Business Today

InfyNitty Gritty

twitter-logoGoutam Das | Print Edition: May 13, 2012

Friday, April 13 began as a sunny and clear day in Bangalore. But well before noon, for Infosys, the city's most visible corporate resident, it was clear that the day would be its darkest in a while. Shares of Infosys lost 12.5 per cent in the six trading days that followed.

PERSPECTIVE: Infy CEO-hopefuls work on strategy changes

At 8.45 that morning, just before the country's stock markets opened for trading , Infosys had delivered a shocker. It said it would grow revenues between eight and 10 per cent in 2012/13, significantly lower than the expected industry average of 11 to 14 per cent expansion. It was facing a slowdown of projects among its financial services clients. There were delays in ramp ups in existing contracts. New deals, especially the larger ones, were taking time to seal. If that was not all, the company said a visa investigation in the United States "could materially and adversely affect" its business.

  Infosys projects 21% revenue growth But there was an even larger question begging attention. Is it the end of the Infosys Way? For years, the company positioned itself as a premium service provider and seldom hesitated in walking away from deals that did not meet its margins aspirations. That has played out since as early as 1994 when it walked out of a deal with General Electric after the US multinational pushed for what Infosys co-founder and Chairman Emeritus N.R. Narayana Murthy once called 'unfair' billing rates.

But the stance is getting badgered. In an open letter, dated April 19, to Infosys co-founder and CEO S.D. Shibulal, CLSA Group analyst Nimish Joshi wrote: "… history is replete with multiple examples where loss of market share impaired pricing power over time and ultimately led to convergence of cost structures and margins across companies. Investors fear that Infosys could be headed down the same path with its current growth objectives." Joshi said his letter reflects views of over 100 Infosys investors.

Infosys has the highest operating margin amongst top-tier tech firms but its pace of revenue growth has slowed.

Infosys needs to rethink its high profit margins strategy if it wants to stay a serious player

Infosys still has the highest operating margin amongst top-tier tech firms - 29 per cent versus 20 per cent of Cognizant - but its pace of revenue growth has slowed . Infosys has missed the top end of its revenue guidance for three quarters in a row now, unusual for a company that enjoys an 'under-promise, over-deliver' reputation. Its 2011/12 revenues of $6.99 billion were lower than its initial guidance of $7.13 billion to $7.25 billion made in April 2011. It is clearly not business as usual at Infosys. Going by analyst projections, Infosys is likely to cede its No. 2 position in the IT services pecking order to Cognizant in the June quarter this year - much sooner than the first quarter of 2015 analysts had earlier predicted.

Over half a dozen analysts and dealmakers BT spoke to believe Infosys needs to rethink its high-profit-margins strategy if it wants to stay a serious player. In a climate where most large US and European corporations remain stressed, there is far more scrutiny of high-priced contracts. Infosys has not been able to move the needle on its highmargin consulting services: they generated 31 per cent of its revenues in 2011/12, flat from the previous year. Rivals point out how its intellectual property-based businesses stay low at 5.8 per cent of revenues.


Analysts quoted in BT's October 30, 2011, cover story on Cognizant predicted that the Francisco D'Souza led firm would overtake Infosys in 2015. With Infosys slowing, Cognizant could take the No. 2 position as early as this June.

Outsourcing expert Sid Pai says the competitive reality in IT services has changed. "Five years back, Indian firms were smaller, there was an abundance of demand and if you didn't do deal X, deal Y would always arrive. That is not happening today," says Pai, Partner and Managing Director of sourcing advisory, TPI India. Industry insiders say Walmart and Bank of America have given more business to Infosys's competitors than to the Bangalore software bellwether.

While other Indian firms have caught up with Infosys on quality parameters, tech multinationals, which have expanded their employee base in India, now offer India prices. "It is no longer that the lowest price IBM can offer is $150 per hour. IBM today is capable of participating in deals at $30 per hour. Offshore pricing today, regardless of who is providing, is a like for like comparison," Pai says.

In a December survey of 80 Infosys clients he conducted, says Sudin Apte, CEO of advisory firm Offshore Insights, many complained the company's contracting terms were stringent. "If there is a need to change technical specifications or a business process midway, Infosys is asking clients to revisit pricing. Cognizant and TCS, on the other hand, accommodate client requests," says Apte.

Infosys's famed 'brand premium' may be on the wane too. At American Express, a $100-million account for both Infosys and Cognizant, the latter has been able to command a five to seven per cent premium over Infosys, says Apte.

Other experts say that Infosys's efforts to emulate others in consulting have not been successful. "The ascent has been tougher because unlike Accenture or E&Y Infosys has not been able to position itself as a company with substantial consulting expertise," says T.R. Madan Mohan, Managing Partner at Browne & Mohan, a management consultancy.

Infosys' management, meanwhile, says it has a balanced approach. "We seek highquality growth. At the same time we also adopt a portfolio approach. Large, annuity outsourcing deals are integral to our growth aspirations," says Shibulal on e-mail. Market watchers suggest Infosys clearly needs to make a choice between revenues and profits - Cognizant, HCL Technologies and Wipro have all chosen to expand revenues as opposed to margins. Cognizant is growing at twice the rate of Infosys' and has guided for 23 per cent growth in 2012. Infosys needs to adjust its mindset to keep up, says Amneet Singh, India head of research firm, Everest.

Is it the end of the Infosys way? Infosys has four strategic choices: one, ease up on profit margin expectations. Two, use its $4.1 billion reserves to support the big technology bets through buyouts. Three, use a combination of the above two. Or, four, stick with its high-margin philosophy at the cost of slow revenue growth; and, get overtaken by rivals and be forced on pricing.

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