Infosys gets more flexible on pricing strategy4 min read . Updated: 02 Apr 2013, 11:00 PM IST
Software services firm cutting prices, offering add-on services for free, forming partnerships to regain momentum
Bangalore: In a marked departure from its usual business strategy, Infosys Ltd is cutting prices for select clients, offering add-on services for free to some customers, and partnering with niche firms to drive business volumes, even if it means squeezing profit margins.
Once the bellwether of India’s information technology (IT) industry, Infosys has been lagging close rivals, including Tata Consultancy Services Ltd (TCS), Cognizant Technology Solutions Ltd and HCL Technologies Ltd, in revenue growth.
Two weeks ago, Infosys entered a partnership with IPsoft Inc., which uses software robots to replace engineers at top outsourcing customers including Comcast Corp., the largest cable operator in the US, according to three people aware of the development, who declined to be named because the deal that will see Infosys share revenue with the US firm is yet to be made public.
“It is quite uncharacteristic of a firm traditionally known for staying away from such alliances and deals that threatened to affect its high profit margin," said one of the people.
Both IPsoft and Infosys declined to comment.
Since fiscal year 2010-11, Infosys’s revenue growth has been slower that many of its close rivals. S.D. Shibulal, chief executive of Infosys and the last of the founders to lead the firm, hopes to regain some of the lost momentum by chasing volume growth. Last year, Infosys missed the lower end of its revenue growth forecast at least twice and gave up trying to predict quarterly growth.
Infosys’s profit margins are already down at around 25.7% from nearly 30% two years ago, which investors and analysts tracking the company do not expect the company to regain any time soon. In fact, some expect it to fall further.
The company’s slide in margin has just begun, according to James E. Friedman of Susquehanna Financial Group Llp, which provides equity research and brokerage services.
“We have numerous, and increasing, anecdotes on pricing reductions on the run side (commoditized software services projects) of the business at Infy," Friedman said in a note after meeting company executives in March. “Our sense is that Infosys has loosened the pricing strategy."
To be sure, despite the recent slide in profit margins, Infosys maintains its premium positioning. The average profit margin for top Indian tech firms was 23% in the third quarter ended December.
Others analysts, such as Nimish Joshi of brokerage CLSA Asia-Pacific Markets, said Infosys has sharpened competition by cutting rates.
“Competitors, deal advisers as well as client managers mentioned that they are seeing never-before-seen proactive behaviour and flexibility from Infosys, especially over the last three-four months," Joshi said in a research note in March.
In the two quarters ended December, Infosys has stepped up its spending on sales and marketing, and hired hundreds of sales professionals to chase growth from new customers such as the BMW Group, the world’s largest premium car maker with whom it signed a five-year outsourcing contract worth around $100 million earlier this month.
“This aggressive behaviour has resulted in Infosys snatching new deals from competitors while protecting its incumbency in clients wherever deal renewals have come up,’ Joshi said. “The recent bout
of aggression implies Infosys will likely reverse the growth metrics in FY14 (fiscal 2014) and could grow faster than peers."
In the past 12 months, Infosys has also taken over local staff from customers such as Harley-Davidson Inc. and Marsh and McLennan Cos. Inc. as part of large, multi-year outsourcing contracts, promising to create jobs in the US. This strategy will result in more high-cost staff and will have an impact on profitability.
“Infosys is definitely waking from a two-year slumber, promoting some younger, more dynamic executives into the management ranks, such as Gautam Thakkar in the BPO (business process outsourcing) division. The firm realized it was quickly beginning to lose ground to the likes of Cognizant and TCS, and couldn’t rely solely on its strong brand to keep pace at the forefront of the industry," said Phil Fersht, founder of US-based outsourcing advisory firm HfS Research.
An alliance with IPsoft will help Infosys gain more business from customers such as Bank of America Corp. and others who are beginning to ask for delinking project fees from the number of engineers deployed in an outsourcing project. While it will mean sharing revenue with a niche rival, the alliance will help Infosys hold large customer accounts.
“These tactics were absolutely absent until a few quarters back, but I will hold my judgement for another few quarters," said Sudin Apte, chief executive and research director of Offshore Insights, an outsourcing adviser. Infosys has hired 500-700 sales professionals in the past few months to push harder for new deals, Apte said.
Executives at rival firms said Infosys’s new-found aggression is not a cause for concern as long as it’s temporary.
“They (Infosys) are under pressure from investors and analysts to do more and regain growth. We understand this aggression will not last long and they will go back to the high profit chase after some stability in revenue growth kicks in. It’s difficult to imagine Infosys behaving like an HCL for too long," said the chief executive at a mid-size software firm that competes with Infosys for business from common customers. He spoke on condition that neither he nor his firm be named.
Infosys is scheduled to announce its March quarter earnings on 12 April.