The old order changes

June 14, 2014. The auditorium at Christ College, Bengaluru, where Infosys has held its annual general meetings (AGMs) every year, was abuzz with excitement and speculation. This would be the last time NR Narayana Murthy would take the stage as executive chairman of the company he built with six others 33 years earlier. It would also be his second farewell to shareholders. In 2011, on turning 65, Murthy gave up the executive position at Infosys to become chairman emeritus — only to return two years later. He was called back by the Infosys board to set the company’s future strategic direction and to find a suitable successor.

Two days before the AGM, at a press conference on the Infosys campus, Murthy announced to the world that his job was done and he was leaving the company in the very capable hands of a new CEO. “My biggest satisfaction is that I was able to complete both the mandates given to me by the board. As a parent, I only wish Infosys continues to scale greater heights,” Murthy told Outlook Business after the press meet. 

He has reason to be optimistic, since the new CEO taking over the reins from SD Shibulal comes with impeccable credentials. Vishal Sikka is a former member of the executive council at SAP. He led innovation and products at the enterprise software giant and is credited with developing HANA, the company’s flagship analytics database and among its fastest-selling products. In an earlier interview to Outlook Business, Murthy said he believed in recruiting people smarter than himself. Well, Sikka is certainly very, very bright. The 47-year-old is a PhD in computer science from Stanford, which Murthy says is “perhaps the highest recognition you can get as an intellectual”. Murthy isn’t leaving alone. Infosys co-founders SD Shibulal and Kris Gopalakrishnan will also step down in July 2014 and October 2014, respectively, leaving Infosys without a founder at the helm for the first time. “Infy has made an unconventional choice, which was the need of the hour,” says Ashok Soota, chairman and MD of IT services company Happiest Minds. 

In an investor conference earlier this month, Infosys had indicated it was looking at both internal and external candidates as the possible CEO who can take the company forward over the next eight to 10 years. Its bread-and-butter software services is getting commoditised and the Infosys 3.0 initiative spells out its strategy for moving up the value chain. Clearly, what the company was seeking, then, was someone who would help it transition smoothly from being a software services provider to offering value-added solutions through products and platforms as well as consulting. “Infosys wants to have a deep presence across verticals and will probably end up looking like an SAP or Oracle. The need today is to have an IP mindset and not just about a possible movement towards becoming a products company. That transformation has been going on for the past four or five years,” says Sudin Apte, CEO of Offshore Insights, an IT research firm.

Given his extensive background, the CEO designate seems to be the perfect man for the job. “Vishal Sikka is best suited for defining the future of Infosys since he understands products really well,” says Subhash Dhar, CEO, Enterprise Nube, and former global head of sales at Infosys. 

In particular, Sikka was brought in because Infosys wanted a client-facing CEO based in the US, which contributes nearly 60% of its revenue, and a leader who could open the doors into global boardrooms. “Bringing in Sikka may make it easier for Infosys to embrace the fundamental change it needs,” points out Peter Schumacher, founder and CEO, Value Leadership Institute. 

However, for a mature services organisation like Infosys, the transition to a more product-based offering will take time and requires a different mindset. The immediate concern, some analysts feel, is that Sikka’s products background could be a challenge when it comes to running a services company. “In the services business, the product is the people. They represent your brand and it is important to keep them motivated. It is important for Sikka to establish credibility, alleviate concerns and put forth a strong viable direction to customers and employees,” feels Frances Karamouzis, vice-president and analyst, Gartner Research Advisory Group.

But others believe such worries may be unfounded. “Today, there are no silos such as hardware, software and networking. Clients are looking for business solutions. To that extent, the product-services debate is not important. In that context, Sikka not having a services background does not matter at all,” says Apte.

Besides, Sikka will have help figuring out the services business. He’s got a crack team in place already (see: Change of guard), headed by the newly-appointed COO, UB Pravin Rao, who, having spent 28 years in the company, knows Infosys like the back of his hand. “While Sikka will be interacting with clients, I will handle the delivery out of India since I have a good understanding of how the company works. The dream is to get Infosys back on the growth path,” says Rao.

Expectations from Sikka are already high. The past few years haven’t been kind to Infosys and the new CEO will have his hands full trying to bring the company back on the fast track to success even as he works on a possible shift in direction from services to products. While there’s certainly work to be done, Sikka’s appointment is being seen as a positive move not just for his professional capabilities but also the change in thinking it signals at Infosys. From a company that was becoming hidebound and linear in its approach; here are signs that, perhaps, Infosys is becoming more open to change and open to new business opportunities.

Not fighting fit

Over the past few years, as the company lurched from crisis to crisis, competition surged ahead. Cognizant Technology Services (CTS) and TCS have been growing faster than Infosys (see: Tough competition) primarily because they have evolved into companies that are fundamentally more agile, dynamic and less hierarchical. “Rather than simply following the chairman’s orders, the Cognizant and TCS executive teams have spent a lot of time and energy deliberating about who they are, where they need to go, how to build organisational alignment, and what capabilities they will need to compete in the future,” points out Schumacher.

In stark contrast, Infosys has over the years become more inward-focused and process-oriented, rather than a customer-centric organisation. “Till 2002, we were like cowboys running the place, doing our own thing, encouraged to take more responsibility. There was enough volume and demand to keep the deal flow robust. There was a need to centralise things and have some more control as we grew, but the focus changed to margins and protecting them at all cost and Infosys became a finance-led organisation,” says a former executive council member. 

As a result, Infosys was seen as a more rigid organisation benchmarking its progress against its long-term plans while CTS and TCS were changing their business model to respond to customer needs. “When it comes to dealing with customers, TCS and CTS are very collaborative and bring a global mindset to their game. Customers tell us they like them because they spend time learning and understanding their problems. Infosys, by contrast, tends to seem arrogant, more interested in convincing customers that they’re the smartest guys in the room than that they have the best understanding of the client’s needs. This approach might win some contracts but it’s not a good way to keep clients happy over the long term,” says Schumacher. 

For the most part, challenging the status quo hasn’t been part of Infosys’ DNA. “Success became the biggest threat for a large company such as Infosys. At that time, we didn’t take too many risks. The thinking was, ‘why fix it if it ain’t broke’,” says V Balakrishnan, former CFO of the company. However, in an industry such as technology, where disruptions change the pecking order once every decade, what works today may not necessarily work tomorrow. That’s something Infosys learnt the hard way over the past couple of years. But back then, Infosys still preferred to play it safe and follow the Murthy rule book even when he was not around. In an earlier interview with Outlook Business, Murthy had explained his thinking. “First, I only believe in bottomline. I don’t believe in topline. For me, if you are running a business, you have to be the most profitable business in the industry. That’s the way I have operated from day one.”

So, Infosys continued to be fixated on margins and not compromising on pricing. Even post the financial crisis in 2008, which considerably changed the outsourcing landscape and when traditional business models were challenged, Infosys was often rigid in its negotiation process and delivery, which analysts believe contributed in no small measure to the company’s slow growth rates (see: The margin conundrum). “Many customers have told us that Infosys does not listen. In 2008, at the height of the economic crisis, Infosys bluntly told its customers that it wanted to raise prices. TCS and CTS, instead, said they were aware of the pain points and wanted to help their customers. The result is that they emerged from the crisis stronger than when they went in, with deeper relationships, while Infosys left sadly diminished,” says Schumacher.

Questioning leadership is never easy. It gets even more difficult when you have to challenge an iconic leader such as Murthy, who put India on the global IT map but also had the vision to build an organisation that has grown into an $8-billion entity. While iconic leadership can give companies an unbeatable advantage, it can also hurt them because often they are a tough act to follow and, at times, you don’t question some of their decisions. Indeed, that is why when co-founder Nandan Nilekani met Warren Buffett at an Infosys roadshow in the US in early 2000 and asked him to invest in the company; Buffett refused, saying he never invests in companies with iconic leadership.

Interestingly, in the earlier interview, Murthy had also said that Infosys has always operated as an enlightened democracy and “the good thing with democracy is that usually there aren’t any disasters because there is always opposition.” So, was it the lack of opposition that led the company to its current position?  

Crisis situation

Infosys, which was already struggling with growth issues in the market place, for the first time since inception witnessed power struggles that resulted in an exodus of senior management, even as NRN returned to the helm last year. “I have always believed that fairness, transparency, accountability and leadership by example are the key to the success of any enterprise. Somehow the company diluted its focus on meritocracy and accountability during the last decade,” said Murthy in his speech at the AGM last fortnight. While the observation may be true, usually when things go wrong at companies, it is the CEO who is held accountable for its performance. Not so at Infosys, where the founder-rotation policy for the top job continued and the corner office had little accountability for the company’s performance in the previous couple of years. “You cannot have one set of rules for the founders and another set of rules for the employees,” says Mohandas Pai, former CFO and HR head of Infosys. “Murthy coming back was due to the failure of the CEO to deliver.”

While leadership issues and its rigidity to change did take a toll on performance, many feel Infosys dug itself into a deeper hole with its Infosys 3.0 strategy. In April 2011, the company formally launched ‘Infosys 3.0’ to lead its transformation from a technology solutions to a business solutions company. (see: The evolution of Infosys) The business was restructured into three service lines: transformation, which included consulting and systems integration; innovation, which included IP-led products and platforms, and cloud; and finally, business operation, which included its bread-and-butter business, application, development and maintenance, testing, BPO and infrastructure management services. The aim was to get a third of revenues from each of the service lines, instead of the existing contribution of around 33% from transformation, 5% from innovation and 62% from operations. Even the tagline was changed from ‘Powered by intellect, driven by values’ to ‘Building tomorrow’s enterprise’ to reflect this new focus. The idea was to sell the transformation and innovation business while scaling up the existing core business. 

But it didn’t happen that way. The timing was all wrong. The ongoing economic crisis and subsequent reduced IT spends meant that most of Infosys’ clients were content just keeping the current organisation running, which meant all transformation and innovation business was put on the backburner. At the same time, the sales team was busy pushing the future to clients, and took its eye off the IT services business. With the result that in faster-growing services such as infrastructure management and BPO, Infosys lost out to companies such as TCS, which has grown these businesses faster. For instance, a UBS Securities report points out that TCS has grown its infrastructure and BPO business by 27% and 30%, respectively, during FY09-14 compared with 15% and 9%, respectively, for Infosys. 

The return of NRN

All of which meant there were some tough decisions to be taken when Murthy returned to the corner office in 2013. He drew up a three-pronged strategy to improve cost, sales and delivery effectiveness. Infosys started by trimming onsite and selling, general and administrative expenses, improving the onsite-offshore revenue mix and reducing employee costs by hiring more freshers. In order to improve sales, the company renewed its focus on its core applications business and went after large deals in that space. It also worked on improving delivery through automation, using tools, process and solutions. While some of these measures were short-term fixes to restore investor confidence, there are other strategic initiatives that could potentially change the DNA of the company in the medium term. It is now up to Sikka to drive these.

While cost-cutting measures have resulted in improved margins, which have risen 200 bps to 25.5% in the past six months, they may be unsustainable in the long run unless revenue growth accelerates (see: Fringe benefit). Much of the margin improvement was a result of lower employee costs and subcontracting costs. 

In the investment period, which usually extends to two or three years, margins dip before they start climbing higher once revenue momentum kicks in. Consider TCS, where margins improved from 26.5% in FY10 to 29.05% in FY14 after revenue more than doubled from $6.3 billion to $13.44 billion over the four-year period. “Revenue growth is a concern for Infosys today. That said, you cannot keep margins up and also continue to grow. That is an oxymoron. TCS’ high margins have come with scale and the ability to understand the low-cost structure. High margins are not sustainable as the market matures. Customers then want more value,” says Peter Bendor-Samuel, founder and CEO of Everest Group, a global management consulting firm. 

Issue issues

While no company gets it right all the time, Infosys and Murthy were probably judged harsher because of the halo both have painstakingly built around them over the years. There were cardinal rules the company swore by and Murthy would always reiterate that going back on your word was not an option. That meant offer letters were always honoured despite market conditions, guidance to shareholders always met and even the unwritten rule that members of the founding family didn’t join the company was strictly adhered to. So, when Murthy decided to bring in his son, Rohan Murty, as his executive assistant in his second stint, it didn’t sit very well with many people both within the company and outside. 

At the outset, Murthy insisted Murty would only assist and would not be given any leadership role. Reality, though, was quite different. Not only was he reshaping strategies and resizing units, he would often sit in on meetings with key executives and client meetings with his father. “Rohan used to question a lot of people on their competence or how they ran their unit, which put them off. Even if it was Murthy asking, you knew where the questions were coming from. The role of the EA is to maximise the productivity of the boss, not question and reshape company strategy,” says the former executive council member quoted earlier.

At the June AGM, Murthy defended bringing his son into the company. “Some of you have questioned why I asked Rohan to put his life on hold and come 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. When the board requested me to come back I knew I needed somebody by my side who is intelligent, smart and is new to the industry to the point of where he/she would not accept status quo.” Not just that, Murthy went on to credit his son for all the strategic initiatives of the past year, from automation of software and improving productivity to bringing in a culture of innovation. “Each and every one of these initiatives has been conceived, implemented and pushed forward by Rohan,” declared the visibly proud father. Certainly, there is no questioning the credentials of Murty, who is currently doing his doctorate at Harvard. But the question that begs to be asked is, why wasn’t  someone within the company  given the mandate? “While he may have a PhD in computer science, you can’t expect someone who spent two decades building the business to take strategic direction from someone with no work experience. This business is all about execution. The customer doesn’t really care if you are from Harvard or Stanford,” says an exasperated former employee who left Infosys last year.

He isn’t the only one to feel that way — several members of the senior management left Infosys over the past year (see: Trooping out). “When nearly 13 senior managers leave in one year — and some of them handle a large part of the P&L — it is more than just cleaning house. And if someone says that their departure had little impact on the company, they are definitely smoking something,” says a former senior leader of the company. Analysts tend to agree. “The exodus at Infosys has been devastating. This is a relationship business and all about people, perception and trust. Infosys cannot afford to have more leadership or employee departures. And it absolutely cannot afford client departures or a slowdown in contract signings,” says Gartner’s Karamouzis.

With one in every five employees leaving the company in the past one year, attrition is definitely a concern for Infosys but the silver lining is that it still has a large talent pool it can dip into. The company has over 150,000 employees and 585 leaders at all times nurtured and developed by its leadership institute. “There is enough talent in Infosys at the unit level. There are enough opportunities in the market, which is evident when you look at the numbers of other players. You have to ensure that promising talent is given additional responsibility and empowered to take quick decisions so they can capitalise on market opportunities.” says Pai. 

Indeed, an immediate concern for Sikka is likely to centre on employees, boosting morale and addressing concerns. A beginning was made during Murthy’s regime when two salary hikes were given and a clear career path detailed for promising juniors who will be mentored. But more needs to be done, especially since so many exits in such a short span may have shaken their confidence in the company. “While it is definitely about time Infosys had a non-founder CEO, Sikka does have some challenges. He must develop an emotional connect with the employees and Infosys traditionally has taken time to warm up to outsiders,” points out former CFO Balakrishnan. Still, every effort is being made to ensure a smooth transition for Sikka when he takes charge in August. 

Murthy has indicated clearly that the new CEO will be allowed to chart his own path. With founders and a large chunk of senior management leaving, the decks have been cleared for Sikka. “Murthy and the other founders have made the right decision in moving out to allow the new incumbent an opportunity to be his own man,” says Soota. With leadership issues sorted and a formidable CEO waiting to take over, it looks like the worst may finally be over for Infosys. As one of the shareholders said at the AGM, “Ab Infosys ke achhe din aane wale hain.”.