(This story, written by NS Ramnath of Forbes Indiabefore the decision to bring back NR Narayana Murthy as Chairman of Infosys was taken today, gives you the backdrop against which to view the changes. Infy was limping, and its peers were gaining ground. Murthy’s return is intended to reverse the slide and to acknowledge that the Infosys 3.0 strategy has as yet failed to deliver.)
By NS Ramnath : First Post :1 June 2013 39 mts ago
As you drive on the flyover to the sprawling Electronic City from Bangalore, you can’t miss the shiny, glass buildings on the Infosys campus. One is a pyramid, another looks like the bow of a ship and yet another has a big hole right in the middle.
What lies inside this building, which goes by the number 44, holds a key to the future of the 32-year-old software company. Inside, Infosys Experience Centre showcases a range of new products that its engineers developed in the last few years, some of them a direct outcome of its Infosys 3.0 strategy.
One application helps Infosys clients reduce incoming calls by nudging end users to solve problems without having to reach out to a contact centre. Its algorithms use unstructured data (from Facebook, for example) to figure it all out. Another app lets a client (say a bank, which is squeamish about telling a third party what it plans to do with its customers, and yet is interested in emerging technologies such as social, mobile and big data) build its own big data application using algorithms in Infosys’s library. It’s as easy as dragging and dropping the databases you want, the visual tools you want to use.
Inside the building, engineers trade jargon like Hadoop and NLP as they walk around. One can feel the raw energy of a well-funded startup. It is a feeling one associated with Infosys 10 years ago, when it seemed it couldn’t take a single misstep, and journalists mobbed around the top management to ask them questions on… how to run the world.
Today, the questions are different: They are based on a suspicion that perhaps the top guys don’t know how to run Infosys.
While its peers are sprinting, Infosys seems to be limping. Its revenue growth is slower than the industry (which means it is losing market share); its operating profit is dropping too. It has let Cognizant—a company founded 13 years after Infosys—run past it. Once known for consistently beating its own estimates and market expectations, it missed its revenue guidance a number of times before deciding to temporarily stop giving guidance. The market has beaten down its stock.
This sense of gloom is in stark contrast to the scene inside Building 44. And here’s the interesting part—the polar opposites emerged out of a single seed: Infosys 3.0. The same strategy that is cementing the future of Infosys is in a way leading to its poor performance today.
Agreed, this is not the most popular explanation for the company’s woes. The prevalent reasons revolve around its leadership or its aggression or its portfolio mix. There’s a bit of truth in all these, but none of them explain why these weaknesses should matter so much to Infosys.
Take leadership. No other IT CEO among the top five companies has been as pilloried by stakeholders as SD Shibulal. (In the company’s recent annual strategy meet in Mysore, he had to face tough questions from founder NR Narayana Murthy.) According to Glassdoor, a website that lets employees vote on their CEOs anonymously, Shibulal has the lowest approval rating among his peers—51 percent (N Chandrasekaran of TCS has a rating of 88 percent, Cognizant’s Francisco D’Souza 92 percent, Wipro ‘s TK Kurien 78 percent, HCL Tech ‘s Anant Gupta 68 percent). Critics say Shibulal is an operations man—without marketing background and lacking vision.
However, studies show that employee ratings are often biased by company performance, and a company’s performance is determined by the strategic decisions taken in the past. No one expected Shibulal to infuse new vision into Infosys. He was there to execute a strategy conceptualised when Kris Gopalakrishnan was the CEO. And, by all accounts, he was the right man for that job. “Shibu is one of the most determined people I have met. If he starts something, he will finish it,” Subhash Dhar, then the head of sales and marketing, told my colleague Mitu Jayashankar when Shibulal took charge.
Infosys 3.0, the strategy to take the company to the next level of achievement, has not delivered for several reasons. Reuters
Consider the second reason: Lack of aggression. So much was made of Infosys’s reluctance to make a big acquisition that when it acquired Lodestone last year, there was a sense of triumph among its leaders. (“I don’t think ‘Infosys’ and ‘conservative’ should be used in the same sentence anymore,” said Shibulal.) But the growth in other companies was not driven primarily by acquisitions. In 2008, HCL Technologies acquired British SAP consulting firm Axon, but its own growth was driven by infrastructure management. Cognizant makes only tuck-under acquisitions, good to open doors, but too small to drive growth straightaway. In a note to its clients, JP Morgan pointed out that TCS has not made a single worthwhile acquisition since Citi’s BPO arm in 2008; and in any case, its growth was driven not just by BPO.
Shibulal’s own explanation for Infy’s struggles—of blaming it all on the market—doesn’t carry much water either, given that others also operate in the same market. It is true that Infosys has a higher percentage from consulting and systems integration, which are discretionary spends. However, its competitors and some analysts point out that it’s not as high as the 30 percent that Infosys says it is, since a good part of systems integration is about maintenance.
The reason really comes down to something that people don’t usually point out to: Infosys 3.0.
All major players embarked on new strategies around five years ago. HCL Technologies, under its hard talking CEO Vineet Nayar, decided to put its force behind infrastructure management and re-bids. Cognizant, which was bigger than HCL Tech, under its young, ambitious and methodical boss Francisco D’Souza, added more verticals and geographies like consulting and infrastructure management in Europe. TCS was more global and had a finger in all these. Its efficiency-driven CEO R Chandrasekaran reorganised the company into smaller units of USD 250 million each. In all these cases, the restructuring was done to make the individual parts grow faster. There was no big change in the direction (and when there was one, it fell on a separate business unit, or a set of business units).
But Infosys 3.0 was a very different exercise. It came from the recognition that there was a significant change happening in the world of business. “It was not created out of the sky. I met over a 100 clients myself,” says Sanjay Purohit, who was chief strategy officer when it was designed, and is now in charge of products, platforms and solutions division. This is similar to Cognizant’s Horizon 3, which looks at emerging technologies such as social, mobile, big data and other products.
But Infosys 3.0 was much broader in scope. It also encompassed the other parts of the company, including the core operations business (application development and maintenance, infrastructure management, BPO), and the transformational business (consulting and systems integration).
While the sales teams in other companies were mostly selling more of the same, the Infosys sales team was also selling a vision of the future. The company conducted over a hundred workshops with senior leaders of client organisations, laying down how the emerging technology trends will change their business, and why they should partner with Infosys to get ready for that change. Infosys changed its tagline to ‘building tomorrow’s enterprise’.
The only problem was, all these happened at a time when clients were worried about saving today’s enterprise. The economic crisis had shrunk IT budgets and CIOs were looking at ways to keep the lights on at a lower cost. Companies which were flexible on pricing could grab these contracts when they came up for renewal, like HCL did. On the blueprint, Infosys’s new matrix structure should have ensured that the team pursued tomorrow’s opportunities as well as today’s business. But, in reality, that did not happen. “The company lost the plot on the core business,” says a senior executive from a rival company.
To get a sense of why this did not work, contrast Infosys’s approach with that of Cognizant. When Cognizant restructured itself to align with the emerging technologies, it clearly defined the contours of each set of business units. Horizon 1 was about its core business—such as application development and maintenance—which contributed most of its revenues. Horizon 2 was about emerging businesses that it had entered in the last three-four years. And Horizon 3 was about new technologies that would drive its future growth. The responsibilities were clear. D’Souza was incharge of H3, while Gordon Coburn, Rajeev Mehta and Chandrasekaran were in charge of the first two.
However, Infosys 3.0 was a philosophy that pervaded the entire organisation and all its businesses irrespective of their maturity within Infosys. (Infosys 1 was about establishing global delivery capability; Infosys 2.0 was about scaling the global delivery model in different verticals; Infosys 3.0 was about building tomorrow’s enterprise.) Its sales team was asked to pursue Infosys 3.0 opportunities (of creating tomorrow’s enterprise), as well as make the sales in existing businesses (maintenance, testing and business process outsourcing). In 2011, while he was still a COO, Shibulal explained this to analysts in terms of a matrix organisation, in which the sales team would find a balance between scaling up the existing businesses even while selling the vision of the future.
The numbers show the sales team was getting carried away with 3.0. As a result, it was losing its edge in core markets. In North America, the biggest market for all Indian IT services companies, Infosys fell behind Cognizant in March 2011 quarter. (Cognizant’s quarterly revenues grew from USD 1,012.1 million to USD 1,069.9 million that quarter, while Infosys revenues shrank from USD 1,025.5 million to USD 1,020.5 million.) A quarter later, it happened in its largest vertical, banking and finance. The inevitable happened a year later: Cognizant overtook Infosys in overall revenues too.
Infosys was losing out on another of its traditional strengths, dealing with large clients. The number of USD 100-million clients went from 13 to 15 in the last two years. At the same time, for TCS, it went up from 8 to 16, and even for underperforming Wipro it went from 3 to 10.
Two other issues within Infosys made this more complicated. The first is its devotion to profitability. The desire for profitability shows in sales and marketing expenses. Says Sudin Apte, CEO of Offshore Insights, an IT-focussed consultancy, “Infosys continues to underspend in S&M [sales and marketing]. While they are spending couple of millions more and percentage has gone up from 4.8 percent few quarters back to just about 5, it’s still much less than what their top three peers spend. Further, not only the improvement in S&M—both spend and client outreach activity—is improving only a bit, its pace is also very low. We believe both the increase in S&M and pace are falling short of what is required and Infosys does not have time at hand and its problems are big.” The joke within Infosys campus is, it’s not “income – expenses = profit” at Infy, it”s “income – profit = expenses”.
So, what stops the company from investing more in sales and marketing, or getting more flexible about pricing?
One, it believes that when demand conditions get better, it will get the growth back, without compromising its profits. That, in fact, is the promise of Infosys 3.0. With the new strategy, it is possible to be both a growth leader and a margin leader.
But, there’s no denying that it’s right now standing on shaky ground. It’s telling on what’s perhaps the most important resource for an IT company. Subhash Dhar, who spoke approvingly of Shibulal’s ambition, has quit Infosys. The company has seen at least three other high-profile exits, and many more smaller ones. (In March 2008, its attrition rates were just 1 percentage point more than that of TCS; now it’s 5 to 7 percentage points more than its bigger rival.)
Writing in Forbes India towards the end of 2011, Apte said absence of charismatic leaders weakened the company’s ability to get access to Fortune 500 boardrooms. Nothing has changed, he now says. “In addition, compared to their peers like TCS and Cognizant, quantity of effort that Infosys is putting for business growth in existing clients—say on account mining, client hand holding and support, and proactive solution proposing to clients—is, per Offshore Insights estimates, approximately 15-20 percent lower. This is clearly the reason for their slower growth.”
Sitting in one of the rooms in Building 44, Sanjay Purohit is quick to dodge a question on what he would do about the fall in short-term growth, if he were in his previous role of CSO. “That’s a wrong question. Strategy is about the long term.”
It’s true. That question should have been addressed to Shibulal. But Shibulal didn’t speak toForbes India for this story, nor did he respond to questions over email. Infosys’s spokesperson said he was abroad, busy meeting customers. Investors would hope it’s not so much about building tomorrow’s enterprise, as it is about getting revenues. In this quarter, and the next and the next and the next. Not getting that will undermine its future, irrespective of how good its strategy is.
NS Ramnath writes for Forbes India
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