Business Today

'My view has always been I don't care about the top line'

Chaitanya Kalbag        Print Edition: Feb 17, 2013

Infosys co-founder N.R. Narayana Murthy, 66, has done it all - bootstrapping an enterprise with what is loose change today, going on sales calls riding pillion on a Vespa scooter, walking away from a GE deal because would leave little profit on the table, setting up India's first mega software campus, leading Infosys to make India's first Nasdaq listing, setting the best corporate governance standards in India, and leaving the enterprise with $6 billion in annual revenues when he retired. In a rare interview, Murthy speaks to Business Today's Chaitanya Kalbag about Infosys's current troubles, its past and future, the functioning of the government and the prospects of his own venture fund, Catamaran. Edited excerpts:

Q: What have you have been doing for the past two years after you stepped down from the executive role at Infosys? Have you had any satisfying experiences with Catamaran?
A: I must say that Catamaran being a venture capital investment company, it is too early to say anything about its success, because in the case of most venture capital (VC) investments in India, exit takes much longer than in the United States. It probably takes five to seven-eight years. So we will come to know whether Catamaran's investments have been okay or not in four-five years.

Q: What sort of ventures are you investing in?
A: We have invested in education, particularly high school and junior colleges. We have invested in new models of urban healthcare, in e-commerce, in energy drinks.

Q: Do you have a panel that analyses these investments or do you look at them yourself?
A: My only job is to connect interesting opportunities. I have a colleague, Arjun Narayan (Arjun Ramegowda Narayanswamy). He did his undergraduate degree at MIT in computer science. He worked in the United States for eight years. He was my son's senior at school. My son advised me to invite him.

Q: Have you funded Catamaran yourself?
A: Yes. Both my wife and I realised that taking money from others is easy, but if you don't do a good job with it, it would be very difficult. I said I don't know much about this VC stuff. Running a company as an entrepreneur is one thing, but claiming to know VC is another. Therefore my wife and also my son suggested that whatever you want to do, do it with your own money.

Q: And how did you come up with the name Catamaran?
A: That was actually designed by Arjun. Catamaran, as we know in Kannada, is Katumaram. It is a nimble, small boat which can navigate very treacherous waters very fast. So we said entrepreneurship is what Catamaran represents. It is nimble, it will manage difficult waters, it is inexpensive, everything. That's how we chose Catamaran.

Infosys co-founder N.R. Narayana Murthy was interviewed by Business Today Editor Chaitanya Kalbag for our latest cover story, on Infosys's current troubles, its past and its future. Audio excerpts of their conversation

Q: I also wanted to ask you about the business environment. Do you feel things are getting better?

A: I don't think the current environment in India is very business friendly. I will give you a few data points. Bangalore is considered the Silicon Valley of India. It is the headquarters of the most famous multinationals and the most famous Indian companies in IT. But here, we do not have the facility of visa-on-arrival. Visa-on-arrival was introduced in Delhi and Bombay several years ago (for visitors from select countries). In spite of our repeated requests, this has not been done. This is where many from the US, UK, France, Germany, Australia, Japan come directly. They don't go to Delhi. Who goes to Delhi? Only politicians and heads of state do. Business people come to Bangalore. I have not been able to understand this.

Q: These are small things, not earthshaking things …
A: Any person with basic business sense should understand that Bangalore should have been the first city to have the visa-on-arrival facility. But it does not since the bureaucrats are still 1950s oriented. At that time, Delhi, Bombay, Calcutta, Chennai were the important cities. That is the problem. So we have to judge people by actions, not by words. Looking at the actions, somehow I don't get the feeling that we are very serious about business in India.

Q: What about Infosys? How do you think Infosys is doing?

A: Well I am now only an investor. I am the largest shareholder. Infosys came out with a new business model, Infosys 3.0, which was to focus on high value addition businesses. At the time when it came out with this, the economies of western countries went down and therefore the company was trying to introduce new ideas in a tough environment. Therefore, I believe they had lots of friction. Also, Infosys has historically had at least 20 to 25 per cent higher per capita revenue productivity compared to other companies. Selling such higher revenue productivity services in a difficult market, in a market which is very cost conscious, is not easy. I think those are the two reasons why Infosys has had some challenges in the last year and half or so. But in the last quarter, it seems 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 … my best wishes are with them.

Q: There is a growing feeling that customer-centricity has weakened. What we heard from analysts is that it is extremely difficult to negotiate with Infosys …
A: Infosys does not sign on the dotted line. We understand every clause. Most Indian companies say 'Oh, we will sign'. They don't seem to understand the liability. Again, we feel that whatever clauses we sign, we must be able to fully honour if required to. So you are right. Our people spend lot of time going through contracts. In fact, I would say that every company in India should do that. The weakness of Indian companies is that they don't go into the details of contracts.

Q: There has been no chief operating officer (COO) at Infosys for some time now. Is there a lack of a clear successor?
A: The company has been restructured in such a way that among Bala (V. Balakrishnan), B.G. Srinivas and Ashok Vemuri, the whole company is covered. Each of their units runs virtually as a company. So the management felt that there is no need to have a COO.

Q: There could be a battle for succession …
A: There are very clear KPIs (Key Performance Indicators) for each of the three and whosoever does best, will be selected. All three are in the running. In some ways, it is perhaps a good model because now there is an incentive for each one to perform better and better.

Q: There are lessons from history. If you look at the Fortune 500 list, companies that were on top at sometime don't even exist today. A: These things happen because of the cycles of business. And the nature of the IT industry has changed dramatically over the past few years. Do you really feel confident that there has been a relentless search for the best talent to make the Infosys brand permanent?
I think so. Over a period of 10 years, when I decided to voluntarily step down, I realised that I had people in the company who had been involved in this marathon for 21 years. Each of them was a brilliant individual, be it Nandan Nilekani, Kris (Gopalakrishnan), S.D. Shibulal, (K.) Dinesh, (N.S.) Raghavan, Ashok Arora. When you have a group of people all of whom are brilliant, you automatically look at how long they have shown this brilliance. You need some differentiation. 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 handled, etc (on who should succeed me). Nandan was chosen. As I have said earlier, 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. Then Dinesh wanted to retire because of his health. And then Shibulal, who was the seniormost guy among the high quality performers, was chosen. I don't know of many companies in the world which have handled succession based on meritocracy, transparency, well-known procedures, discussions and debates at the board as Infosys.

Q: It is just the changing nature of developments around the world, in the IT industry and in customer spending patterns. The US and A: Europe have been badly affected. It calls for a complete top-down reinvention of how you look at business opportunities. You mentioned earlier how per capita revenue productivity is the highest at Infosys, which is true. But conservatism sometimes can also be a stumbling block. You are sitting on a huge cash pile. Acquisitions have been very slow….
A: We have an acquisition team, which is headed by a very smart person. It has probably looked at about 150 cases. Just because you have money in the pocket, you should not throw it out. You have to get the best value for the money. You have to see if it is a strategic fit. You have to see complementary strands, as low customer overlap as possible. You have to look at the value system of the promoters. There are lots of issues. I would think that this company has a very good theoretical framework for acquisitions and it has been used by this wonderful team to make analyses, and if we find something that is truly worth buying, of course we will.

Q: Infosys's brand image as an employer of choice among younger people has also started fading a bit …
In the last two years, there was a big debate in the company about whether to seek postponement of (the joining date of) youngsters who were supposed to join. We said, these youngsters have spent four years in college, parents have spent a lot of money and we have gone and offered them. And if we don't take them on board now, these children will sit at home. It is not fun for parents to see their children get up and do nothing after getting their degrees. While we were fully within our rights to postpone - most other companies have done so - we deliberately took a decision that we will welcome them. We have the world's longest training programme, anywhere between 23 and 29 weeks. We have created lots of opportunities for youngsters to do things on their own. They can develop applications for apps stores. But 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. I think it is ungrateful and unfair of these youngsters to say that we are not being given work. Their salary is being paid.

Q: Is there scope within Infosys for a bright young person to go up the ladder very quickly? There are so many layers now that it seems difficult.
A: I was very, very focused on identifying high quality people and giving them bigger opportunities. But there is a focus on fairness amongst other people. So they say, we have to give opportunities to everyone, even though there are some bright people. There is focus on fairness. The laser focus on meritocracy, the laser focus on high-quality talent may have suffered a little bit. 

Q: Do you think some of these things need changing?
A: When you are running a company of 150,000 people, whatever changes you make are likely to (adversely) affect at least one or two per cent (of employees). Even if 30 of them start talking and say they are not happy, people will think there is a big problem. But remember it is a community of 150,000 people. Those 30 are 0.02 per cent. I want you to understand that the stray voices you may hear form a miniscule percentage. And no organisation can take decisions based on the views of 0.02 per cent.

Q: Infosys had a dream run for many years. Its business model was seen as unparalleled. Competition obviously started growing. Nimbleness is one of the casualties of a very large organization. The challenge is to be huge and nimble at the same time. There is a concern about that …
The reality of Infosys is most of what differentiates Infosys from the rest of the companies was done during my era. There is data - whether it was the global delivery model, whether it was building India's first software campus, whether it was getting listed on Nasdaq, getting certified to CMM level 5, whether it was issuing one of the world's largest stock option plans, they were all over by 2002.

Q: How did you come up with all these path-breaking concepts?
A: It was very simple. The only way you can succeed in a market is through a strategy of differentiating yourself from your competitors in such a way that you can better margins. For me, margins are extremely important. What differentiation can you have in finance, human resources, infrastructure, technology, research? You look at leading edge companies in each of these dimensions and see what they are doing. That gives you ideas - to either learn from them or create new ideas.

Q: Did you have people advising you about best practices?
A: No. We didn't have any of that. But everything was discussed and debated within Infosys. We had a set of really bright people. As long as you create an environment of openness, there will be new ideas.

Q: Do you feel that atmosphere continues?
A: I would say that at the time I left Infosys, it was continuing. Now, I don't know because I am away. I would think it continues, knowing Shibulal. 

Q: As Chairman Emeritus, are you still open for anybody to come and talk to you?
I am open, but they should come and talk to me. I don't go and talk. I did lecture yesterday at a strategy conference because they invited me. There is a saying in your home and mine - grandparents should speak only when they are asked to. Otherwise, they will not be welcome in the house. It is very important that grandparents are seen but not heard. I conduct myself like that.

Q: What about the structure of Chairman Emeritus and two co-chairmen. It is top heavy…
A: Chariman Emeritus is more of an honorary title. The Non-Executive Chairman is K.V. Kamath. His responsibility is board governance. Kris is Executive Co-Chairman. He is part of the team consisting of the internal board of directors. Kris is much more involved in helping Shibu run the company.

Q: Since Infosys is your grandchild and you are the largest shareholder, could there be a situation where they say, 'Come back, Mr Murthy'?
A: No, no. They are all good people, smart people.

Q: You feel there will never be a situation where you will be needed at the Chairman level?
A: 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. But looking at the data, looking at what I see in front of me, looking at the people who are involved, looking at their smartness and energy levels, their commitment, etc, I don't see the need for me to get back to Infosys.

Q: You have said intriguingly ambiguous things about the prospect of being called upon to play larger national roles. Do you feel you might do something like that?
I don't think so. I have crossed 65. After 65, people must take a little bit of rest. This is a country that has the largest number of people under 35. Therefore, the task of the elders is to help younger people perform better and succeed.

Q: You spoke at the Infosys strategy meet. What would be your advice to the Infosys leadership at this point of time?
A: I spoke of the need for continued differentiation from competitors. I said that strategy, according to game theorists, is outdoing your competitor who you know is trying to outdo you. Strategy, according to me, is all about creating sustained differentiation to add better value to customers for better margins. So for me differentiation is very important, better value to customer is very important, and better margins are very important. I think it is very important that when you people make the analysis, look at our depreciation policy, our provisioning policy, the money that we spend per employee on training, and then you compute the margin.

Q: You mentioned margins quite a few times. Despite the fact that all of you are management, strategy, technology-kind of professionals, Infosys has been strongly finance oriented in many ways …
Right from day one, I was focused on finance, strategy and software. I wrote down a set of principles. I said from Day One, we will be profitable. People said how? I said spend less than what you earn. Two, I said that from Year One, we will declare dividends. On those dividends, you pay taxes and put it back as your equity because our starting equity was only Rs 10,000. I said we have to build enough equity so that when we go public, we will have at least Rs 1.8 crore.

Q: What was the significance of Rs 1.8 crore?
A: At that time, we offered 40 per cent to the public. So we had to build it upto Rs 1.8 crore. To go from Rs 10,000 to Rs 1.8 crore was not easy. Therefore I said from Day One, you become profitable, declare dividends, pay taxes and put it back as your equity. Infosys was probably the first company in the industry to have such robust financial systems. I have had a focus on margins right from Day One.

Q: Your depreciation rules are very different?
A: We depreciate most technology in two years. We write off software the same year. We write off anything (costing) below Rs 5,000 the same year. We depreciate buildings in 15 years as against the 28 years allowed. If we do not receive money from a customer in 180 days, we make a provision. Somebody has to make this analysis and talk about our true margins, the true quality of our earnings.

Q: It is remarkable that the margins stay good after these kinds of provisionings…
A: Absolutely. This has become such a part of our DNA that our sales people don't want to reduce their rates. 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. Infosys is one company that does not take decisions based on ticker-tape.  In 2001, we had grown by 100 per cent in the year prior to that. On April 10 or 11, 2001, we made an analysis and I was comfortable with only 30 per cent.  Everybody said what will happen? The stock price will go down. I said I don't run this company based on stock price. I run this company based on how well we satisfy our customers, how happy our employees are, how transparent we are with our investors. I stood up and said 30 per cent.  I think the stock price went from Rs 5,000 to Rs 1,500-1,600.  I didn't bother.  It came back! That's the advice I gave Shibulal - don't take decisions based on ticker-tape. Take decisions based on customers, employees, investors. Be transparent with investors but don't take decisions based on stock price. I would say that the focus on margins has always been an integral part of Infosys's thinking.

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