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TMCNet:  Infosys revival: 4 challenges for CEO SD Shibulal [Software & Services] [Times of India]

[February 12, 2013]

Infosys revival: 4 challenges for CEO SD Shibulal [Software & Services] [Times of India]

(Times of India Via Acquire Media NewsEdge) That inheriting a legacy can be a big monkey on the back, Infosys CEO S D Shibulal got to know soon after he occupied the corner office. On August 21, 2011, when Shibulal took over as the fourth CEO of Infosys, of the plethora of fleeting thoughts that crossed his mind, the ones he remembers most prominently concerned the sheer legacy that he was inheriting.

Not only was he filling in some big shoes but the culture of performance that the company's founding Dream Team had laid down was now Infosys' hallmark--and that was intimidating. "It was scary. Not only because I was taking a role that earlier had stalwarts like Mr Murthy, Nandan (Nilekani) and Kris (Gopalakrishnan) as incumbents but also because we were a company that had set a benchmark in all dimensions," says Shibulal as he rattles off the many firsts credited to Infosys. "I thought I have to make sure that legacy continued," he says with a large smile.

But luck has a strange way of putting a spanner into the best-crafted plans, as Shibu would discover later. And as the last promoter-CEO set about playing his part in the Infoscian saga, it wasn't long before the first road bumps greeted him. Faced with an uncertain global economy, demand hit a roadblock as IT budgets froze in key markets: US and Europe.

And the Infosys portfolio that had a larger share of projects, dependent on a client's discretionary spends, suddenly became vulnerable. The turn of events this time tested Infosys' signature business philosophy: gun for best-in- industry margins. A 'New Normal' had jacked up the price pressure and price-flexible competitors had started biting at its heels.

The growth that had never been a problem for Infosys, suddenly started to stutter. As luck would have it, the company in a bid to proactively challenge the twin demons of scalability and commoditisation that will haunt the Indian IT industry in the future, decided to give legs to its long-term growth, by rolling out Infosys 3.0, a long-term roadmap for growth, focused around products, platforms and building intellectual property.

And for better focus, speedy execution and greater domain expertise, Infosys restructured into 4 verticals that were supposed to be the key touch points to drive business into 3 areas: Consulting and Systems integration (32 per cent of revenues), Business IT services (61 per cent), and products, platforms and solutions ( 6 per cent).

So, to the troubling troika of rapidly slowing demand, a limiting value-conscious vis-a-vis volumedriven strategy and a portfolio that had a higher proportion of discretionary spend projects, were added the distracting internal changes within the organisation.

The result was fairly obvious. The famed Infy growth went off kilter. And worse, in relative comparison, the competitors suddenly appeared better off.

Cognizant, with its stable margins but aggressive marketshare gain approach, was galloping; TCS showed steady volume and revenue growth; HCL chased growth by taking a margin hit, making acquisitions and targeting deals that were up for restructuring.

And for the first time, the Infosys story was being questioned, and that too, under Shibu's watch. The last promoter's big test was finally upon him: how to balance the short-term expectations from the investors, employees and clients, and at the same time, erect the pillars for future growth, the ones that would also probably define the future of the company-and also his legacy.

All that had to be achieved at a time when the recession showed no sign of receding. For Shibulal, personally, it was also dealing with the constant overhang of comparisons with his predecessors, the visionary NR Narayana Murthy and the charismatic Nandan Nilekani. Cut to January 11, 2013.

That's the day Infosys, famous for its under-promise and over-delivery philosophy, stunned the market with 6.3 per cent QoQ, 5.8 per cent YoY revenue growth-bringing the smile back on Shibulal's face.

But one swallow doesn't make a summer. Infosys will need many more quarters to prove that it is summertime again at Plot number 47&97 A, Electronics City, Bangalore. But make no mistake, Shibu's team is hard at work changing course.

What went on in the preceding 18 months can best be described with the analogy of a duck swimming in the river; it appears calm and moving slowly from outside but underneath the water, its feet are moving furiously.

An analyst puts it succinctly, during the last one year, "inertia changed to action". And in September 2011, the 'risk averse' (Shibu hates the word!) Infosys even acquired a company, Lodestone, for $350 mn. In the past 18 months, Shibulal has let go of many old Infosys habits for the sake of new growth: the margin fixation, centralised decision-making, and to an extent, risk aversion.

Tweaking the model Shibulal and his leadership team realised that the demand scenario would remain weak-so why not proactively tweak the business model for optimisation-be it the business mix or productivity or pricing rather than wait for demand recovery. "Transformations are not new to Infosys. Every three years, this company has changed," says Shibulal.

Every evolutionary step requires some amount of letting go of the past and some big, bold future bets. To jumpstart growth, one big change that Shibulal and Co undertook in the last one year was to let go of its margin maximization policy.

Infy watchers say the chase-the-best-margin stratagem architected by Mr Narayana Murthy (in the late 90s, he even turned down GE that was a substantial business for Infy), had created a market perception of Infy being an inflexible vendor and it also limited the bellwether's capability to lower prices in increasingly competitive deal situations.

Infosys finally bit the bullet on pricing. A close look at pricing numbers indicates offshore pricing was down 7 per cent over the last few quarters. "For about a year now, we have been aggressive on the deal front. In some kind of commoditised services, we are aggressive with pricing but in transformation kind of projects, we still charge a premium. We compete on price where it is necessary but we are also chasing more deals in areas where we have differentiation," says Basab Pradhan, Senior Vice President, Head of Global Sales, Marketing and Alliances.

According to analysts, competitive pricing seems to have been working, especially in the commoditised bread and butter business (Application Development and Maintenance, BPO, Infrastructure Management, Testing etc). And despite Oct-Dec being a seasonally weak quarter, Infosys won deals worth $731 mn, including 8 large outsourcing deals.

However, the price drop is bound to have margin implications, and as a corollary, the margins have shrunk 350 basis points over the last two quarters. Despite being more flexible at pricing, Infosys executives insist that the margin focus hasn't changed.

"We believe there is no trade-off between margins and growth. More you drop the margins, more the growth drops," says V Balakrishnan, Head, Infosys BPO, Finacle and India Business Unit. A recent JP Morgan report says that even today, every deal is undertaken with a margin profile in focus, though this target margin is now lower than earlier. "In the last two quarters, their language has changed. They don't talk about having the best margins but one of the best margins," says the marketing manager of a rival IT major.

"Infosys now may realise that the marketplace has changed and customers don't see Infosys as different from other players," adds Bhavin Shah, CEO, Equirus Securities and ex-JP Morgan MD and head of Asia Pac Technology research, who has tracked the company since 1997. But pricing is just one component of margin.

While prices may have come down, Infosys team got down to work the other levers to jack up or maintain the margins. On the productivity front, in the last quarter, the quarter on quarter per capita onsite productivity was up 3.7 per cent while the offshore part inched up 2.3 per cent. The utilisation rates (percentage of capacity used) were 71 per cent last quarter, whereas their optimum utilisation rates in 2008 had touched 78-80 per cent range. "That means there is a gap of 7-8 per cent in our utilisation levels from peak levels. There is an opportunity loss," says Shibulal. Offshoring more work saves cost and that's another area (TCS offshores 6 per cent more) Infy is looking at revving up. The current Infosys management's pet child, the PPS, is expected to be margin-active in two years, raking in 100 per cent more average revenue productivity than the current average.

Manage thy account The 'M' bottleneck addressed, the management set about fixing other problems that arise from rapid scaling up. In eleven-and-a-half years, from June 30, 2000 to December 31, 2012, employee strength in Infy rocketed from 6,445 to 1,55,629. With such exponential growth, an unwanted outcome is that organisations turn bureaucratic, reducing its ability to adapt as customer focus becomes a casualty. Under Shibulal's guard, one of the recent key changes in Infosys has been in the Basab Pradhan-led sales and marketing division. An old hand who had quit Infosys in 2005, Pradhan re-joined the company in June '11, and since then has been driving changes in sales and the client servicing arm to drive volumes and manage the accounts better. In line with global majors, like IBM and Accenture, a focus area has been the lucrative Global 2000 accounts that usually use more service lines, have longer engagements. As a rule of thumb, they give three times revenues in 4 years visa-vis smaller accounts.

For better account management, a Star Account programme makes sure that most high potential clients (about 50) get serviced by the best talent and a senior client partner is dedicated to a single client. "We need to be better partners in transformation, in operations and in innovation," says Pradhan. To produce winning proposals to improve deal flow, Infy brought in a 'value design' concept wherein customised solutions for each client were drafted by studying client focus areas and then defining how much business can be targeted from the client. But many of these best practices are already followed by the major players of the industry. So, isn't Infy late on the bandwagon "We have a lot more arrows in our quiver now, so we required a robust and agile sales organisation that's closer to the customer," explains Basab. Another vestige of the past that Shibu has been trying to shrug off has been the centralised decision-making culture that revolved around few individuals. In the new scheme of things, the financial control and approvals for the deals lie with the 4 verticals who take calls on pricing and structures.

The next big thing While Shibu & Team are fixing up the short-term problems, the long-term piece of the Infosys growth blueprint, Infosys 3.0, is work in progress. From the company's point of view, the ultimate aim is to get a balanced portfolio in 5-7 years, one-third revenue from each of the arms: Consulting and Systems integration, BITS and PPS. The dream sales pitch that the software major is working towards is this: we will transform your business with C&SI, we will optimise your business with BITS and we will help you drive innovation and create new capabilities with our PPS.

Before coming out with its proposition in mid-2011, Sunjay Purohit, the head of PPS division (roughly 6.5 per cent of revenue currently, including Finacle) spent 10-12 months (and still does) running around the globocorps and chatting up with senior executives to find out what the clients would do to build their tomorrow. Having identified 7 macro trends (see graphic), Infosys has started creating and co-creating platforms around the themes by having "conversations" with clients. What that means is that Purohit and his team talk to clients about the future trends and what the clients need to do to win in the future. Then they try and scope out where the company can help them ('diagnostics' in consulting terms).

"Rather than creating a hammer and then looking for a nail to hit, I am saying you need to change your business because these are the trends and patterns you need to respond to. We can create a funnel of ideas and then create and co-create products around them," says Purohit. Currently, there are 50 full-time researchers in the 'Center of Innovation For Tomorrow's Enterprise' who identify the trends and where the customers should be investing in the future. It's early days but starting just 18 months back, the PPS team has 70 clients already, filed 525 patent applications and pocketed projects worth $600 million. "The PPS focus is not just today, but how will Infosys make money five years from now," says Kuldeep Koul of ICICI Securities. And Infosys 3.0 is not only about "higher value" stuff but even the bread and butter businesses. There is an attempt to bring in differentiation in these commoditising service lines that have traditionally raked in the moolah.

"We have to differentiate our offerings in different ways. Some by using our depth of knowledge, some by using productivity and efficiency, and some by using the IP that we are creating," says Shibulal. For example, Infosys has combined their capabilities on the infrastructure management side and the testing side and used it to launch "infrastructure testing as a service", which could be a $5bn opportunity for the industry. Likewise, they have brought their global delivery model (GDM) model to Agile application development (a software development methodology), which helps reduce costs for clients significantly. "But the question as always is-"how unique are these innovations", and more importantly, "how scalable are these innovations" in a market, which is $400bn-plus," asks a research head of a major broking firm. While this PPS strategy is ahead of the curve compared to other Indian IT players, it remains a tough sell.

"Building a non-linear business will be difficult. When we evaluate the products and solutions of these companies, we find that these still require lot of customisation. So there is still a component of effort-based revenue model built in," says Shah of Equirus Securities. Call it timing or luck, when it's Shibulal's turn to lead the company he helped start, Infosys lies at a crucial juncture when either it changes orbit or remains just another Indian IT player. The last quarterly results were the first fruits of labour resulting from all the changes that the IT company has been making in the last few months but jury is still to be out on whether the company has turned the corner. "They still have many dharma sankat's to solve," says the CEO of an IT rival. Ask Shibulal of Infosys' aspiration now. He says modestly, "Our aspiration is to grow above industry average and we have one of the leading margins. Even if we go halfway through our strategy 3.0, it should allow us to meet our aspirations." Whether Infosys makes the leap between 2.0 to 3.0, is the million dollar question-and that will also be Sarojini Damodaran Shibulal's legacy.

Shibu versus the rest The last of the Infy promoters may have to be the most daring Often, Infosys watchers like to look back at the go-go times when NR Narayana Murthy and Nandan Nilekani led the IT behemoth. But in 2002, when the former quit, the employee strength was 14,000 and in 2007, when the latter left, the number was 59,000. Infy now is an altogether different beast with 776 active clients, more than a-lakh-and-a-half employees, a much more complex service offering, and on top of that, there is also the challenge to place future bets; the order of scale and complexity is of a different magnitude.

While NR Narayana Murthy did a fabulous job of creating the DNA of a world-class Indian IT company, Nandan Nilekani and Kris Gopalakrishnan scaled the Global Delivery Model admirably. But Shibulal's predecessors operated in an environment when outsourcing was under-penetrated as an offering, cost savings drew customers in hordes to Indian firms, MNCs were in the process of ramped up low-cost locations, and talent was aplenty. Also Infosys was the gold standard in many areas due to its corporate governance policies, a spanking new world-class complex, NASDAQ listing, and a sterling stock options plan that created scores of crorepatis.

"During Narayana Murthy and Nilekani's time, the company was running on the pride of Infosys. The customers and talent were besotted with Brand Infosys and almost flocked to the company. But that core value has started to diminish now," says CEO of a rival firm. By the time, Shibulal and Gopalakrishnan took over, the peers had caught up and Infy needed new momentum drivers to stay at the top. Now the IT Industry, infamous for its shifting sands, has started shape-shifting again. "Shibu has to deal with some mega trends, like the bottom of the industry is becoming a utility. It's not about selling bodies anymore. That end is being converted into a utility with the help of technology and processes. And if you have a mindset of selling people at hourly rates, you will be caught on a wrong step. In the utility model; it is 60 per cent people, 40 per cent technology.

So either you transform or you are out-competed," says head honcho of an IT services MNC. Market experts are of the opinion that Shibu will have to face much deeper challenges than any of his predecessors. With software-as-a-service, hardware-as-a-service and cloud-as-a-service becoming a trend, the legacy applications are changing to standard applications, and that's another big change that Shibulal & Co. will have to deal with soon. The whole client outlook is undergoing a change. During Narayana Murthy and Nilekani's tenure, the large focus was run-the-business kind of services where cost savings and operational excellence was what the client was looking for. Now the client wants growth and innovation and they are asking for benefits-based pricing. The market is transforming from efficiency-based innovations to disruptive innovation.

Leadership and attrition issues have always plagued Infosys CEOs. But such issues dog all young services businesses that have scaled exponentially and Infosys is no exception. Despite high-profile exits, the company has maintained a robust pipeline of leaders that is maturing with diversity of experiences. No doubt, Shibu's Infosys faces a plethora of challenges but it's a work-in-progress. Just that Shibulal doesn't have the founding Dream Team by his side when he faces his big test.

(c) 2013 Bennett, Coleman & Company Limited

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