Infosys bold global ambition

In april 2002, Infosys Technologies made a foray into business process outsourcing (BPO) with a subsidiary called Progeon. It had S.A. Ibrahim, CEO of California-based GreenPoint Mortgage, its first big customer, fly down for the launch. At a time when BPO meant voicebased businesses—like call centres —Infosys attracted a lot of attention by plunging into the lessexplored and supposedly riskier nonvoice market which included data centres and record management.

Nearly seven years later, nonvoice has become big business, contributing up to 20 per cent of Infosys’s revenues. Clearly, it was a bet that paid off well (GreenPoint, though, is gone: being an early victim of the current financial crisis, in August 2007). The company’s numbers are still strong, despite the crippling effect of the slowdown and Infosys remains a shining beacon of corporate responsibility along with steady revenue and profit growth.

Infosys is again betting big, this time really big. “We want to be among the three largest IT services companies globally,” declares S. ‘Kris’ Gopalakrishnan, CEO& MD of Infosys. “We are changing the company to meet our ambitious goals.”

But there is a disconnect between its ultimate goal and the way in which it is currently going about achieving that objective. The company appears to be playing it safe—eschewing strategic moves like its non-voice foray—and sticking to its usual, familiar ways of generating revenue. Instead of chasing down large-volume, multi-year but ultimately lower margin contracts— key in order to grow quickly while being bolstered by a stable, long-term revenue stream—Infosys is still comfortable with pulling in higher margin, short-term contracts. Also, with a headcount of 100,000, Infosys is only a quarter of the size of IBM, but remains wary of acquisitions— the only way for the company to achieve scale rapidly. Moreover, in order to become a truly global company, it needs to expand its offices around the world and hire international talent.

CEO Gopalakrishnan says that the company remains committed to its current business model of delivering low-cost IT and BPO services from mainly low-cost locations, combined with its recent foray into high-margin consulting business. “It is important not to deviate from long-term principles such as profit and growth... this is not the time to target growth at the cost of margins,” he says.

Wanted: a new game plan
That’s not good enough if it has serious aspirations of becoming a global contender. The company’s business chiefly comprises of shortterm contracts that are smaller in volume, but with higher margins. Industry watchers say the company will have to revamp its business model in order to scale up to the big leagues. They can do so by shifting their focus to long-term annuity contracts which are high volume but with lower margins, in addition to betting on big acquisitions to grow. Lower margins are anathema to Infosys. In the third quarter,

Dreaming big Here’s what Infosys needs to do to become a global player. Currently: Focussed on low-volume high margin projects Should do: Go for larger longer term contracts despite lower margins Currently: Mainly India-based delivery presence Should do: Expand its global delivery and marketing presence Currently: Poor record on M&A deals. Lost Axon to HCL Should do: Bite the bullet and look for big-ticket acquisitions Currently: Great employer in India but nowhere on the scene abroad Should do: Tweak its policies to be a top employer globally Currently: Four founder-directors in their mid-50s Should do: Build a strong succession planning system

Infosys won 20 contracts exceeding $50 million in value, but just two of them were long-term annuity contracts. “There are two clear differences between Indian vendors and their global peers: the global vendors can deliver services from both lowcost locations such as India and near-shore centres and secondly, a high percentage of their business comes from long-term annuity contracts,” says Siddarth Pai of offshore advisory services firm TPI. By contrast, IBM, the 800-pound industry gorilla, has a number of annuity contracts in the areas of technology outsourcing and maintenance. These contracts provide not only a good revenue foundation but also a steady source of profits and cash. As Mark Loughridge, IBM’s Senior Vice President and Chief Financial Officer, told analysts recently: “These businesses provide a distinct advantage in today’s environment.”

Infosys will have to look beyond its India-focussed delivery capability, even at the cost of margins. IBM has 400,000-plus people in the market, with 150,000 of them in the US alone and as many as 5,000 in Brazil. Accenture has over 50,000 people in India. If Infosys has dreams of being a global player, they need to similarly set up shop all around the world Infosys has also been overly cautious about acquisitions, rece walking away from a deal to buy Axon, the German enterprise solutions vendor, after it was outbid by domestic rival HCL. “There is no point over-paying for assets…,” says Infosys CFO V. Balakrishnan. “We are not a conservative company, we are realistic.” Cross-town rival Wipro, on the other hand, has been scarfing up companies at a scorching rate. “We have undertaken 21 deals valued at around $1.3 billion,” says Lakshminarayana K.R., Chief Strategy Officer and M&A Head, Wipro. “A challenging environment always throws up more opportunities… we continue to look for inorganic growth,” he adds. Ultimately, for Infosys to achieve additional scale and realise its selfprofessed ambitions, it needs to go shopping.

All of these arguments might seem absurd considering Infosys’s solid, consistent numbers—that too during adverse economic conditions. Third quarter numbers for the company were better than what most industry analysts had expected. Net profit was up 33 per cent and revenues 35 per cent compared to the same period during the previous financial year. The company is also sitting on a ton of cash—it has over $2 billion (Rs 10,000 crore) in the bank, generated free cash of $869 million in the first nine months of FY2009 alone compared with $775 million the year ago, and expects this to grow to $1 billion in FY2010. The one note of worry—the company has not reported any big-ticket deals in financial services after the ABN AMRO contract back in 2005.

Nandan Nilekani

Changing tack
Still, posting great numbers is one thing, but becoming a respected global player necessitates something entirely different. For Infosys to grow and evolve into a global giant, the company will have to look at non-linear business models. “We may be reaching the end of the current model favoured by Indian companies, who rely on adding thousands of people to continue churning out projects and revenues. Companies like Infosys need to delink headcount and revenue growth,” says Sudin Apte of Forrester Research.

Clearly, Infosys has started thinking along these lines—a positive move for the company’s global dreams. In 2004, the company set up the Software Engineering & Technology Labs (setLabs) to create more intellectual property and has so far filed 196 patent applications. “We want to look at non-linear growth, either based on intellectual property or non-effort based initiatives,” says Gopalakrishnan. Infosys today gets 3 per cent of its business from these initiatives and could take it to 10 per cent in a few years.

Infosys is also diversifying its revenue sources. Just three or four years ago, it used to get over 40 per cent of its business from writing code. Today, it gets the same amount from technology services. Gopalakrishnan says the company will target emerging markets such as remote IT infrastructure management, as customers look to reduce costs and manage their businesses in a better way. Its consulting and package implementation business now accounts for a quarter of overall revenues. “Consulting as a business unit will break even this year,” says Gopalakrishnan. However, the company has a way to go to climb up the product value chain.

Infosys is also looking to diversify the geographical split of its revenues. While the North American market is its mainstay, the company is ramping up its investment in other regions, especially Europe, where it earned $1 billion in revenue last fiscal. Says S. D. Shibulal, COO, Infosys: “We see strong growth in Europe, Canada, Japan and Australia and massive potential in Latin America, West Asia and India.” It is betting big on the $86-billion IT market in Europe where it has over

100 clients and sees strong demand in the manufacturing sector. “Service lines such as package implementation have shown strong growth,” says B.G. Srinivas, who runs Infosys’ business in Europe.

Click here to Enlarge

Other challenges
Rejiggering its business model to grow isn’t the only challenge facing Infosys. In an effort to trim costs, it has cut back on sales and marketing expenditures even though rivals say that this has affected its ability to bag new deals. CFO Balakrishnan doesn’t think so: “We win around 30-35 per cent of the deals that we bid for and we consciously don’t bid for several large deals that have, for example, unlimited liability or are extremely margin dilutive.”

Luring the best and brightest people to Infosys has also been problematic in some of their businesses. “We’re attracting top talent in the consulting business in Europe and North America, but we have some way to go in it,” admits T.V. Mohandas Pai, Director, HR & Administration. With four founderdirectors in their 50s and directors asked to retire at 60, leadership transition is a key concern, says Co-Chairman Nandan Nilekani (see Succession at Infosys). A year after quitting as CEO and turning cochairman, Nilekani is doing his bit to nurture leadership. Along with other co-founders he is at the centre of the succession planning strategy of Infosys. “Our strategic goal is to create an institution and not an individual centric organisation. We need to create an organisation that continues to grow as leadership changes,” he says.

Still, these challenges—from attracting talent or grooming future leaders—pale in comparison to the gigantic, overarching one—of how to grow quickly, and with stability, so that the company can become a global name, much like IBM or Hewlett Packard.

Claude Smadja Succession at Infosys: Claude Smadja I know of few companies that have taken succession planning as seriously as Infosys. A “leadership pipeline,” created many years ago, should ensure the company benefits from a seamless leadership transition. Creating the appropriate means and processes for sustaining corporate leadership, for nurturing the next generation of leaders, is crucial for any company. It is even more of a core priority for companies like Infosys, which live or die by the quality and ability of the leaders they are able to generate and empower. It is more imperative than ever for organisations to manage the professional aspirations of highpotential employees in an era of global war for talent. It is the early realisation of this requirement that led the Board of Infosys to approve, in 2001, the creation of the Infosys Leadership Institute, where 400 of the best and the brightest among the company’s more than 100,000 employees are being groomed for senior managerial responsibilities. The Infosys founders’ vision has been instilled at every level of the corporation, along with a strong emphasis on a set of core values. The message is clear: managing succession is much more than just the skills and experience an Infoscion brings to the table. Equally important, this means that the people moving to the helm of the company can benefit from a high level of acceptance from the rest of the employees, have the same set of values, the same rigorous approach to preserving and developing the kind of culture that has been such an important success factor for Infosys. Since only four of the seven founders today are among the seven executive directors on the Board, and they are all in their mid-fifties and fast approaching the company’s mandatory age of 60 for retirement from executive positions—one can understand the commitment to smooth succession planning and management. It is part of the essential duties of good corporate governance and one of the most important responsibilities of the Board. The seamless way with which the process worked in August 2006 when N. R. Narayana Murthy retired as chairman of the company provided a very reassuring demonstration that the system was working well. Given the role and place assumed by Murthy, it would have been almost normal to expect to see some anxiety or some uncertainties inside Infosys or among its stakeholders. None of that manifested itself. And when S. Gopalakrishnan—Kris to his colleagues—took over in June 2007 from Nandan Nilekani as CEO and Managing Director, and S.D. Shibulal took over from Kris as COO, it was the same seamless—almost uneventful—process. But there should be no misunderstanding about the way succession planning has been handled and how all these changes have been managed. What happened was definitely not some sort of mechanical or “automatic” process. In each case, preparatory work inside the Nomination Committee— which I had the honor to chair at the time—was followed by thorough discussions inside the Board. In-depth questioning and discussions took place with the respective candidates. And this could not have been otherwise, given the very philosophy of the company. As Infosys moves ahead towards its goals of becoming even more of a truly global corporation and the #1 leader in its sector, the complexity of the tasks ahead, the need to leverage diversity at the highest echelons of the company will become even more demanding. And so, the need and priority for continuing forcefully to develop leadership potential inside the company, for ensuring full leadership continuity will become even more of a corporate governance priority. Thankfully, all that is needed to meet this imperative exist at Infosys. Claude Smadja Independent non-executive director/ Infosys