BackIs Shibulal Infosys’s boldest CEO ever?
Even as investors keep flagging their dissatisfaction, the CEO has stuck to his Infosys 3.0 strategy
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Bangalore: It must be really tough being Sarojini Damodaran Shibulal these days.
Investors are upset with the chief executive officer (CEO) of Infosys Ltd, under whose watch the company has grown slower than rivals.
Analysts have begun to question every move the company makes.
And the media can’t stop speculating about who will take over when Shibulal retires as CEO in 2014 and whether this will happen sooner.
Amid all this, Shibulal—the last of the founders to lead Infosys—has doggedly pursued his new strategy called Infosys 3.0. This is perhaps the biggest bet the company has made since it was founded. The strategy focuses on new technologies and models such as cloud computing, mobility, software application platforms and products, and was launched when Shibulal took over from S. Gopalakrishnan in April last year. Infosys wants one-third of its revenue to come from these new areas in three-five years.
To be sure, Infosys 3.0 is a refreshing approach to the business of outsourcing, especially since multinational firms including International Business Machine Corp. (IBM)and Accenture Plc have already replicated the low-cost delivery model created by companies such as Infosys by employing thousands in India, and there’s hardly anything left to differentiate one company in the business from the other. To support Infosys 3.0, Shibulal also made the biggest acquisition in the company’s history—Lodestone Holding AG for $330 million in September.
“I believe it’s time to drop the word conservative in the sentences where Infosys is mentioned," Shibulal had said while announcing the acquisition.
Experts tracking the market served by Lodestone said Infosys could face short-term macroeconomic concerns till 2013. “Long term, the acquisition may prove itself as Infosys gains a greater foothold through consolidation," Ray Wang, founder of enterprise research firm Constellation Research Inc., said. He estimated Infosys’s revenues from services based on SAP AG products to reach $1 billion in revenues post merger.
Technology researcher Gartner Inc. supports the view that enterprise customers will make cloud computing and mobility their top priority over the next three years. Infosys and Shibulal are clearly looking at several tipping points while making these bets.
Mobile phones are expected to overtake personal computers (PCs) in 2013 as the most common Web access device and that will change the way top outsourcing customers consume and manage software applications. And the market for cloud computing services is expected to cross $109 billion in 2012 and touch $206.6 billion by 2016, according to Gartner.
Overall, what Shibulal is attempting to do is akin to changing the engines of a plane mid-flight—a particularly bold strategy to pursue when rivals are aggressively pushing to gain share of more commoditized projects that include contracts to manage computer infrastructure remotely. Experts tracking the company appreciate the intent behind the strategy, but question its timing. After all, many of these new areas still fall under the head of discretionary spends within the information technology (IT) budgets of customers, and given the economic and financial pressures most are facing, such spends are often the first to be sacrificed.
Indeed, the problem facing Infosys is not about making these bets, but about the momentum shifting to rivals.
“What it (Infosys) ignores as ‘bad business’ is healthy in a period when growth is tough to come by," said the CEO of a rival firm who requested anonymity because he did not want to comment publicly on Infosys’s strategy. “Infosys was a Holy Cow until two years ago and we all waited for its earnings to pick cues about the future—not any more."
Ever since Infosys’s new management made the 3.0 strategy the centerpiece of its current and future bets, the chorus around whether Infosys is ignoring available growth by preferring to bet on a futuristic strategy has been gaining momentum. In many ways, Infosys was known to set the agenda for the entire industry by reporting its earnings first and providing both annual and quarterly forecasts for the outsourcing business. The company abandoned quarterly forecasts in July citing ambiguities in demand.
Sceptics of Infosys’s new strategy have a lot of ammunition. In four of the past six quarters, Infosys has missed the lower end of its own forecast. In a year when Nasscom has projected 11-14% annual growth in software exports from the country, Infosys has said it will grow revenue by a mere 5%. Rivals Tata Consultancy Services Ltd (TCS), Cognizant Technology Solutions Corp. and HCL Technologies Ltd have indicated that they will beat Nasscom’s forecast for this year. Infosys’s revenue from its top five and top 10 customers has grown below the average company growth rate for 13 of the past 18 quarters.
Analysts such as Viju K. George, who track the company, say Infosys is on the horns of a strategic dilemma about whether to focus on Infosys 3.0, or push strongly to gain “bread-and-butter" outsourcing business—the agenda customers are far more immediately interested in the current economic climate.
Indeed top outsourcing customers such as Citigroup Inc., which sends software application development and back office projects worth over a billion dollars annually to India, are more interested in cutting operational costs immediately than making bold investments in the future. TCS already counts Citigroup as its top customer; the company contributes around $700 million to its revenue every year.
As a result, Infosys is losing share.
“Now, the question is whether demand is really moderating and there are no growth opportunities available anymore (as stated by Infosys) or whether Infosys is losing market share and other players are eating Infosys’s lunch. We believe it is the latter," said George of JPMorgan’s Asia Pacific equity research.
Meanwhile, Infosys 3.0 isn’t paying off—at least, not yet.
For that, Infosys may need to get even bolder in terms of acquisitions. For instance, the company’s revenues from so called software platforms and solutions are still at 6% of the total business. The company will need to add another $2 billion in revenue from platforms to ensure that it contributes a third of Infosys’s business over the next few years.
“From the way they are talking (about reducing headcount linearity or the extent to which revenue is dependant on the addition of employees), we think they are increasingly considering an acquisition in software," James E. Friedman, and IT services analyst at Susquehanna Financial Group Llp.
Despite growing criticism about Infosys’s strategy, the company’s chairman of the board, K.V. Kamath, is backing Shibulal.
“Something like an Infosys 3.0, if the global marketplace was normal, should have yielded results from day one. But where the world is (today), the results will slightly lag. We need to have patience," Kamath said in an interview on 12 October.
But even the board and Kamath’s patience has its limits.
Kamath said in his interview that he’d like to see the new strategy delivering results by 2014.
“Two years down the line is a long enough lead time to measure the strategic changes that have been put in place. Clearly, two years down the line we would like to see the strategy that has been articulated having delivered," Kamath said.
If being bold in the software outsourcing sector is about increasing share of business readily available, then Shibulal surely does not make the cut. But if boldness is attempting to overhaul the existing business mix by betting on the future, then he surely is a shoo-in as the boldest CEO the software firm has had.
Analysts, though, are hoping he is also bold enough to ditch a strategy that isn’t working— at least not at the current time.
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