Home / Companies / News /  Murthy returns to take charge as Infosys’s woes mount

Bangalore: When Nagavara Ramarao Narayana Murthy retired from Infosys Ltd in August 2011 at the age of 60, it was difficult for insiders and those tracking the firm from outside to believe that the company’s iconic founder would actually manage to step aside completely. Murthy always described Infosys as his third child and chose to take a non-executive title of chairman emeritus, retaining the umbilical cord.

In the seven years since Murthy stepped down from all executive roles at Infosys, the so-called “heritage building", a two-decade-old red-brick block that served as the original corporate headquarters of the firm in 1994, continued to host visitors from within Infosys and outside. Murthy’s office at this building received everybody from mid level to senior Infosys executives who came for advice and others from different walks of life.

In many ways, his office at the heritage building never logged out of Infosys, and with the Saturday announcement of Murthy’s comeback, it won’t for another five years at least.

“Standing here today is very unusual for me. When I walked out of Infosys on August 20, 2011, I did not in my wildest dreams imagine that I’d be back here in an executive capacity," he said on Saturday at a hurriedly called press conference called by Infosys at noon, following the morning press release that announced the appointment.

Also present were chairman K.V. Kamath and two other co-founders—S. Gopalakrishnan and current CEO S.D. Shibulal. All four faced uncomfortable questions from journalists who asked about the company’s leadership strategy and also queried them on bringing Murthy back from retirement.

When asked about holding the CEO responsible for the current state of the company, Kamath said: “There are a whole lot of theoretical approaches...but we needed to take a practical approach."

Murthy, on his part, fielded most questions calmly and faced the television cameras with equanimity, pausing every now and then between responses as is customary with him.

Murthy hinted that he would take an active role in the running of the company and not hesitate to take tough decisions if necessary.

“As I collect more data, certainly I will participate in a discussion on what has worked, what has not worked, what we need to do—certainly I will be an active participant.

Murthy also drew parallels between himself and Indian cricketing legend Sachin Tendulkar’s career longevity.

“This is in some sense a second innings for me because it’s been seven years since I completed my executive responsibilities... Most cricketers around the world have retired around 35. At 35, he (Sachin) continued playing and he is about 40 today and even today he is doing a great job. Therefore, today I have to learn how he managed to be so successful in the innings between 35 and 40."

Since Infosys was founded in 1981, Murthy managed each of the leadership transitions that saw four of its founders run the firms one after the other, even amid questions about whether the last two (Gopalakrishnan and incumbent Shibulal) deserved the chance.

When he announced nearly two years ago that Kamath and Gopalakrishnan would become non-executive chairman and executive co-chairman, respectively, he surely didn’t imagine that he would need to return after a nightmarish run during which the company missed revenue guidance and profit warnings. That cost Infosys its status as the industry’s bellwether, something that Murthy always took pride in.

Even as Shibulal tried his best to explain his new Infosys 3.0 strategy to investors and customers, Murthy kept hoping and waiting for a turnaround.

“You can take Murthy out of Infosys but not Infosys out of Murthy," is what one of the co-founders of the company had said when he had stepped down.

Earlier this year, at an internal strategy meet, Infosys invited Murthy to give a talk. At least two people who attended the session said it was more than just a pep talk.

“It was an intense discussion where he pointed out several tactics and questioned Infosys’s lagging performance," said one of the persons.

Founded in 1981 by Murthy and six others, including Nandan Nilekani, Gopalakrishnan and Shibulal, Infosys held its own as India’s most high-profile IT company—although rival Tata Consultancy Services Ltd was always bigger—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 a so-called 3.0 strategy doggedly in an environment when outsourcing customers were only looking to save costs. The 3.0 strategy was aimed at increasing Infosys’s revenue from newer technologies and business models such as cloud computing and software platforms and products.

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.

In an interview with Mint on 7 May, Murthy had denied any plans to come back to Infosys, but added that it’s “difficult to predict what will happen tomorrow". Murthy served as chief executive officer from 1981 to 2002 and as chairman from 2002 to 2011.

“At this stage, looking at the data that I have, I wouldn’t say that. So, who knows what happens in the future, I am not gone, cannot say what I will do tomorrow, I may not be there tomorrow morning. So, it is not possible for me to predict what will happen tomorrow," Murthy had said.

To be sure, Murthy is not the first founder to return and try restoring the glory of a company. But to make the comeback, Murthy had to break two of the rules he established—that the founders should retire at 60 and that their children wouldn’t work at Infosys.

Not only has the comeback disrupted the succession plan set in place by him and his co-founders, it will also involve the recruitment of Murthy’s son, Rohan, the first time that a second-generation family member of one of the company’s founders has gotten involved at such a level. Murty will be a member of the chairman’s office that his father is setting up.

While Murthy himself is 66, son Rohan will be a member of the chairman’s office.

“Post-retirement, I have been working with a small team of people...and one of them happens to be my son Rohan. He has no leadership role. The only role that Rohan has is to make me more effective. That’s it," Murthy said on Saturday.

Investors have welcomed Murthy’s return, recollecting the days when Infosys stood for predictability.

“Infosys has been facing a huge credibility deficit among its stakeholders of late but Murthy commands respect of all: employees, customers and shareholders. This step should lift the morale of junior employees while keeping senior managers on their toes. Improvement in communication with investors should bridge the trust deficit developed over past 12-18 months," said Nimish Joshi of CLSA India in a note after the announcement.

In many ways, Infosys lost momentum because of its obsession with ensuring high profit margins, a strategy articulated by Murthy over the years. That strategy allowed newer rivals such as Cognizant to displace Infosys from its No. 2 position in the Indian IT, and even saw bigger rival TCS widen its revenue lead. TCS also managed to equal Infosys on profit margins.

The competitive landscape is vastly different from what it was during the heydays of Infosys. Customers are no longer wooed by swank offices, an impeccable campus or great infrastructure, all showcased to world leaders by Murthy until a few years ago. Nowadays, customers are focused more on how much they can save on costs.

Some experts tracking the company are equating Murthy’s comeback with the revival bids by Apple Inc. founder Steve Jobs (spectacularly successful) and Howard Schultz at Starbucks.

“While the stock will instantly react positively, expecting Murthy to deliver immediate success is unreasonable. Investors will now be willing to give Infosys a longer rope and the stock could move beyond being just a trade to a potential longer-term portfolio holding," Joshi of CLSA said in his note.

For Murthy though, more insightful lessons could come from Yahoo Inc.’s Jerry Yang and Dell Inc.’s Michael Dell who failed to hire suitable successors and struggled with their comebacks to save these firms.

“If Murthy really wants to save Infosys, he will get a global leader who can steer Infosys through this turnaround. If he again makes it a personal battle and an emotional effort to save ‘his child’, then Infosys will suffer," said the chief executive of one of the top four India-based software firms who competes with Infosys for business. He didn’t want to be identified.

After stepping down from his executive responsibilities in 2006, Murthy had turned his energies to his venture capital fund Catamaran Investment Pvt. Ltd. The fund invested in several companies, including small loan provider SKS Microfinance, education services provider Manipal University Learning Pvt. Ltd and some start-ups. In 2011, Catamaran, along with Reliance Venture Asset Management, invested in Mumbai-based healthcare services provider Wellspring Healthcare.

Catamaran was created after Murthy and his wife sold part of their stake in Infosys to create a corpus worth more than $100 million.

On Saturday, Murthy said that some of his colleagues from Catamaran would be part of the team that will help him in his role as executive chairman, along with son Rohan.

“I explained to Mr Kamath how, given Rohan’s credentials, he would add value to me and to Infosys. Consequently, I have requested Rohan to take a sabbatical leave from Harvard and join my office to assist me," Murthy said in a letter to all Infosys employees on Saturday.

Murthy also defended what seemed to be like breaches of the 60-year and family member rules.

“If they’ve retired and been invited to come back, certainly they can decide what to do. If the board accepts, they will come in, otherwise they won’t come in," Murthy told reporters at the Bangalore press conference. “Up to 65, I spent all my time at Infosys. After that, I said I will do what brings me joy with people that I’m most comfortable with... Therefore, at Catamaran, I created a small team, one of whom was my son. Because the company requested me—I didn’t go the company and say I want to come back—I said, this has been my experience over the last two-three years, I’ve enjoyed doing this and therefore, if I come in...the ideal thing for me to do is to bring a part of the team into Infosys."

Apart from Catamaran, Murthy was on the board of several companies including HSBC and Unilever after he gave up his executive responsibilities in 2006. He has also just completed terms at Cornell and Stanford university.

“Some of them I’m not associated with now, so I need to look at what outside responsibilities I can continue with and what I cannot," Murthy said.

Murthy added that Cataraman would continue to function but some of its projects would get slowed down and not be taken forward.

“That’s a sacrifice we’ll have to make. At the end of the day, Infosys is very important to me, Rohan and my family."

Experts tracking the sector, however, are not completely convinced about the impact Murthy’s return will have on the company and whether he alone can reverse its.

“This time Murthy has a much more difficult job than he had last time," said Peter Bendor-Samuel, chief executive at outsourcing advisory firm Everest Group. “The market is slowing, their growth is slowing, Infosys still has structural problems. Their 3.0 plan has not proceeded as was hoped...so it’s (a) much more difficult market position he faces."

Bendor-Samuel also raised concerns about the company’s strategy of only appointing founders as CEOs without questioning whether they were capable of leading the company.

“It was under his regime that Infosys put in place the founder-CEO succession plan...and now he’s got to clean it up."

Bendor-Samuel added, however, that the move would help boost the company’s morale. “He understands the company, he still has a lot of inside support and will help morale, which is important."

“It (the move) looks like a half a step forward," said Peter Schumacher, founder of Germany-based Value Leadership Group that advises companies on their Europe strategy. “In light of the immediate challenges the company is facing, it was perhaps their only option to do something quickly. The question will be how customers in the US and Europe interpret this come Monday. Those hoping for a bolder move may be disappointed."

“Today’s announcement also raises governance questions by initiating his son into the organization as his executive assistant. This will surely give rise to a lot of speculation about the actual reasons behind the move."

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