Vishal Sikka inherits an Infosys that has cut costs, increased margins

The audioscape of investor chatter and the Infosys song Moving hand in hand died down minutes before 3 p.m. on June 14. N.R. Narayana Murthy, wearing a white shirt with cutaway collars and grey jacket, walked on to the stage along with other board members. For a while, he sat on a chair, his right palm covering his mouth. A few investors clapped when he introduced himself. There was sombre silence when he got up and walked across to the podium to address the company's annual general meeting for the last time. "This time it is going to be a long speech. Since this is my last appearance as the Chairman of the company, I am entitled to it," he said.

Murthy surprised everybody by announcing he would leave the company just a year after his return. Murthy first retired from Infosys in August 2011 but made a comeback in June 2013 after the company's performance floundered. With the appointment of Vishal Sikka as the new CEO, Murthy will leave the company on October 10 this year. In June 2013, he had been appointed for a period of five years and had said he would take 36 months to turn around the company. And yet, in his long, forceful AGM speech, he claimed victory, saying the twin tasks he had been assigned were complete - building a foundation for the company's growth and finding an "able CEO" to take the firm forward.

Other stakeholders are not too sure about the success, and what Sikka, a visionary leader who led the 'intellectual revival' of SAP, inherits. Murthy has done a commendable job of slashing expenses and increasing margins. Nevertheless, Sikka also has to deal with the rampant loss of top talent and the heartburn caused by the chairman's office, which Murthy constituted. Also, an executive assistant's overreaching role.

All internal CEO hopefuls - Ashok Vemuri, B.G. Srinivas and V. Balakrishnan - have left the company. The Infosys Executive Council in 2012/2013 had 16 members - seven of them have quit; one is on a sabbatical. The overall attrition rate now stands at 18.7 per cent, up from 16.3 per cent the previous year. Ask any executive why he quit, and pat comes the reply: "It's not the same company any more."

When Sikka peels the onion, he will find Infosys, in fact, started changing soon after Co-founder Nandan Nilekani's term as CEO ended in 2007.

ONION PEEL 1: SON RISE

A "founders-only" policy meant that Kris Gopalakrishnan and S.D. Shibulal took turns at the high chair. Co-founder Shibulal was appointed CEO on August 21, 2011. In the following quarters, both revenues and margins suffered setbacks. The company's operating margins, previously among the highest in the industry, had dipped to 25.7 per cent in December 2012 from 31.2 per cent in December 2011. Infosys's cost of sales was shooting through the roof. Murmurs of unease with Shibulal had grown stronger. In private circles, Chairman K.V. Kamath started saying he was unhappy with the company's performance. One of the board members met Murthy to check if he would make a return to the company. A fund manager from Arohi Asset Management also sent the board a letter seeking Murthy's return. Next, Kamath met Murthy with the request.

Murthy, according to a person involved in the discussions, laid out three conditions for his return - he needed all the powers to make decisions, a private jet for travel to all the delivery locations, and the entry of his son Rohan Murty.

No one objected to the first condition. Murthy was told the company need not buy a private jet. He could hire one whenever required. Rohan? Only one board member recalls opposing the new arrangement. He advised Murthy not to come back because by doing so he would be going against the values Infosys stood for - promote meritocracy, under promise-over deliver, be ethical, take no high risks and share wealth, among others. But none of the other board members spoke against it. Murthy assured them Rohan would be there just as an executive assistant, nothing else.

Rohan turned out be more than an executive assistant.

ONION PEEL 2: INFY, DISCONNECTED

The message, for many, was in a tie. Infosys, a conservative company, had a rule - all employees to wear ties on Mondays and Tuesdays. This was unpopular with many of the younger employees, particularly the vast majority who were not customer-facing. The story goes that one day Rohan asked for the tie rule to be scrapped. Sure, many other employees had been asking for it - but the rule quickly changed after Murthy returned. Employees now wear ties only on Mondays. "The organisation quickly found out where the power centre was," a former board member said.

There were others who gained in influence in the company. Murthy constituted the Chairman's Office with four executives - Rohan, who was in-charge of delivery effectiveness and productivity; M.D. Ranganath, the Chief Risk Officer, looked at expenses and cost cutting; Deepak Padaki, who previously headed the company's mergers and acquisitions, now spearheaded sales effectiveness; and H.R. Binod, who was previously the Global Head of Commercial and Corporate Relations, was made responsible for talent supply chain.

All the four made presentations stating what a terrible state the company was in. Murthy subsequently, started criticising the company's productivity, the India business where margins are low, and the product and platforms group, which included the company's core banking product Finacle. Much of Murthy's second coming was about improving profitability. Operating margins improved from 23.6 per cent in the March quarter of 2013 to 25.5 per cent in March 2014.

"Murthy did well on the cost side. Rohan was an EA but he became an 'extra constitutional authority'. He didn't understand the business, but the organisation started taking decisions based on his views," a former executive council member said.

Former board member and HR head T.V. Mohandas Pai seconds the view. "The chairman's office, which was set up as an enabling office, turned into a power centre, disempowering senior people and further slowing down decision making."

In one of the review meetings, Rohan remarked: "Start-ups in Silicon Valley make a billion dollars with 100 people. Why do we need 5,000 people in Finacle for $300 million revenues?" In fact, he had counted some 1,250 heads less. Finacle, in reality, had 6,254 people by March 2014 and revenues of $297 million but it is evident from the company's disclosures that it has cut back on its workforce - the banking product division had 7,249 employees as of March 2013.

Around August 2013, Rohan started an attempt to measure individual productivity, the time spent at work. "He said people were working 6.5 to seven hours instead of nine. A software was installed on all computer screens of some units that tracked employee productivity," an HR executive said. "This is not a factory. Employees protested against the software being installed on their machines." Rohan also wanted evaluation when people were trained on the job, even those who were billable. "The industry does not have assessments for examining the training of billable people. People felt it was like going back to school," the employee further added.

On yet another occasion, Rohan said that graduates from Harvard were paid $100,000 when they joined corporations. Why should Infosys pay its sales guys more? "So $100,000, without perks, became a benchmark. Experienced sales people at Infosys were drawing in the $150,000 to $200,000 range," a former HR executive said.

Infosys, in a response to Business Today's detailed questionnaire, said measuring and improving productivity of employees was integral to every company's management practice. "Companies need to improve productivity of employees on an on-going basis to stay competitive. Higher productivity brings down cost of operations, thereby helping companies price their services more competitively in the market.

"Productivity and cost optimisation have been the focus of the company across departments and functions during the last year, not just a few. Senior leaders drove productivity improvements and cost optimisation measures in their departments and functions. It is totally misleading to attribute such initiatives to just one or two individuals." The company also added that "the implications in the references to specific individuals and numbers in your questions are highly speculative and inaccurate".

Rohan's role was clearly strategic in the company - it is not uncommon for EAs to assume strategic roles. Rajiv Dube, Director of Group Corporate Services at Aditya Birla Group, was once executive assistant to Ratan Tata, Natarajan Chandrasekaran, CEO of Tata Consultancy Services (TCS) today, was executive assistant to Subramanian Ramadorai when he was CEO of TCS, Rajan Anandan, Head of Google India, was executive assistant to Dell Inc CEO Michael Dell in 2003. But becoming a power centre is altogether a different thing.

Murthy himself gave it away during the AGM speech that laid out in detail six strategic efforts Rohan "conceived, implemented and pushed forward" - those that would help Infosys differentiate in the marketplace. Besides measuring productivity, the initiatives included more automation in software development, broadening technical competence, a programme to identify people who could be fast tracked, retraining of people, and ushering in a new culture of innovation.

"Some of you have questioned why I asked Rohan to put his life on hold and come and add value to Infosys. I wanted Infosys to think differently and invest in some bold initiatives that would yield results in the medium-to-long term," he told investors who gathered at the Christ University auditorium in Bangalore for the AGM. His brief was "not to accept the status quo".

Many of Rohan's initiatives may have been well intentioned. But did old timers find it difficult to digest the status quo being questioned? Rohan did not respond to clarifications sought by Business Today.

"It wasn't about the status quo...Everyone knows the company needs to change," Gaurav Rastogi, who joined Infosys in 2003 and was responsible for driving long-term revenue growth for many of the company's top clients as a Vice President, said. "It was more the lack of transparency and clarity of thought that was a concern. It ultimately comes down to trust. Did all the executives feel trusted enough, or did we feel that we were neither trusted, nor could we trust?"

Rastogi, who is based in the US, says he was trying to rebuild the company's sales organisation "when the company pivoted quickly to a plot choreographed closely in Bangalore". He quit in October 2013.

Rohan left the company on June 14 as his stay was linked to Murthy's executive role in the company.

ONION PEEL 3: FAT BURN SIDE EFFECTS

Rastogi's point is not hard to see. Heeding suggestions from the chairman's office, Murthy said he did not want senior people or experienced lateral hires and could run the onsite sales show with fresh graduates from premier B-schools. "Murthy wanted 200 people from the best B-schools for sales. Many refused the offers because there were no perks," the HR executive added.

Murthy then started questioning pay hikes to sales employees. A few had their salary doubled. "They had got promoted. They got promoted to becoming title holders - to the position of Assistant Vice President. The salary doubled routinely because of the variable component in the pay. But Murthy thought the variable pay was high," the executive said.

Infosys, in its clarification, said that its salaries were determined by market benchmarks and individual performance, and that it attracted and retained top notch talent with competitive salaries. The company further added: "We have robust performance management systems and mechanisms covering goal setting, performance evaluation and rewards. Last year, we strengthened these mechanisms further to ensure alignment with organisational objectives such as growth and profitability. We encourage high performance and a robust work ethic in the company."

Murthy, according to two of our sources, went on to give Ranganath a target of saving $130 million to $160 million in onsite costs a year. This created a sense of panic. Sales and support staff numbered 9,346 by March 2014, down from 9,680 in the year-ago quarter.

Sudin Apte, CEO of research outfit Offshore Insights, said the culls were not just in sales. Infosys also trimmed its field marketing teams in the US and Europe. "Foreigners were fired and Indians were asked to come back to India. It was a wrong assessment of the situation. Cognizant is benefiting from marketing," he said.

Chief Marketing Officer of Infosys Paul Gottsegen was one such exit. Mid-tier IT company Mindtree benefited - in October last year, he joined Mindtree as its Senior Vice President, Chief Marketing and Strategy Officer. "At Mindtree we treat marketing as an investment, not an overhead. The game is becoming more market driven. You need to be in front of the customer," Mindtree CEO Krishnakumar Natarajan said. "Paul has worked very well for us. He is putting the foundational elements that will give us the right visibility going ahead."

Infosys doubled its revenue growth from 5.8 per cent in 2012/2013 to 11.5 per cent in 2013/2014, but that is still way behind what rivals mustered. TCS grew at 16 per cent and Cognizant even faster at 20 per cent.

Apte says another of Murthy's cost-cutting decisions may actually end up hurting the company in the long run - Murthy refused to hike the budget for Infosys Labs, the R&D wing of the company. "If there is low differentiation in the market, then accelerate the R&D budget. Infy Labs was set up to differentiate the company," a former executive associated with Infosys Labs said.

Soon after Murthy's return, Subrahmanyam Goparaju, the head of Infosys Labs, met Murthy and Ranganath. Goparaju had to answer a template that had questions such as "what are the initiatives to reduce cost?" Murthy asked: "Did Infy labs produce enough value?" Labs had created packages around business process modelling, mobile platforms and analytics platforms, but the answer was a clear no. "That is because whatever we produced was not deployed appropriately. The talent in the Labs was the same as in the rest of Infosys," the executive said.

For three years, Goparaju had been trying to persuade Gopalakrishnan and Shibulal that the Labs model had to change. He wanted Infosys to double the Labs budget but cut down on the number of people. The budget was needed for better talent, more employees with PhDs, more internships, more relationships with professors who would agree to be at Infosys on a sabbatical, software and hardware. Shibulal and Gopalakrishnan often agreed, but said: "The going is tough. Hold on."

Murthy never approved any higher budget either. Labs, at its peak, had 600 people. By the time Goparaju quit in December 2013, the workforce numbered around 450.

The company's R&D expenditure, which also includes Finacle, totalled 2.5 per cent of overall revenues in 2012/2013 - it reduced to two per cent in 2013/2014.

What will Sikka, a hardcore innovation and R&D executive, do with the company's products group? If Goparaju could have foretold the chain of recent events at Infosys, he might have just stayed on.

ONION PEEL 4: THE LEADERSHIP DEFICIT

Different executives left for different reasons. Among the top three internal CEO candidates who left, Vemuri was unhappy with the swap to manufacturing - Shibulal asked Vemuri, who headed the firm's banking, finance and insurance business (BFSI), to head manufacturing. Srinivas, the manufacturing head, became the new chief of BFSI. Vemuri joined IGATE as CEO. Balakrishnan wanted Human Resources to report into him. That never happened, nor did Murthy or Shibulal do much about his suggestion to promote Vemuri, Srinivas and him as "co-COOs". Srinivas, the last of the three to leave the company, was upset because in the CEO hunt he felt he was put at the same level with many who reported to him. A third party agency, tasked with identifying internal CEO candidates, asked his reportees to make presentations to take a shot at the CEO role. Srinivas, a frontrunner for the post, also asked Murthy if he would quit his executive role after the new CEO was picked.

"Murthy said no. Srinivas did not want to be a dummy CEO. Srinivas did not discuss his resignation with Murthy. He just sent a mail saying he was quitting," the HR executive said. When other executives unhappy with the chairman's office started looking out, there were plum jobs elsewhere. Former executive council member Chandrashekar Kakal left Infosys to join as COO of L&T Infotech. Prasad Thrikutam joined Dell Services and Basab Pradhan is now a Director at Hexaware Technologies.

"If you don't meet revenue estimates, it is flagged up to the highest level. It is a pressure cooker environment at the moment. When you fall, there is no sympathy at all," says a sales executive heading a vertical. "People left because of the pressure. Unlike his public persona, Murthy is an extremely hard hitting guy," he adds. In the last few months, many sales executives wanted to stay away from Murthy "because it is going to be career limiting".

On a year-on-year basis, many sales executives onsite were set a target of garnering 40 per cent growth individually. "This is crazy. Everyone cannot meet it. So Murthy is hedging his bets and hoping we will do 25 per cent," the executive said. The company has half yearly targets. If executives don't meet them, they were put on a "performance improvement plan" for a few months. "You quit if you still can't perform."

Murthy may have made the company leaner and cleaned it up of redundant people. Nevertheless, the new CEO, Sikka, will face the daunting task of connecting disconnected people.

"Time will tell if Sikka can create a team out of the cadre of leaders he inherits. But he will know that many in his team have been tested for CEO, and believe they are close to the seat, only he comes in their way," says Rastogi, former Infosys Vice President. "He will find plenty of ambition, but he will have to give them a shared purpose that's higher than their individual ambition."

Nevertheless, handling people is not new for Sikka. He is known to be an inspirational leader and, as SAP's Chief Technology Officer, got the whole company to rally around a new product. BT has noted earlier the uncanny resemblance between the SAP of 2008 and the Infosys of 2014. In 2008, the German multinational was called a turtle, a giant that was too slow. The company was being slammed by customers, analysts and competitors; it was unable to innovate and competitors such as Oracle gained ground and relative newcomer Salesforce.com emerged a strong rival.

The Infosys Sikka inherits has similar issues. Sikka, back then, spearheaded HANA, a new database management system that eventually became SAP's fastest growing product ever. Its success reinvigorated the company, changing its culture to more customer-centric and start-up like - agile and fast at developing software.

There is one difference though - Sikka is a technologist and has done well in a products company. SAP employs 66,572 and Infosys, a services giant, 160,405 people. The complexities are different.

"The core team is gone. Sikka has to rebuild it. Services business is also about emotional connect because it is a people's business," the former board member quoted earlier says. "Sales also needs fixing and all this has to be done in the public market. Infosys will take a long time to come back."

To his advantage, Sikka will not have the looming presence of Murthy and the chairman's office which has now been dissolved. Kamath is once again Non-executive Chairman, effective October 11.

"I want the new CEO to chart his own path to create better glory for Infosys without any interference from the founders," Murthy told investors at the AGM. For a company 33 years old and with $8.25 billion revenues, that will be the next defining part of its journey.