Infosys' stellar Q2 results: How CEO Vishal Sikka plans to transform company

It’s been a little over two months since former SAP executive Vishal Sikka took over the reins of Infosys, a decision hailed byanalysts as a clever move since it would infuse a much-needed fresh talent and thought process at Infosys as the company has been lagging peer TCS on both revenue growth and profitability over the past several years.

The new CEO presented his first quarterly earnings on Friday, where he stressed thatdigital transformation is the next big opportunity.

“Digital transformation is reshaping the business of every one of our clients. We see this as a great opportunity to help them renew the core of their business as well as to expand into new frontiers and are seeing early positive results. Our strategy is to apply the same principles to our own business in order to capture this opportunity and accelerate our growth,” Sikka said after Infosys reported a 7.3 percent sequential growth in net profit to Rs 3096 crore.

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Sikka is alsoexpected to shed light on his strategy as well as his road map to turn the company around.

Meanwhile, Narayana Murthy will cease to be non-executive Chairman, w.e.f from today.

According to a report in the Economic Times, even though Sikka is expected to continue with Murthy’s initiatives, including cost optimisation, sales effectiveness and delivery effectiveness, the former SAP executive is expected to “double” Infosys investment in Intellectual property-led revenues. With Finacle, he is expected to work to bring it on par with the likes of rival TCS’s products by including allied services in it such as insurance. Under the previous management, the company was reportedly mulling selling off the business or cutting down its workforce.

The company has already earmarked $100 mn for investments in new technologies. This innovation will use in-house and external start-ups to build business and bridge technology gaps, and the process may involve co-creation with universities as well.Infosys is also expected to continue to invest for revenue growth, which may make margins volatile in the near term.Key investment areas include sales, employing people with new skill sets, and expansion into new geographies among others.

“Sikka has designed, architected, developed and monetized business enterprise solution HANA for SAP, which gives Infosys access and edge to his deep technology vision and higher connect with Fortune 500 clients,” said Axis Capital in a research report.

For long, Infosys has insisted on higher-margin deals and stayed away from a more dynamic approach to pricing, even as clients (especially in the financial sector in developed countries) cut back on their IT spending in the wake of the global crisis. This dented the company’s growth prospects, which had a cascading effect on employee morale and sparked a staff exodus at all levels: top and bottom. In the most recent quarter, attrition reached 19.5 percent, the highest in the industry.

Since taking over, Sikka’s biggest priority has been to rein in attrition. Immediately after taking over as CEO, Sikka promoted 5,000 employees, spent time with trainees, gave two to three-fold pay hikes to several employees and urged many to consider staying back.

Sikka also launched a survey reaching out to every employee in the company and asked them for feedback on how the company could improve on various operational parameters.

“If something is limiting us, if something is not as great as we know it can be, it can’t be wished away. It must be fixed. And fixing begins with identifying and acknowledging that which must be changed. Then rolling up our sleeves and making the change happen. That’s what I invite you to do,” Sikka wrote to employees in an email that was seen by the Financial Express .

He also launched a programme that would impart training to employees and said he would help employees develop skills in “design-thinking”, in which special emphasis is laid on improving consumer focus and ergonomics.

Sikka’s efforts have not just been in the area of improving operational efficiency. He also launched a campaign called Murmuration in which he asked employees to contribute ideas towards how the company could take its business to the next level. After receiving and evaluating as many as about 2,700 entries, the company has started working on 70 such ideas.

Sikka also encouraged employees to start using social media platforms such as Facebook and Twitter to express themselves, as long as their performance in core jobs wasn’t affected, something that was frowned upon in the company’s erstwhile conservative culture.

“Sikka’s engagement and efforts to realign employees is motivating them and driving more energy across the organization. Stability in top management team also lends positivity and direction,” noted Axis Capital.

Here’s a snapshot of all that Sikka has done since he took over as CEO

[caption id=“attachment_103681” align=“aligncenter” width=“600”]  Source: Motilal Oswal[/caption]

And here’s what to expect from Sikkain the coming days

The addition of large, new clients

Currently, Infosys works with one third of the Fortune 500 companies globally and earlier this year it said it wants to add another 300-400 employees in the sales team, over and above shifting some employees from delivery to sales role, with the intention of tapping more high profile clients.

“Sikka’s focus over the first few weeks has been to learn more about the company. Client overlap among Infosys and SAP implies opportunity for Sikka of a smoother discussion on evolving relationships and how they can be strengthened,” said Ashish Chopra and Sidharth Vora, analysts at Motilal Oswal.

Probability of better cash utilisation

Analysts also expect Sikka to show more acumen in utilising the company’s war chest better.

“With Sikka’s thrust on new and transformative solutions have not be lacking, even so early in his tenure within the company. Hence, investments in the same, organically or inorganically, could likely gain speed, and increase the possibility of cash seeing swifter allocation,” noted Chopra and Vora in their report.

Some attrition now, but plateauing later

The company’s attrition level grew to 20. 1 percent in the second quarter from 19.5 percent in Q1, along expected lines.

Analysts had expected one more round of attrition, as the team is built around Sikka to his satisfaction, post which the attrition level, which is at its peak currently, is expected to come down on the back of multiple initiatives within Infosys. The completion of succession planning should also aid stability in the higher rungs of the organisation.