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Has Infosys’s dream run ended?

Has Infosys’s dream run ended?
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First Published: Tue, May 01 2012. 09 30 PM IST

Tough going: Shibulal says he does not agree with the perception that Infosys is facing a leadership crisis. The reality is that Infosys continues to win large-scale transformation deals, he said. Pho
Tough going: Shibulal says he does not agree with the perception that Infosys is facing a leadership crisis. The reality is that Infosys continues to win large-scale transformation deals, he said. Pho
Updated: Tue, May 01 2012. 09 30 PM IST
Mumbai/Bangalore: When the Infosys Ltd board announced in April last year that a new leadership team would take the company’s helm the following August, co-founder and then chairman N.R. Narayana Murthy described the incoming management as a dream team in an interview to a television network.
One year later, after Infosys stunned the markets by missing its annual revenue growth forecast for the first time and predicted fiscal 2013 revenue that fell short of investor expectations by a wide margin, the dream has turned sour for India’s second largest information technology (IT) company.
Tough going: Shibulal says he does not agree with the perception that Infosys is facing a leadership crisis. The reality is that Infosys continues to win large-scale transformation deals, he said. Photo by Aniruddha Chowdhury/Mint.
On 13 April, Infosys management led by chief executive officer S.D. Shibulal forecast revenue growth of 8-10% in dollar terms for the year to 31 March 2013—lower than the 11-14% growth estimated for the IT industry as a whole by the Nasscom lobby group. Earnings-wise, rivals such as Tata Consultancy Services Ltd (TCS), Cognizant Technology Solutions Corp. and HCL Technologies Ltd have outdone Infosys, which has missed its own revenue forecasts in three of the last five quarters and lost its status as the industry bellwether.
Its shares reflect the downturn in the fortunes of the Bangalore-based company. In the year ended 31 March, Infosys shares declined 11.49% on BSE Ltd compared with a 10.5% drop in the benchmark Sensex and a 7.12% fall in the IT index. Investors in Infosys lost Rs 21,323.6 crore in the year, more than double the Rs 9,454.82 crore that investors in Wipro Ltd lost.
Analysts cite multiple reasons, besides the economic troubles in the US and Europe, for the trough the company is in.
They blame the change in management, its failure to motivate employees at a time when staff morale is already hurting because of delayed and smaller pay raises, chasing high-margin business in the face of slowing economic growth, and Infosys’s own conservatism—mirrored by its reluctance to use its cash pile to make the kind of acquisitions that would raise it to a truly global company.
Sudin Apte, principal analyst and chief executive officer of IT research firm Offshore Insight, recently conducted a survey of 80-odd clients of Infosys. Clients had a range of issues such as projects heads changing every five-six months and management being busy with internal organizational changes, the survey found.
“The clients we surveyed did not have any quality issues,” Apte said. “Their complaint was that Infosys had fewer people, at least 20-25% lower, than other vendors for collective mining and account management. The problems started with the leadership change and reorganization. Today, Infosys is neither a leader nor is raising the bar.”
In August, Murthy stepped down to make way for banking veteran K.V. Kamath to become non-executive chairman as part of the company’s reorganization.
Kris Gopalakrishnan, the chief executive officer, took over as executive co-chairman, while Shibulal, chief operating officer and the last founding member of the company, became the CEO and managing director. That team, however, did not have T.V. Mohandas Pai, who was a board member and director of the human resources department till early June 2011 besides being the chief financial officer from 1984 to 2006. Pai resigned in April 2011. Nandan Nilekani—another charismatic co-founder—moved out in July 2009 to head up the government’s Unique Identification (UID) project.
In July 2011, Infosys reorganized its industry sector units with a view to “building tomorrow’s enterprise.” It changed its name to Infosys from Infosys Technologies to “more accurately reflect the company’s evolution over the last 30 years from technology services to business-led consulting and solutions”.
Conflict in transition
It also created four industry sector units with financial services and insurance under Ashok Vemuri; energy, utilities, communications and services under Prasad Thrikutam; manufacturing under B.G. Srinivas; and retail, consumer packaged goods, logistics and life sciences overseen by Pravin Rao.
February saw another recast. Vemuri’s portfolio was given to Srinivas, who took over as the new leader of Infosys’s financial services and insurance business. Vemuri took charge of Srinivas’ portfolio—manufacturing and engineering.
Companies such as Cognizant have meanwhile been narrowing the gap with Infosys.
“Infosys is a great firm. What we are talking of is their falling off somewhat, but that doesn’t mean they are going out of business,” said Peter Bendor-Samuel, founder and CEO of Everest Group, an IT research and advisory firm. “They have great customers and the fact that they are strong has not changed.”
“There is a lot of internal reorganization, transition in terms of the leadership team, etc,” he said. “Moreover, there are conflicts between the consulting and delivery organization in Infosys... we hear of different business models. The strategy they are trying to execute now is attacking in the space in which Accenture is, and it is the most difficult territory to operate in. So, the company is struggling with the implications of its own strategy, which is seeking to do more transformational work.”
His views were echoed by an analyst with an international IT research firm who did not want to be identified because he had dealings with the company.
“A pure services delivery model will no longer work,” the analyst said. “Infosys will have to take higher risks with clients while simultaneously getting into low-margin business.” Rivals such as TCS, Wipro, Cognizant and HCL Technologies have worked on outcome-based models by investing in their clients’ businesses and by allowing their pricing to be directly proportional to the revenue increase or decline experienced by customers.
“The problem is that Infosys will have to let go of a strategy that has worked well for it in the past years,” the analyst said. “It should also look at a significant acquisition to gain scale and market share.”
Infosys has been criticized for sitting on idle cash. It had cash and bank balances of Rs 20,591 crore as of 31 March. The last acquisition it made was in June 2011 when it spent an undisclosed sum to buy Gen-i, the software solutions division of Telecom Corp. of New Zealand.
“Yes, we will make an acquisition in the products and platforms space. It has to be a good fit, and they should want to be acquired,” Shibulal told Mint on 13 April, the day it announced earnings.
Infosys products include Finacle, its banking solution, and Flypp, an application marketplace that helps partners engage consumers across digital channels. Its suite of business platforms, Infosys Edge, is built around specific themes for enterprises to focus on delivering guaranteed business outcomes. The suite includes Infosys BrandEdge, which is aimed at simplifying digital marketing using a cloud-based platform and a multi-channel commerce solution known as the Infosys Credit Servicing Platform. The company currently gets about 6% of its revenue from this business space.
Infosys has been targeting a third of its revenues from the products, platforms and solutions space in an unspecified time frame. An executive who has held senior positions in Infosys in the past said the company with 150,000-odd employees is clearly facing a crisis of leadership.
“Infosys also has a high exposure to discretionary work in the IT outsourcing space which makes it vulnerable,” said the executive, who didn’t want to be named. “It should clearly get more aggressive and make a big acquisition and should have cut the wages of senior management personnel instead of telling employees they won’t get any hikes this fiscal. Infosys also has a huge number of managers who are non-billable and hence non-performers. These issues need to be resolved soon. The board should step in if needed.”
Shibulal does not agree with the perception that Infosys is facing a leadership crisis, and that the board needs to step in to avoid further damage to the company.
“It is a perception issue,” he said. “The reality is that we continue to win large-scale transformation deals.”
As examples, he cited the Norwegian utility Hafslund selecting Infosys to transform its customer service and billing processes and Swiss chemicals company Syngenta AG, which has awarded it a multi-year contract. Bharti Airtel Ltd, India’s biggest phone company, is using Infosys’s WalletEdge to power Airtel Money, a mobile wallet that enables phone users to make cashless transactions.
Despite the perceived disaffection among employees, a recent survey by Firstnaukri.com found Infosys and International Business Machines Corp. to be the most preferred employer for graduates, said Shibulal. To pacify employees who will not be given a salary hike this financial year, the company “will revisit our decision on salary hike if things improve during the course of the year, just as we did during earlier years”.
Rationalizing the high-margin, non-commoditized IT services work that Infosys does, Vemuri said on the day of the company’s earnings announcement that it “is the only way we are going to build a sustainable organization. Traditional, commoditized, offshoring business may give you spectacular results in the short term, but it is a race to the bottom. Like now, down this path, we have got headwinds. But we will not change our strategy now.”
Surabhi Agarwal in New Delhi contributed to this story.
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First Published: Tue, May 01 2012. 09 30 PM IST
More Topics: S D | Shibulal | Infosys | TCS | HCL Tech |