New Delhi: With revenues of some Rs13,150 crore or nearly $3.1 billion, Infosys Technologies Ltd is India’s second largest software services vendor. Last month, it announced it was reorganizing its business—the second time in four years—by industries and expanding its reach to ensure better proximity with customers in the US, Europe, and its home market India.
Senapathy ‘Kris’ Gopalakrishnan, Infosys’ co-founder and chief executive officer, says the restructuring will allow Infosys to offer more specialized offerings to its clients as also allow more young ‘Infoscions’, as Infosys employees like to call themselves, participate in the management.
As the industry readies for withdrawal of a tax exemption scheme designed to help boost software exports, Gopalakrishnan told Mint in a recent interview that Infosys will have a peak tax impact of 21-22% of gross profits in fiscal 2010, up from the current 12-14%, before it falls to about 18% in subsequent years. Edited excerpts:
The last time you announced a reorganization was in 2003. How different is the rejig this time?
What we did through this reorganization was to expand the industry focus to more geographies and regions. In 2003, when we last restructured, we brought in industry focus to North America and created seven to eight industry units. Europe (as a market) was very small at that time, at around 13-14% of Infosys revenues from mostly Belgium, the Netherlands and some smaller countries (besides the UK). We wanted to keep the focus on Europe and wanted to grow aggressively there so that we can balance out our geographical distribution of revenues. Europe has now become 28% of revenues and B.G. Srinivas (senior vice-president, Europe, Middle East and Africa) has ‘verticalized’ that region in a way that the teams will be organized around clients. (As an example, now that Srinivas has been put in charge of manufacturing globally) he will have someone running manufacturing in North America, someone running Europe, and an auto customer, say, in Detroit will have an engagement manager who will report to North America which, in turn, will report to him.
Infosys’ co-founder and chief executive officer S. Gopalakrishnan
Is this structure a natural progression from the reorganization in 2003?
It is. We created these industry units and saw their benefits. Some of the industry units like communications were global (even earlier). The second thing we did was we saw some natural synergies which we wanted to take advantage of. A communications company today is moving into providing content and applications such as media, video and data. It's not just providing infrastructure. So we brought media, communication and entertainment together as one group. Similarly, all manufacturing is now under Srinivas including hi-tech, aerospace and autos. In retail, we have brought in logistics also, because the supply chain is very important.
Through this reorganization, we will consolidate on the number of industry verticals we focus on and take advantage of the synergies we see in the market.
Our value-adds will come and it will be beneficial for our clients if we support them and the ecosystem that exists around them and bring our synergies in the solutions we take to them. It’s very clear in the physical world…people work across supply chains and try to optimize them. But optimization is not just in the organization context but also with your partners. There are a lot of connections across the supply chain in the physical world, but it is all driven through data today. As IT service providers work across the supply chain, there is value-add we can bring to our clients.
In the horizontal rejig, we have products and services: combined consulting, solutions and domain competency to create a consultancy solutions group; (and services such as) system integration, infrastructure management, BPO, Finacle as a product group, and lastly combined independent validation and R&D services like product engineering.
Potentially, you could see more of industry-based reorganization?
Potentially, yes. We have to keep an open mind, if the environment has changed in a different direction.
Does this reorganization reflect in any way the scope for the next set of young leaders at Infosys?
There are two things that we talked about in this reorganization. First is a creation of an executive council, which is a clear signal that through that process, we will identify the next generation of leaders who could take over from the founders at some point in time and run this company. The executive council will have maybe four-six unit heads. We will announce the names soon. When we created the executive council, we had a management council at the organization level, which had 10 young leaders, because we have always believed that we must get them involved in the operations of the company management and get their input. The primary criterion (for selection) of these 10 people is that they should be less than 30 (years old). Now, the management council has been moved to the units as part of the reorganization because at the corporate level, we said we will have a very small executive council which will manage the corporate operations. These will move to the different units and they will have a management council and each of these can now have young leaders representing them. So the number of young leaders who can participate in management multiplies.
Tell us this: was this reorganization vetted by anyone? Did you take the help of any consultancy firm?
No. What is the need to do so?
Indian software firms are mostly associated with technology consulting and not as much for business or management consulting where global firms such as Accenture Ltd are strong. How is your consulting business doing and what is your strategy to grow this?
We do management, process and technology consulting. Not the strategy piece like what product should you (as a client) get into, but definitely once that decision is taken, how do you execute that, set up your offices, procurement, sourcing and all that stuff. We definitely see ourselves going into that (business consulting) in the future because that leads to IT and operations work. In fact, we are doing that already. We cannot name customers but in some cases, we are even becoming their primary supplier of consulting services and replacing some of the existing global system integrators such as Accenture and Deloitte.
Analysts talk about a more or less flat growth at 5-6% in IT spending in the US. What is your view on this considering that the US contributes two-thirds to your business?
Around 62% of our revenues come from the US. It is one of the most robust and dynamic economies, that takes action very fast and bring things under normalcy quickly. What we have seen in the past is that even when there is a slowdown, the offshore part increases because when you want to cut cost, you increase offshore. At worst, maybe a temporary freeze on new projects starts but then once the budgets are set, that restarts. So, in this case, because this year’s budgets are already released and projects have started, we are not seeing any slowdown at this point. That’s why we said we will wait for Q1 (of calendar 2008) to see what next year (fiscal 2009) looks like. There is no concern at this moment.
If the software technology parks scheme offering incentives to tech firms does not get extended beyond March 2009, what will be the impact on Infosys?
We see a peak income tax in (fiscal) 2010 as we transition from the STPI to the special economic zones (SEZs) scheme. When the STPI tax holiday closes down, you will see an abrupt increase in tax. Right now we are paying about 14-15% income tax and it may go up to 21-22% by March 2010. But it also depends on how our new business grows in SEZs. If we are able to do more new businesses in SEZs, we may able to bring it down. But after a peak of about 21-22%, tax impact will come down to around 18% because all the new growth is happening in the SEZs. Then it will start going up again, because SEZs have a five-year window for 100% tax exemption. Approximately, already about 10% of our billing is happening out of SEZs and that’s growing. We will not be able to transition the entire business because (Infosys centres in the) STPs will have to be sustained.
Are you hopeful that the government will extend the tax holiday beyond 2009?
We are pushing as an industry to continue with it. Individually, we may have different views. (Infosys chairman Narayana Murthy has said that he believes large software service companies should start paying tax like any other corporate.)
Where is the India story headed for Infosys and how does the domestic market look for you beyond your banking product Finacle?
We are definitely increasing our focus on India and hope to work with better companies and government organizations and have created a new business unit. We are involved with some domestic clients in a more consultative or advisory role and hope to get engaged with some of them on projects. As the Indian and Chinese economy grows, we believe that the profile of our business also has to change and that’s part of reducing our dependence on the US. Right now India contributes 3% of our total revenues and that’s purely from Finacle. We are seeing government buying, and private companies here are investing significantly in IT. India is under-invested in technology and IT. For a country of our size, our domestic software services spending is just about $5 billion to $6 billion.
What is Infosys doing today that will be talked about or copied by the rest of the industry in the future?
We were one of the first to talk about modular global sourcing as we believe that sourcing has to be modular and you have to have both horizontal slices such as application development, BPO, infrastructure management and maintenance and vertical slices such as business functions – finance and administration. We are also creating many solutions that will give multiple options to clients, as it reduces their risk and gives them the opportunity to go for the best of breed solutions. Also, how we are globalizing our employee base and encouraging foreign nationals to come and work in India.
In the future, you will see a lot of innovations coming out of Infosys. Our intellectual property is increasing and so is the number of patents we have. There have been a lot of innovations in the last two years in the retail space. The second is telecom followed by banking and financial services. Already about 10-11% of our revenues are driven through the solutions we have come up with internally.
We have 300 people in the software engineering technology labs. In each of the business units we have a small group of 40-50 people working on converting these applications into business solutions and then we have the consulting team which helps us sell this.
We have moved from being reactive to becoming more pro-active.