Infosys struggles as industry laggard
When Infosys became the first Indian company to list on the technology-heavy Nasdaq stock exchange in 1999, it was a moment of pride for the nation that had put behind socialist isolation to embrace globalisation. N Madhavan reports.The hot seat just got hotterbusiness Updated: May 01, 2013 02:36 IST
When Infosys became the first Indian company to list on the technology-heavy Nasdaq stock exchange in 1999, it was a moment of pride for the nation that had put behind socialist isolation to embrace globalisation.
So much so that then prime minister Atal Bihari Vajpayee said that leaders from developed nations were visiting Bangalore, where Infosys has a lush-green campus, like they used to visit the Taj Mahal.
Now technology’s Taj Mahal has lost some of its marble glow.
For most of the last eight quarters, India’s second-largest software service company has been lagging market expectations — and worse, some industry peers.
This is unthinkable for a company known for outshining since its humble start in 1981 and a stymied IPO in the early 1990s when it was not taken seriously.
Its stock plunged by 21% on April 12 when it forecast revenue growth of 6 to 10% for 2013-14, well below industry association Nasscom’s industry estimate of 12 to 14% growth for IT/IT-enabled service exports.
Murmurs have started that some board members of the company in which foreign institutional investors (FIIs) hold more than 35% want a change in leadership amid senior-level changes inside.
“We have been hearing of management changes that do not hold well for the stock,” said Ankita Somani, IT industry analyst at Angel Broking.
"Ever since Shibulal has taken over, we have been seeing senior level changes every two months," added Somani.
The softspoken S.D. Shibulal, the fourth among the seven co-founders to don the CEO's mantle, is facing pressure of the kind no one has faced in the company's history. With good reason.
Industry leader Tata Consultancy Services (TCS), late riser HCL Technologies and outsourcing peer Cognizant Technology Solutions have been steadily outperforming Infosys.
“It is taking more time for them to grab additional business. Infosys has been reluctant to drop profit margins, but is now showing more flexibility. But the competition is gaining more business,” said Dipen Shah, IT industry analyst at Kotak Securities.
Industry watchers used to first chief executive officer (CEO) NR Narayana Murthy's articulate, bold style and successor Nandan Nilekani’s focused confidence have picked holes in the understated styles of its last two heads, S “Kris” Gopalakrishnan and back-room boy Shibulal, who is due to complete two years in August.
Both Kris and Shibulal have been known for their down-to-earth styles and hands-on service management.
“It is difficult to have two back-to-back operational CEOs and expect the company to survive,” said an industry veteran who did not wish to be identified. “It seems they want to just ride out their terms.”
Those are harsh words for a company that was founded when personal computers did not exist. From mainframes to mini computers to local area and wide area networks to the Internet, Infosys has successfully ridden every major wave of the desktop era, weathering storm after storm.
Officially, the company is busy now crafting a new strategy that it calls Infosys 3.0. There is a reason why a new story is needed — though its plot is far from clear to those who are tracking it.
Things were easier when Infosys, alongside Tata Consultancy Services and Wipro, thrived on India’s abundant pool of software engineers at a fraction of what it cost to hire similar talent in the West.
Now salaries have steadily risen, and techies and manages have many other places to go to as global firms expand in India.
With only founders sitting on the CEO chair so far, senior-level exits have been frequent over the past five years as young and restless managers seek faster growth.
For middle-level employees, avenues have opened up in companies like Accenture and IBM, which have caught up in size to match TCS and Infosys in India. Accenture now has 80,000 people in India - and that is more than half of Infosys’ headcount of 156,700.
“Time and material” pricing, or renting out talent by the hour, has been the staple pricing model for Infosys that is being questioned by some, including its own former sales head Phaneesh Murthy, who left to head iGate. iGate is betting on a model that involves pricing services based on shared risks and outcome.
“No company can talk the same model forever,” Murthy said assertively.
Infosys is not sharing risks, but instead has a new growth recipe -- a business unit called platforms, products and solutions (PPS). The PPS unit is investing in the creation of intellectual property (IP) -sometimes jointly with clients.
For example, it has created a mobile wallet platform for telecom service provider Bharti Airtel that stays with Infosys. The client pays per transaction conducted. Over a longer period, the low-price turns meets high volumes.
“We have to change strategy for high quality growth over the medium to long term” says V. Balakrishnan, board member and head of Infosys’ business process outsourcing (BPO) and banking product unit.
“But we are doing this while the environment is against us.”
The environment has most certainly been against Infosys since the Wall Street crisis of 2008, which followed soon after the exit of its sharp CEO Nandan Nilekani. The juiciest of banks financial industry clients like Goldman Sachs- who account for more than 30% of Infosys revenues, were the worst hit across the West.
As the Great Recession hit North America and Europe, the other big focus, high-skill consulting, also took a hit. Consulting, was Infosys’ original path to boost profit margins but this involves futuristic “discretionary spend” by clients - which gets hit most when companies tighten their belts.
The twist in the consulting tale came at a horrible time.