Bangalore: Infosys Ltd, India’s second biggest software firm, has started the hunt for a chief executive officer (CEO) when the last of its founders, S.D. Shibulal, retires in two years. Some directors on its board want the search to include external candidates because the company’s current management is struggling to regain its past glory.
Jeffrey Sean Lehman, the New York University Shanghai vice-chancellor and chairman of the nominations committee at Infosys’s board, is leading the process, said two people directly familiar with the development. Lehman led the hunt for Infosys’s chairman when the company’s iconic founder N.R. Narayana Murthy retired in August 2011.
Infosys’s 15-member board has nine independent directors, two co-founders and four leaders from the management. Of these, some are of the opinion that Infosys needs to make bolder decisions, especially while selecting the next CEO as part of the company’s biggest management transition.
“The board is duty-bound to look for the best possible candidates, both internally and from outside. Given recent performance, a more thorough hunt that includes candidates from outside too is something high on the agenda,” said one of the people. Both requested anonymity because these are confidential details and nobody is authorized to comment.
Founded in 1981 by Narayana Murthy and six others, including Nandan Nilekani, S. Gopalakrishnan and Shibulal, Infosys was considered the bellwether of India’s $108 billion information technology (IT) sector until three years ago.
In the past two years, the company has missed its revenue and profit growth forecasts several times and has been overtaken by Cognizant Technology Solutions Corp. in annual revenue. It also pursued the new 3.0 strategy doggedly in an environment when outsourcing customers are only looking to save costs.
Last year, Infosys missed the lower end of its revenue forecast at least twice and stopped giving quarterly forecasts. The sluggish growth rates and increasingly impatient investors prompted Infosys to re-examine its strategy and it started cutting prices for select clients. The company also entered into revenue-sharing agreements with companies such as IPsoft Inc. to drive up business volumes, even at the cost of margins.
On his part, Shibulal admitted that the new strategy that aims to generate one-third of total revenue from Big Data solutions, products and platforms may have been ill-timed.
“There’s no doubt that the volatility impacted our revenue, which did not allow us to benefit from 3.0. The strategy is all about creating two other new growth engines. That should be done at any point of time—there’s no good time or bad time for that. We cannot wait for the world to be stable before we say we’re going to create a new growth engine,” Shibulal said in an interview after the company announced its earnings for year ended 31 March, which fell short of the 5% revenue growth prediction.
When asked about his views as a board member on Infosys’s next CEO and the ongoing succession planning, Shibulal said that was being done by the nominations committee.
Experts such as Partha Iyengar, who heads research at Gartner Inc.’s India office, said Infosys’s pessimistic stance at the beginning of the year is a cause for concern and it’s time the board gets aggressive.
“If you’re in a position of strength and you’re making changes, then it’s alright. But when your position is weak, you should not be making drastic changes. They made those changes at a time when they came to the realization that the market doesn’t see them at a premium,” said Iyengar.
“I don’t think the board of Infosys will significantly shake things up now. They should take a long hard look at the company and get back some mid-course sanity,” Iyengar added.
Analysts at brokerage firms, some of which had upgraded Infosys after better-than-expected earnings announced for the December quarter, were shocked to see their own forecasts of a recovery go wrong.
“Infosys’s extremely poor result across top line and margins should take the stock back to its pre-December 2012 report levels. This volatility in Infosys’s financial performance is even worse than a tier II IT company and the Street will rightly punish it with a massive de-rating,” CLSA analysts Nimish Joshi and Arati Mishra wrote in their 12 April note.
While Infosys management blamed macroeconomic uncertainties for providing a weak 6-10% revenue growth forecast for year ending March 2014, experts are not convinced.
“There is a lot of clarity in their key markets, especially in the US. There’s clarity in decision-making on the political front, whether it’s the H1B visa issue or immigration. Infosys’s performance in this quarter isn’t justified by the broader economic conditions,” Iyengar of Gartner said.
The challenge for the Infosys board is to ensure that the company does not become an outlier in an industry where top firms including Tata Consultancy Services Ltd, HCL Technologies Ltd and Cognizant continue to gain market share in the same industry, serving similar customers.
“It’s not just the board; the transition at Infosys is seminal with all founders set to go. The board, especially independent directors who have operated under the shadow of the founders for long, will also get more active,” said the second person familiar with succession planning.
The question is whether Infosys has enough time to trust the strategy being executed by the current management.
“As far as the leadership is concerned, they need someone with a vision. Infosys specifically is at a stage where they need someone like that. This is not the right time for detail-oriented management,” Iyengar said. “So they need someone with a vision, someone who’s not afraid to take risks, and someone with charisma. Infy has been weak on all those counts.”