On a sunny October afternoon at an Andalusian-style resort in Southern California with breathtaking views of the Pacific, a senior PepsiCo information technology (IT) executive stopped in midsentence to peer thoughtfully into a glass of Chardonnay. The conversation, around outsourcing to India, had paused at Infosys, the poster child of Indian IT.
Infosys is by far the biggest Indian IT outsourcing vendor that PepsiCo, a $67-billion food and beverage multinational, ships big dollars worth of work to. The Bangalore company has been running PepsiCo's applications for many years. "I remember the time when Nandan was there. It was a very different Infosys. They were very clear about their strategy. I just don't know Shibulal. What is the company's strategic focus now?" the PepsiCo executive said. (Nandan is Nandan Nilekani, the company's former CEO, and Shibulal is S.D. Shibulal, another co-founder who currently holds the post.)
Q&A: We still have some catching up to do, says Shibulal
Even gods have feet of clay. Infosys, a company that grew from a seven man start-up in 1981 to the 155,629 person, $7 billion enterprise it is today, has time and again been called India's most admired and respected company. But its halo has dimmed.
On the BT500 annual listing of India's most valuable companies, Infosys fell from No. 2 in 2010 to No. 6 in 2012. In Business Today's 'Best Companies to Work For' survey, it slipped to No. 2 in 2011 for the first time in three years. It is not just employee adulation that is waning. Several key customers also feel unloved.
An internal restructuring, a leadership vacuum, complacency towards customers, rigid contracting terms, and a stubborn high-margin pricing model have made recording growth at Infosys as difficult as walking on wet tar. So much so, the company is now struggling to beat even the average industry growth rates. Its bigger rival, Tata Consultancy Services (TCS), has pulled away and widened its revenue lead by about $3 billion, while third-placed Cognizant has already overtaken Infosys in terms of quarterly revenues in the June and September quarters of 2012. Things may get even more slippery as Infosys transitions for the first time to a nonfounder CEO in March 2015, when Shibulal turns 60.
Read: Inside voices from Infosys
Long admired as an exemplar of best practice, Infosys has not stopped trying to change. In March 2011 it launched a much vaunted 'Infosys 3.0' strategy that seeks to steer the company towards high-end consulting, innovation and more "non-linear revenue" - revenues growing faster than people costs. Shibulal says he "can clearly see our customers and analysts accepting the strategy", but it is not resonating with clients like PepsiCo yet. The multinational recently outsourced more innovative projects to TCS, which is now working on analytics and speciality applications like transportation optimisation systems.
Since it was founded by Nagavara Ramarao Narayana Murthy
and six other engineers in Pune in 1981 with an initial capital of Rs 10,000, Infosys has been feted
and applauded for everything from its business model to delivery excellence and its leadership to its corporate governance. It was the first Indian company to offer stock options to employees in 1993, the year it went public. A total of 16,237 employees benefited until ESOPs were halted in July 2003. In 1999, it became the first Indian company to list on the Nasdaq. It was also the first in India to report quarterly financials, issue guidance against insider trading, come up with the concept of a lead independent director, and have directors assessed by peers.
"The halo came from stock options that gave exceptional returns. The company was growing at a fast pace and nobody had a campus like us. There was a lot of employee pride and people clamoured to be part of the organisation," says Rajesh Varrier, who started Activecubes, an analytics company, after working with Infosys between 2000 and 2006.Q&A: 'Infosys is like any other Indian IT company now'
The magic has faded. Although it boasts one of the best training programmes in the IT industry - anywhere from 23 to 29 weeks - many young "Infoscions" are sitting it out, waiting for work to come their way. Murthy is irritated by such disgruntlement.
"The reality is that when the business slows down and you take another 25,000 people, naturally there will be people who will not have much to do. But I think it is ungrateful and unfair of these youngsters to say that we are not being given work. Their salary is being paid," he told Business Today in a long and candid conversation in Bangalore.Q&A: 'Hope this quarter's good results are a beginning for Infosys'
Building number 44 in Infosys's plush Electronic City campus in Bangalore is sometimes jokingly referred to as the "washing machine building" by employees because its architecture somewhat resembles the household appliance.
Inside, hosting the company's 'Innovation Day' in early September last year, Infosys executives articulated the company's non-linear strategy.
Nandan Nilekani March 2002 - June 2007
Much of the day's action was centred around a balding, salt-andpepper-haired executive with a professorial air, Sanjay Purohit. Senior Vice President and Global Head of Products, Platforms and Solutions, Purohit is tasked with growing an important part of Infosys 3.0 - the company wants to scale its revenues from banking product Finacle, other products and platforms to a third of its revenues from about 5.5 per cent currently. While Infosys had Finacle, led by Senior Vice President M. Haragopal for a long time, the company recently has started selling platforms - IP-led configurable services where the pricing is tied to either usage or outcomes.
Purohit's appointment, which came soon after Shibulal took over in August 2011, raised some eyebrows. Besides enjoying his CEO's confidence, Purohit is an accomplished executive with experience in strategic planning, business operations and leadership development. He played a substantial role in framing Infosys 3.0.
But there is one big gap in Purohit's resume: he has never handled sales, and many insiders wonder if it shouldn't be a hard-nosed business development leader who should be driving the platforms group. Many company-watchers and rivals have the same question. Does Infosys have the right people in the right places to take it from the current $7-billionplus annual revenue to, say, $15 billion in five years?
From its earliest start-up days, Murthy assembled a crack team at Infosys whose roles were clear-cut. In the 1990s and early 2000s, the team shone: Nilekani, the strategist and rainmaker; Kris Gopalakrishnan, the technologist; Shibulal, the delivery specialist; Mohandas Pai, the financial wizard; and Murthy holding the team together even as he set processes and rules for predictability, quality, scale and growth. Of the original team, Infosys now has only Gopalakrishnan, who is Executive Co-Chairman, and Shibulal. Nilekani left in 2009 to join the government, and Pai quit in April 2011, clearly miffed that he was not going to get a shot at the CEO's job, as Murthy stuck to the formula that the baton would pass from one founder to another.
Murthy stepped down from the board in August 2011 to become Chairman Emeritus with no executive responsibilities. ( Other founders - Ashok Arora, N.S. Raghavan, and K. Dinesh - are no longer with the company).
Most observations about the greatness of Infosys are made in the past tense today. "Infosys had an extraordinary advantage over any other company - that of a charismatic leadership who had the ability to open the boardroom of any global 2000 company," says Sudin Apte, CEO of IT research company Offshore Insights. "The brand was very differently recognised in the world. Nandan had great relationships. That advantage has faded."
Kris Gopalakrishnan July 2007 - August 2011
Murthy spells it out starkly. "The reality ... is most of what differentiates Infosys from the rest of the companies was done during my era," he said. "That is data - whether it was the global delivery model, building India's first software campus, getting listed on Nasdaq, getting certified to CMM level 5, whether issuing one of the world's largest stock option plans, they were all over by 2002" - the year Murthy stepped down as CEO.
Indeed, the loss of key leaders, coupled with the exit of many senior executives over the past two years may have drained the company of both thought leadership and client relationships. Clients and competitors cite several examples.
BT, formerly British Telecom, at one point Infosys's largest revenue-generating customer adding $375 million to its top line a year, has been reducing the business it gives out to the Indian vendor.
S.D. Shibulal August 2011 to date
Since the 1990s, Adidas used to work only with only one Indian vendor, Infosys; 18 months ago, the German company signed on mid-tier player Mindtree. At American insurance company Aetna, where both Infosys and rival Cognizant are vendors, the latter is growing much faster - Cognizant generates upwards of $50 million in revenues from the account.
About a year ago, Infosys lost an $85 million account from US health benefits corporation WellPoint. Both Shibulal and an Infosys spokeswoman were at pains to stress that the company never comments on specific clients. "I should add that there are factual errors [in Business Today's reporting] - which we cannot clarify in line with our policy of not commenting on client engagements," the spokeswoman said in an e-mail response without elaborating.
The view from certain quarters in Europe, a market that CEO Shibulal sees as key for Infosys's future, is not flattering. "Infosys became complacent in a lot of client situations, which is really surprising.
They were not responsive. Their growth problems are not because of pricing. It is because they are not there in the bidding process or are not being considered at all," says Peter Schumacher, President and CEO of Value Leadership Group, a firm that offers global consulting services to buyers of IT services. Between calendar years 2007 and 2012, in Europe, Infosys added some $568 million in incremental revenues; TCS added $1.39 billion.
Murthy is not apologetic about the company's focus on margins. "This has become such a part of our DNA that our sales people don't want to reduce their rates. Because if you reduce, margins will go down. When I used to sit there, nobody dared come to my room and say I want to sell at a lower rate. I think even today, Shibulal has taken that view. Kris took that view. Nandan took that view. Therefore, selling in a difficult market is more difficult. My view has always been I don't care about the top line, I care about the bottom line."
And, commenting on market perception that Infosys is a finicky negotiator, Murthy says flatly: "Infosys does not sign on the dotted line. We understand every clause."
While market complexity and rivalry have grown, there has been a proportionate decline in the quality of Infosys's leadership, industry veterans warn. Rajeev Sawhney, who quit as the President of HCL Europe in December after 31 years in the company, has seen Infosys evolve from close quarters. "I hear their teams on the ground say that there are very few leaders they can take to clients. Very few leaders who can provide top cover and management commitment."
Ironically enough, it is Shibulal who is credited with building the core that Infosys stands on today. As the chief operating officer (COO), Shibulal reviewed targets and did everything to achieve them. He introduced the model of fortnightly operations reviews.
"His strength comes from execution," says co-founder K. Dinesh of Shibulal, adding the current CEO architected a cost-effective network for Infosys's global delivery model in the 1990s that helped swell business.
Customers back then had expensive telecom links between the United States and India. Shibulal created a hub in Boston where customers could connect via local telecom links, while the hub connected to India with two high-capacity lines. Even today, Infosys counts 63 per cent of its business from the United States.
Shibulal, the perfect operations head, is not as customer-savvy as his peers, however. A former employee now with Wipro had accompanied him for an executive connect meeting to a health insurance customer in 2009. "I figured out he didn't have much knowledge of the industry and was not a sales guy. But he was confident and direct. He could steer the conversation with the client to his comfort zone - operations," he said.
But weak customer links could end up being a handicap for a CEO trying to navigate difficult times. Most of the rivals outdoing Infosys in growth are all led by aggressive salesmen: N. Chandrasekaran at TCS
, Francisco D'Souza at Cognizant
, and HCL Technologies's Vineet Nayar, who until early January was the company's CEO. Shibulal's - as also his predecessor Gopalakrishnan's - performance pales before the customer-savvy Nilekani and Murthy.
As its customers change, and as its biggest market, the United States, is beginning to veer away from outsourcing and offshoring to "reshoring", should Infosys have looked for a far more aggressive sales whiz as its leader?
In his interview, Murthy stuck to his loyalty and longevity guns. "When you have a class of people all of whom are brilliant, then you automatically look at how long they have shown this brilliance. So while we had other people - Mohandas Pai, Balakrishnan and others - we had to make a decision based on longevity in the company and the kind of responsibility they have handled. Kris was theoretically ahead of Nandan but he gave it up voluntarily and Raghavan was not interested in taking up any responsibility.
So Nandan became the CEO. Then Kris was ready and he was chosen. Dinesh wanted to retire because of his health. And then Shibulal, who was the senior most among high quality performers, was chosen," he says. The Balakrishnan Murthy refers to is V. Balakrishnan, the company's former CFO.
But Pai, who joined Manipal Global Education as Chairman after quitting Infosys just as Shibulal was set to take over as CEO, finds the longevity argument fallacious. "The business has become complex. The company requires a world-class management team to grow the business. There is deficiency in this area. The company has lost its lustre as TCS and Cognizant have performed better," he says.
| INTERVIEW: K.V. KAMATH|
What's remarkable about Infosys
What I admire about the company is that from 1980 to date, the company has virtually reinvented itself.
What it takes to be a good CEO
Anybody who becomes a CEO has to tick several boxes: how entrepreneurial is the CEO, how technically strong, how strong in the context of governance ... and what I call emotional maturity.
In the last year, bench utilisation was lower than the competition. We are working to see how we could change this utilisation level. I am sure we will watch in the next four quarters what is the outcome of the effort. (Click here for the full interview)
Non-executive chairman K.V. Kamath hints some executive shortcomings can be corrected over time. Any body who becomes the CEO, he says, has to meet many criteria ("tick many boxes") : how entrepreneurial the CEO will be; how strong he is in terms of technical capability, governance, managing peers, managing the external environment; and emotional maturity. "What happens is that, in some people, some boxes score much higher than others and the board, during the selection process, tries to make sure the balance ultimately is what works. I have found a person who is otherwise good has some other weaknesses which are made up in the course of time," he says, in answer to a question whether Infosys is hurting because its leadership does not have strong customer connections.
In other words, Shibulal may have had to learn on the job, but does the company have that much time? Co-founder Dinesh feels Shibulal is already an improved executive. "I don't know what he can improve. He is a people's man, a process man, a tech man. Even his articulation has changed for the better," he insists.
In September 2012, Infosys used some of its $4.3 billion cash reserves to acquire Swiss consulting company Lodestone and the buy has already spruced up the company's top line, surprising markets. In the third quarter ended December 2012, the company reported a sequential top-line jump of 6.3 per cent in dollar terms to $1.91 billion.
While a pricing uptick and strong domestic revenues also helped the numbers, which some attribute to the Infosys 3.0 strategy, it is too early to spot green shoots, says Shibulal. "I do not want to acknowledge Q3 - a single quarter - as a reflection of our direction because it is a reflection of the work we have done over multiple quarters," says Shibulal. "I remain cautiously optimistic because of the environment. The world has not changed."
Narayana Murthy prefers to tread cautiously as well. "They (Infosys) seemed to have pulled back a bit. But it is only one data point. Unless there are at least two data points, ideally three because three points define a plane and two points define a line … so, therefore, my best wishes are with them," Murthy said.
The longest shadow looming over Infosys, however, is of leadership succession. Significantly, Shibulal, who was Chief Operating Officer before his elevation, has not filled his old shoes - and there are three strong contenders for his job in 2015: Ashok Vemuri, who heads the manufacturing clients business, B.G. Srinivas, who runs the banking and financial services business, and Balakrishnan, the former CFO who now heads business process outsourcing, the banking product Finacle and the India business.
Insiders say there is more than the usual competitive friction in the boardroom.
"There were times when there was a COO and then there were times when we didn't have one. Organisations make these choices," Shibulal told Business Today in a November interview.
Murthy said there are very clear 'key performance indicators' for each of three executives and the best performer will be selected to head the company. "All the three are in the running. In some ways, it is perhaps a good model because now there is incentive for each one of them to perform better and better."
Nevertheless, both current and former employees feel the scales may be tilting towards Srinivas, who is close to Shibulal and is said to be more people-friendly than Vemuri. The CEO, many insiders say, does not see eye to eye with Balakrishnan, a straight-talking executive who during his CFO days blocked the $450-million acquisition of Belgian payment solutions company Clear2Pay, a buyout that Shibulal was keen on.
He stepped down as CFO in October 2012, handing over the reins to Rajiv Bansal, the vice president for finance. There is no evidence to link Balakrishnan's role change to the acquisition that didn't happen. Shibulal had two words when Business Today asked him about his differences with Balakrishnan. "Good story," he said. Balakrishnan did not want to comment.
Watching Infosys's challenges, both on the business front and at the leadership level, from the office of his venture capital fund, Catamaran Ventures, in Jayanagar in south Bangalore, can hardly be comforting for Murthy, who likens himself to a grandparent. "Grandparents should be seen and not heard, otherwise they won't be welcome in the house," he says. But it is clear the leading founder is watching very closely and is not totally disengaged.
The day before he met Business Today, he was invited to speak at a company strategy meeting. Murthy is aware of the company's problems. For instance, he acknowledges that while there is a focus on fairness, Infosys's "laser focus on meritocracy, high-quality talent may have suffered a little bit".
All this clear-air turbulence could just be symptomatic of a 32-year-old company that listed only 20 years ago. Some of its troubles could be put down to hubris. Murthy disagrees. "There is no hubris. It is based on value system, well thought of, it focused on margins, focused on value systems … there is no hubris," he says.
To revive its glory days, then, will Murthy return to the company and play an active role again? "I don't think so, but who knows. If something happens to some critical people, if their health suffers, who knows? I don't want to say never," is his reply.
"But looking at the people that are involved, their smartness and energy levels, I don't see the need for me or anybody else to get back to Infosys." Famous last words?