cent of its revenues; the combined revenues from the North American and European markets accounted for a whopping 85 per cent of overall revenues of the company. Thus, when the world economy unhinged in 2008, with Europe and the U.S. being at the epicentre of the financial crisis, it was bound to have severe consequences for the global outsourcing business.

In successive earnings conferences after the meltdown began, however, Infosys executives continued to nurture the illusion that the crisis would soon pass. Later, as the crisis engulfed Europe, they began to sing the tune that global corporations, under pressure to cut costs in order to remain competitive, were only likely to outsource more. However, in April 2012, soon after the company’s share price dived 12 per cent following the announcement of its financial results which revealed that the company had missed its earnings forecast for 2011-12, for the first time in 19 years, its CEO and managing director Shibulal told this correspondent: “We are now in a new normal, and it [the global economy] will continue to be volatile.” Indian outsourcers, Shibulal said, would have to “adjust” to extreme volatility in demand for services that had been outsourced for many years. Clients, particularly in the U.S. and in Europe, had significantly slowed the pace at which they took decisions, he said.

The following year, on June 1, 2013, Narayana Murthy, who had retired, returned as executive chairman, in a clear move that was aimed at setting things right. One of the first things he initiated was the move to go after “plain vanilla” business avenues, which went against the company’s long-held strategy of only going after high-margin business. In a move that raised the hackles of investors, Murthy roped in his son Rohan Murthy as his executive assistant. A year later, addressing the recent annual general meeting of the company, Narayana Murthy said that his son’s fresh “outsider’s” perspective had helped him give the company a new direction. He admitted that in recent years the company had slipped from its focus on “meritocracy and accountability”.

Top executives of Indian IT services companies say the fierce competition among service providers has resulted in the “commoditisation” of services. This has important consequences for the IT services industry. This implies that companies such as Infosys, which had traditionally cherry-picked its clients with an eye to profitability, will be forced to be less choosy about business opportunities. Moreover, the pressure on margins is aggravated by the need to acquire suitable talent to process work in India and elsewhere for clients. Added to this is the growing pressure on Indian service providers to source “local” talent in the overseas markets they serve. For instance, Wipro chairman Azim Premji is on record as saying that over the next few years, foreign nationals on his company’s rolls would account for at least half its overall workforce. He pointed out that this was the only logical long-term response to the backlash against outsourcing in the U.S. and other countries.

Much has been made of the exodus at the top at Infosys; nearly a dozen senior executives have left the company. However, the company-wide desertions at the lower levels have not attracted the same attention. Significantly, in 2013-14, the company reported an attrition rate of 18.7 per cent, “the highest ever” according to Shibulal. Ironically, the apparent saving grace in this otherwise dismal scenario has been the rise in rupee-denominated revenues and profits, caused by the rupee’s slide against the dollar.

It is obvious that the phase of rapid growth of the Indian outsourcing industry is well and truly over. Clearly, Infosys is at a critical juncture in its journey. Its attempts to “climb up the value chain” in order to escape the curse of commoditisation has not been easy. For years, the IT services industry had depended on the opportunities offered by labour arbitrage costs. With clients putting pressure on service providers to offer more for less, margins have come under severe pressure. Indeed, smaller IT services companies are increasingly offering to provide services which are priced in terms of the “outcomes” they deliver to clients. iGate and many others now price their services in such a way that clients only pay them a certain fraction of the costs that they are able to cut by using such services.

At the other end of the spectrum are the global players such as IBM and Accenture, companies which are able to compete more effectively using their clout in a range of industries.

The significant command they enjoy over intellectual property resources in areas such as Big Data, analytics and Cloud Computing give them a huge advantage over Indian service providers trying to climb the value chain.

The stepping down of Narayana Murthy, the helmsman at Infosys, gives the new leadership an opportunity to adopt a fresh approach to the challenges it faces. But the world Infosys now lives in is so different from the world it was born into that the road it seeks to tread now will have to be different from the one it travelled for three decades.