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Infosys founders are slowly cutting the umbilical cord - and it's good for company and shareholders

The Rs 6,500 crore stake sale by four founders of Infosys Technologies is a turning point in the history of India's iconic IT services company.

The sale, which roughly halves the collective holdings of the NR Narayana Murthy, Nandan Nilekani, K Dinesh and SD Shibulal families from a collective 12.5 percent of Infosys's share capital to 6.62 percent, marks a psychological snapping of the umbilical cord between the founders and the company they founded. The company is now in new hands - something that was apparent with the induction of Vishal Sikka as CEO around mid-year, the first non-founder to get that position.

The Infosys share fell nearly 5 percent on the news yesterday (8 December), and continued to rule weak today in morning trades, but this only proves the emotional link shareholders have to the founders. Nothing fundamental has changed for the shareholders to think Infosys is on some kind of downward curve because of the slow exit of the founders.

In fact, it is worth recalling that Infosys's downward trajectory began with a botched Infosys 3.0 strategy under its last founder-CEO, SD Shibulal, which needed the board to call back retired founder Narayana Murthy back to head the company for a year, till alternate arrangements could be made. This has happened with the induction of Sikka, who seems broadly on track to revive the company's fortunes.

Sometimes, the problem is that we tend to hang on to the old for too long when the world around us has changed. Infosys, under the old management, had tried to reinvent itself as a platforms, solutions and products company from being a mere IT services one, but it ran smack into consumer resistance after the 2008 financial crisis. The IT customer in north America, in search of quick cost efficiencies, preferred the cost-saving IT services model, where labour cost arbitrage was key.

As I had noted earlier, Infosys changed gear to chase long-term goals, possibly at the cost of low-hanging fruit in traditional IT services. This is where it dropped the ball, and when Murthy entered the picture around mid-June 2013, TCS, Cognizant and HCL Technologies had already stepped on the gas to swallow a large chunk of the easy businesses. Most of Infosys' competitors changed strategies to pluck the available fruit even as Infosys tried to plant a new seed that it thought would grow faster in future.

As Forbes India wrote in a recent issue, "all major players embarked on new strategies around five years ago. HCL Technologies...decided to put its force behind infrastructure management and re-bids. Cognizant ...added more verticals and geographies like consulting and infrastructure management in Europe. TCS was more global and had a finger in all these. Its efficiency-driven CEO R Chandrasekaran reorganised the company into smaller units of USD 250 million each. In all these cases, the restructuring was done to make the individual parts grow faster. There was no big change in the direction (and when there was one, it fell on a separate business unit, or a set of business units)."

The induction of Sikka and the exit of Murthy from the executive chairmanship around mid-year this year should also be a lesson to the Infosys board - and all boards in general. The problem with Infosys's relative decline with respect to its peers (it continues to be among the most profitable IT companies even now) partially lay in the fact that the board, used to high performance by its old executives in a booming market, also took its eyes off the ball when the environment changed.

Clearly, Infosys needed fresh blood and new thinking and Sikka could be just the man to provide it. The problem with having the old faithful at the top (and as big shareholders after Sikka's entry) meant that the company had two masters. This would not have been healthy. Infosys needed to clearly break away from its past, and the sale of a substantial chunk of the founders' shareholdings is a win-win for both them and the employees of the company.

Sikka said in a recent interview to The Economic Times: "The consistent feedback from customers is that though Infosys is without comparison in quality and delivery and we follow orders dutifully, we don't speak up, we are not proactive. As an innovator, this made me very sad. We are trained to solve problems, not trained to find problems. We have this cultural thing - if I speak up, it is questioning of authority. This is totally counter to the Western mindset. We serve Western companies, and they expect us to speak up. John McCarthy, father of artificial intelligence and who was in my examination committee, once told me this unforgettable thing: Finding and articulating the problem is half the solution. The other half is to solve it".

This may look like criticism of the old management, but it is really a truism. The previous management had its way of doing things, and soon people thought that was the best way since success had come with it. But the world has changed. What worked then may not work now. Sikka's challenge is to get Infoscions to think differently, boldly, and aggressively.

It is just as well that Infosys's founders are gradually exiting the company and snipping their ties to the company they built, bit by bit.

It is time to ring out the old and bond with the new.

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Updated Date: Dec 09, 2014 15:34:10 IST