Is the future of Indian IT its past?
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Bangalore: In February, Infosys Ltd chairman N.R. Narayana Murthy made the headlines after he said at an investor conference in Mumbai that some of the high-profile exits the company has seen since his return last June were because the executives in question were not doing much, especially given how much they were being paid.
What didn’t make the headlines, but should have, was his comment that much of the growth of Infosys, and India’s $118 billion information technology (IT) services industry, would come from traditional plain vanilla services and not from some of the newer and much talked-about offerings.
“The reality is simply this—that large outsourcing projects, which includes application development and maintenance, business process outsourcing (BPO) and infrastructure management, will continue to be the main revenue earners for the industry,” Murthy said.
There was a time when Murthy and Infosys’ view would have been the industry’s. Murthy, now 67, used to be part folk-hero, part legend, and Infosys, the IT industry’s bellwether, till the company witnessed a slump in its fortunes over the past few years that resulted in the board beseeching Murthy to return from retirement.
The new poster boys of the industry are the still boyish-faced Francisco (Frank) D’Souza, the 45-year old chief executive officer of US-based Cognizant Technology Solutions Corp., and Tata Consultancy Services Ltd’s (TCS) N. Chandrasekaran, 50.
Cognizant started out as a captive unit of an American private sector firm, Dun and Bradstreet, but has, over the past five years completely disrupted the pecking order of Indian software services firms. D’Souza is betting that new businesses will generate billions of dollars of business for his company in the future.
Over the past few years, D’Souza has relinquished control and left the running of Cognizant’s core businesses (Horizon 1 and Horizon 2) to company veterans such as Gordon Coburn and Rajeev Mehta. While maintaining that the company will continue to focus on its traditional outsourcing business that generates the lion’s share of revenue for his company, he himself is devoting most of his energies to chasing business from newer, emerging technologies.
TCS, once considered the most old world of India’s new-age IT services firms, has tapped entrepreneurs and venture capitalists in Silicon Valley to help build disruptive technology solutions for customers.
In 2010, the company put entrepreneur Satya Ramaswamy in charge of creating a business unit within the company that would incubate new ideas focusing on technologies such as cloud computing and analytics.
In a recent interview with Mint, Chandrasekaran said the digital space alone had the potential to rake in $3-5 billion in revenue for TCS over the next few years.
Both TCS and Cognizant believe areas such as mobile, analytics, artificial intelligence and the Internet of Things represents a multi-billion dollar opportunity over the next 5-10 years, with top clients such as Citigroup Inc. and Johnson and Johnson (J&J) increasingly looking to spend more dollars on newer, innovative technologies to solve existing and future business problems.
Meanwhile, Murthy is devoting most of his time and energy on cutting costs and strengthening the core businesses to turn around Infosys’s fortunes.
And he doesn’t share D’Souza and Chandrasekaran’s belief that the new businesses point the way to the IT services business’ Holy Grail, so-called non-linear growth where revenue growth is no longer linked to employee addition.
The case against Infosys
Murthy believes customers will not hand out $50-100 million worth of business in any of the new areas anytime soon.
“The reality simply is that these are small, $1-3 million kind of projects,” he said at the investor conference. “The world has still not evolved to a stage where there are $50-100 million digital transformation projects—it’s not there.”
“Somewhere there is a perception that these new technologies cannot be offshored easily,” added Murthy. “Therefore, I think it will take a few years before these technologies reach a critical mass.”
The danger with this strategy, experts say, is that Infosys may lose market share in the battleground for the future to companies such as TCS and Cognizant.
A market worth over $200 billion is at stake—technology research firm Forrester Research estimates that the global cloud computing market alone will touch $241 billion in 2020.
The question is: can Murthy afford to turn away from the future and revive Infosys by betting it all on the past?
Or will TCS and Cognizant, with their formidable balance between core and new businesses, continue to dominate the battleground and extend their lead in market share over Infosys and Wipro Ltd?
Unlike most Indian companies (with the exception of TCS) that have deployed their best and brightest, including their top executives, in their bread-and-butter IT services businesses, Cognizant has gathered its brightest minds into what it calls the Emerging Business Accelerator.
This entity is at the core of Cognizant’s focus on its so-called Horizon 3 business—new geographic markets and new technologies such as social, mobile, analytics and cloud (SMAC).
Over the past two years, even as Cognizant was adding incremental revenue much quicker than other top-tier Indian rivals, D’Souza wanted to be an early mover in the area of new technologies and create an alternative revenue stream that would provide a much-needed cushion in the event of a slowdown in its traditional business.
“One of the (best) pieces of advice I got was to get some of the most seasoned leaders in the company to move to the Horizon 3 business. But they had to be paired with fresh talent that could bring new thinking for the true power of this strategy to work. And that’s what we have done,” D’Souza said in an interview with Mint last year.
For D’Souza, it became imperative to pursue this strategy whole-heartedly, given how technologies evolve rapidly and make others redundant in no time.
“In today’s era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility. Nothing else is sustainable. Everything else you create, somebody else will replicate.”
His efforts are slowly already starting to show results. In 2013, Cognizant’s revenue from areas such as cloud computing and analytics exceeded $500 million, more than that of any other top-tier Indian rival.
“It’s definitely a multi-billion dollar opportunity,” said Malcolm Frank, who heads strategy and marketing at Cognizant. “It’s akin to what happened before the Internet bubble—in the late 1980s, all these new technologies started hitting the market, such as PCs, Unix servers, etc., and IT departments saw the value in these, but the businesses didn’t. Around 1992, at the time the likes of SAP came up, that’s when the market really took off. I think we’ll see something similar here, when SMAC solutions start to crystallize into true business solutions and then clients understand how to buy those.”
“When you start something like Horizon 3, if you fear failure, you won’t succeed. With Frank, the approach is very different, he feels like he has nothing to lose,” says Lakshmi Narayanan, vice-chairman of Cognizant.
Even TCS is beginning to see the results of its focus on software products and solutions. While the company’s growth is still largely driven by traditional services, CEO Chandrasekaran says that TCS can’t afford to ignore the multi-billion dollar opportunity in the digital space.
“The rate at which these technologies are evolving, the rate at which new things are happening, is pretty rapid. There will be more technology in everything we talk about, whether it’s automobiles, retail, etc. Every industry will get transformed,” said Chandrasekaran.
“We will be ready for the future. That is about creating new platforms where there is traction, where there is an opportunity. And then, experimenting there, working with customers to prove them and scale them. Whenever the customers adopt, we will scale. So we want to be ready,” he said.
Over the past two years, TCS has hired more than a dozen entrepreneurs in Silicon Valley who have helped it build more than two dozen software platforms and products in areas such as mobile and analytics.
The case for Infosys
To be fair to Infosys, the company did articulate and implement a vision to diversify from plain vanilla outsourcing and into newer technologies with its controversial 3.0 strategy—one that it hoped would help generate at least one-third of its overall revenue from these newer areas by 2020.
The 3.0 strategy was first articulated when co-founder S. Gopalakrishnan was the chief executive and executed beginning August 2011, under the last of the founders at the helm, S.D. Shibulal, who is currently Infosys’ CEO. Three years after the strategy was first put in place, the company conceded that it had gone wrong with the timing of 3.0. The products and platforms business failed to live up to expectations and is now in the process of being hived off.
Infosys also conceded that it had taken its eye off the core outsourcing business and was forced to cut prices for select clients for the first time in its history as it scrambled to win back market share.
“When you’re in a stable environment, you can much easily take the low-hanging fruit. When you’re in a volatile environment, you have no low-hanging fruit,” Shibulal said in an interview in early 2013.
Infosys’s problem was that it was too early, said an analyst.
Unlike TCS and Cognizant, which managed their investments in both the core and new businesses in a balanced manner immediately after the global recession, Infosys now faces the disadvantage of fixing its core business first before whole-heartedly pushing into newer areas.
Infosys, which has traditionally always been obsessed about protecting its high margins, also runs the risk of further eroding those margins by pursuing the traditional services contracts only—an area where competition is stiff with several established entities and where revenue addition is linked to manpower addition.
Evolving customer needs
The needs of top outsourcing customers such as J&J and Citigroup have also changed from the time they looked to India for access to cheap engineering talent to maintain and develop back-office software applications.
Customers these days are increasingly opting for pay-as-you-go pricing models and are asking for higher levels of automation in commoditized services to drive efficiencies.
“We can see the shift to innovation is real. Companies want their IT services firms to help them not only be a trusted advisor, but also co-create and co-innovate new solutions,” said Ray Wang, founder of enterprise research firm Constellation Research. “The cloud and analytics space will grow, but those revenues will take at least three to five years to make a significant impact in the business. However, that is the future and any IT services firm not making those investments will fail.”
Experts say Indian IT firms need to strengthen their presence in the digital arena quickly if they are to avoid losing market share in the near future.
“If you look at the original value proposition, it had a lot to do with labour arbitrage,” said Stuart McGuigan, chief information officer of J&J, in a recent interview. “Here was a pool of incredibly talented, well-educated IT professionals and the cost was just so compelling. Also, the kind of work that was outsourced were your basic transactions, the more commodity type work.”
“As we’ve both got more experienced, it’s moved up the food chain to much more sophisticated services, much more strategic services. So where I see the best players today are the ones who are experimenting with all kinds of different ways of providing value to companies,” McGuigan added.
Even though deal sizes in digital and cloud computing still remain relatively small, the pace at which clients are increasingly asking for newer services has increased manifold over the past three to four years, experts say.
And clients such as J&J are looking to Indian technology vendors to help them in this area of digital transformation, with many of them developing newer apps that compete with pure-play mobile app firms.
“For preparing patients, we have a digital tool today that has gotten great acceptance in assisting patients of being compliant and in that area, we are competing with other technology companies that develop apps and other capabilities, and the expectations of consumers are rising with the ability of non-healthcare providers to provide compelling tools. In some sense, we are competing with Angry Birds. That’s a very important part,” said McGuigan.
Infosys’s future: back to the past
Still, most experts interviewed for this story believe Murthy is doing the right thing by fixing the past first. “I think Murthy wants to give his team some breathing room to do a good job before setting expectations,” says Wang of Constellation Research.
“Murthy came in to clean up the core outsourcing business and figure out how to grow new areas. There’s still a lot of money to be made in optimizing infrastructure, especially given that IT departments have 70-80% of their budgets tied up in legacy. So, in short, this area will still get a lot of attention and provide a core base.”
Traditional outsourcing deals still account for 80% of revenue of India’s top IT firms, according to industry lobby group Nasscom.
“I think the company has recognized that they cannot lose sight of their core market because that’s where the big dollars are today,” said Notardonato of Gartner.
Since Murthy’s return to Infosys last June, he has put together a blueprint for Infosys’s revival and identified three core areas that will help the company—aggressively cut costs, protect the top 25-30 customer accounts, and win large outsourcing deals.
In the process of re-focusing on the core business, Murthy has also undertaken a massive organizational overhaul that has resulted in the exits of at least eight top-level executives.
Murthy later said most of the executives who left the company were being paid a lot, but not doing much work.
The worry for Murthy will be whether the person who takes up the role of the next CEO will be up to the task.
“For Murthy, the bigger worry right now is around the question of leadership. Despite the recent exits, the top deck of Infosys is still filled with people who were part of the problem that led to Infosys’s underperformance. Murthy’s biggest challenge is to figure out how to turn the people who were part of the problem into the people who will be part of the solution and define the agenda for the future,” said a former top executive at Infosys, who requested anonymity.
And the bigger worry is that Infosys will get its timing wrong again, leaving it until too late.
“Of course, traditional outsourcing contracts will continue to generate the lion’s share of revenue for IT firms in the near future. But if they take their eyes off emerging and newer technologies, all of their current business models will get disrupted by the new wave faster than they can imagine,” said the former top executive at Infosys quoted above.
“The changes that are happening in our industry, if we don’t realize it now, we will be impacted. The reality is that 95% of your business is being driven by what’s happening today, but the other 5% has the potential to dwarf the other 95% over a period of time,” said the CEO of one of India’s top-10 IT firms, who asked not to be identified.