Trouble at Infosys: What to expect from ongoing investigations into the tech giant

Irrespective of merits of allegations, Infosys clients are concerned and asking about the right approach to mitigate their risk from their relationship with Infosys and possible corporate governance challenges they may face. Please note, many corporates have policies not to work with tainted providers or providers with lowly ethical standards and punished for the same and hence while their service delivery may not be hampered or they may overall be happy with a particular vendor, but if that the vendor is proven guilty of manipulating financials or intentional false reporting, several Fortune 500 firms either reduce business with such firm or even blacklist the defaulting vendor. While we cannot comment on the truth of allegations, we suggest clients to consider two approaches and one bottom line conclusion:

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Scenario 1 - Allegations are proven incorrect or emerge as issue of minor nature.

If Infosys investigations and legal actions in the US result in the tech giant proven as innocent or suggest any charges of minor nature, clients need not worry. Based on the situation, Infosys management may be asked to do nothing or probably file any updated/revised financials to fix any minor discrepancies. In most client situations, this will not result in any increased client risk or situation that calls for vendor continuity review.

However, our interactions with clients indicate that they may tape the pace of business volume with Infosys and before giving any additional work, they will review with corporate compliance teams. Clearly, this scenario is not a major challenge for Infosys and its business prospects, beyond some delays and marginal drop in revenues from a given client

Scenario 2 - Allegations of serious nature stand and pursued/prosecuted further.

If Infosys' own investigation or US agencies where complaints are filed finds prima facie merits in allegations and pursues the case further, it may have serious repercussions for the company. While, again, we can not comment on final outcome on allegations, it will certainly create uncertainty over Infosys' business prospects and its competitive positioning.

Further, this will also result in leadership changes and additional uncertainty and attrition because of this. Based on the severity of charges, Infosys will also run the risk of business loss should clients reduce business, or lower the pace/stop of new business, or worse, terminate the relationship. Infosys will face at least 24 month-long turmoil in unfortunate eventuality of this scenario.

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Bottomline - In the past six-eight years, every time we think Infosys is setting and getting back to the growth trajectory, it faces some new challenges and uncertainties, resulting in slow growth and other leadership challenges.

Everyone thought Narayana Murthy's return will solve all problems, but after initial positive signs, neither growth came back nor attrition stopped. When Vishal Sikka started getting client traction, it evolved to be the time of his exit.

And now, when Infosys is showing positive business growth they have got this jolt. Where allegations emerge true or otherwise, the company surely faces short term uncertainty. Its competitive positioning is surely under the shadow and its image is clearly dented - even if the allegations are factful or wrong.

Historically PR, market position, corporate governance and ethics, and leadership have been the hallmarks of Infosys and it's taking hit on its these very core values. Lastly, Infosys being one of the most popular and marquee brands from offshore, any dent to its image will have an impact on overall Indian IT services business.

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