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Business News/ Opinion / The Infosys turnaround: hype or reality?

The Infosys turnaround: hype or reality?

Though Vishal Sikka put up a brave front, it is doubtful if the fruits of all his initiatives with respect to this crucial aspect will be evident in the current financial year

Infosys needs a leadership style honed in the basics to succeed through this difficult period where navigating the rapid rate of change is the main challenge. Photo: MintPremium
Infosys needs a leadership style honed in the basics to succeed through this difficult period where navigating the rapid rate of change is the main challenge. Photo: Mint

The highly disappointing first-quarter earnings of Infosys Ltd have raised questions about claims of a turnaround under way at the company. I continue to be amused, though, at the alacrity with which sell-side analysts and excitable TV anchors/commentators rush to conclusions and create demigods out of mere mortals when the complexity of a turnaround in an increasingly complex international environment is still to be fully played out. This complex question needs to be analysed under three heads.

Firstly, an understanding of what constitutes a successful turnaround. The three phases are: fixing the structural issues (revenue, costs and organization), turning around the morale of employees and investors, and finally successfully implementing the new business model through acquisition of new revenue streams. Infosys chief executive Vishal Sikka can be credited with achieving the first two. It must be remembered, though, that when one inherits a humongous cash reserve of a few billion dollars, it is relatively easy to throw money at the front- and middle-line employees, make some acquisitions and talk up the morale through buzzwords like “innovation, Aikido, design thinking", etc., with some feel-good training programmes thrown in for good measure. Also, though quick-fixes to spur revenue growth so far have been commendable, they have been achieved almost entirely from mining existing customers—which usually is the low-hanging fruit after a management failure in any organization of the proportions we witnessed during S.D. Shibulal’s tenure at the helm.

However, the strains of pulling up revenue in the last two quarters is now apparent: the true test that the turnaround is sustainable will be based on revenue growth from new services/customers based on definitive business model changes. This is yet to happen and, though Sikka put up a brave front, it is doubtful if the fruits of all his initiatives with respect to this crucial aspect will be evident in the current financial year.

Second, the enormity of the challenges facing the information technology (IT) industry is true for Infosys too. These relate to the confluence of four tectonic shifts to our business models and potentially threaten the prime sources of India’s competitive advantage: cloud-based services, technological changes, resistance to immigration and global economic uncertainty precipitated by a negative interest rate regime. It is well documented in the annals of management history that the three most significant factors in the inability to navigate periods of disruptive changes are: complacency bordering on arrogance of hugely successful companies with large cash reserves and high margins; focusing management time away from the pressures of operating the highly lucrative legacy business; and the misalignment of the CEO’s incentive structure with the need to create a new business model vis-a-vis continued profitability and earnings-per-share growth. Celebrated examples include Kodak, Nokia and Digital Equipment (where I was directly involved in such a failed transformation).

Infosys pretty much reflects these realities too. Given all this uncertainty and the enormity of the challenge, I was very surprised that Sikka chose to provide a hugely bullish full-year guidance less than three months ago. This led to a bull charge on the stock, a re-rating by all institutional brokerages and a media frenzy on his leadership in turning around Infosys. Then, suddenly he “cautioned" the investors 45 days later of some possible volatility! And dropped the guidance today by 1.5%! I had written of my skepticism when all this was playing out over the last few months. And this leads me to the third point, which is pretty fundamental.

Has the character of Infosys changed from what was painstakingly built by the founders led by legends like N.R. Narayana Murthy and Nandan Nilekani? They believed in under-promising and over-delivering: the key mantra for Infosys’s premium valuations and credibility among investors. The entire international community used to hang on to every word of Infosys’s guidance as an indication of the state of play for the IT industry. Not so today. In my opinion, even the reduced guidance of 10.5% to 12.3% provided today will not be met by the year-end as it implies a quarter-on-quarter growth rate of 3.8-4.7% for the rest of the year—an almost impossible target in my view given my assessment of the IT industry and Infosys in particular.

Forecasting ability is a key skill which demonstrates that the business is under control of its management. This requires immense coordination and depth of understanding of each customer engagement in totality, right down to the grassroots, and a judgement of various macro and micro trends at the CEO/CFO level. It is an ability which was honed to perfection in Infosys due to the untiring, conservative leadership of the Murthy, Nilekani and T.V. Mohandas Pai combine. With an almost total replacement of the erstwhile top and senior management team (dangers of a management style I had alluded to in October 2015), coupled with the flamboyance associated with Sikka, I am not surprised that this ability has been the casualty. As someone who has managed this in almost my entire career, I can say with confidence that efficient management teams do not have a better crystal ball: it is solely their ability to be honest, conservative and retain a tight control of the business drivers which helps in the generation of a credible forecast and thus project the confidence of a “tightly run ship" to investors. And being a key skill impacting credibility, apart from Cognizant, none of the IT majors provides a full guidance—Wipro Ltd, HCL Technologies Ltd and Tata Consultancy Services Ltd included.

Infosys needs a leadership style honed in the basics to succeed through this difficult period where navigating the rapid rate of change is the main challenge; it has a distinguished board but most of them being from a non-technology background, I guess their reliance on Sikka is total and their focus is on the usual financial metrics and incentivizing type of interventions. Infosys will be well served if the board uses the expertise of Ravi Venkatesan, ex-chairman of Microsoft India and its only technology member, to the fullest in guiding the management to make this strategic shift.

Prabal Basu Roy is a Sloan Fellow from the London Business School and a chartered accountant. He presently manages a private equity fund and has formerly been a director and group CFO in various companies.

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Published: 15 Jul 2016, 09:14 PM IST
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