Infosys AGM: Narayana Murthy to change company tack

The big takeaway from the Infosys AGM on Saturday, held at Christ University in Bangalore: the company is set to change. The change will be slow, but it will be distinct. It could take up to three years for the company to rebound.

Co-founder N.R. Narayana Murthy, whose executive chairmanship was ratified by the shareholders on Saturday (June 15), spelt out his rebound strategy at the AGM, but added a caveat. "The task of rebuilding a desirable Infosys will take at least 36 months, even with a high quality team. In the process there will be some tough decisions resulting in pain as we move forward," he said.

Murthy's comments only underline that the company has indeed slumped and "pain" could mean making compromises it had never made before.

For decades, for instance, Infosys was known for its stringent pricing strategy that helped it keep high margins on deals.  Murthy had always defended the company's premium positioning. But speaking to investors at the AGM, he softened his stance and hinted that Infosys may well have to let go of this strategy to catch up with the competition, which is growing at a faster clip.

"We will adopt a flexible pricing policy, where absolutely necessary, to enhance our growth rate," he said. "Executing this strategy may require me to change some of my long-held beliefs. But then, I too believe in Sir Winston Churchill's words that improvements require change and the quest for perfection requires us to change as often as necessary."

Infosys called back Murthy from retirement on June 1 to lead the struggling company for another five years. Non-executive Chairman K.V. Kamath stepped down and became the Lead Independent Director while Kris Gopalakrishnan, Executive Chairman, was re-designated as Vice-Chairman.   

Murthy promised to build a more effective sales force and refocus on Infosys's bread and butter business that got "blurred" as the company pressed ahead with Infosys 3.0, its new strategy. The new thrust stressed consulting and selling intellectual property-based solutions. The company had been ignoring highly competitive large outsourcing deals in the application development maintenance (ADM) segment, which company executives often dismissed as 'commoditized'. Murthy's promise is an acknowledgement that the company had made strategic errors over the last two years. Consulting is a high-end service and many IP-led solutions fall into what is called discretionary spending - CIOs have been less keen to buy such services at a time of financial distress.

"The entire company is committed to refocusing on the third stream (ADM/BPO), to enhance our win ratio in large outsourcing deals. Such extra focus on commoditized business has the potential to accelerate our revenue growth while reducing our margins. I want you all to be aware of the downside," said Murthy.

He also promised to create a more predictable earnings model. The company had recently stopped giving out quarterly guidance because of lack of visibility.  

But three years to catch up is a long time. Are investors willing to wait?

That has to be seen. Some shareholders asked pointed questions. One of them, for instance, Nirmal Banerjee, asked at the AGM: "What are the skill-sets of the independent directors? What has been their contribution?" Others brought up allegations of insider trading, leadership deficit in the company, its use of cash, and one even advised the company to stop asking employees to wear ties. "It is outdated and employees don't like it," he said.    

Nevertheless, many shareholders welcomed Murthy back warmly, just as Infosys employees, who crowded the conference halls to hear Murthy address them a few days back, had done. An emotional K. Sadanand, an investor, quipped, "We had become victims in the last two years. I have said that before as well - no Murthy, no Infosys. We are safe now. We are breathing. "

The Infosys stock ended at 2,394.95 on the BSE on Friday, 0.67 per cent up. In comparison, the Sensex ended 1.86 per cent up at 19,177.93.