Infosys premium position is a liability for Indian IT

Infosys Ltd, the company that symbolised India’s rise as an outsourcing powerhouse but has struggled this year, will have to wait longer than expected for returns from a remodelled strategy.

The $7 billion company based in Bangalore has missed sales targets, lost market share, put off an annual pay rise and seen its stock battered this year.

“The realisation of the benefits will be delayed short-term,” said SD Shibulal, the company’s chief executive officer, referring to the “Infosys 3.0” strategy that the company says will better position it for the future.

It was a rare acknowledgement for a company famous for hitting or beating its targets.

[caption id=“attachment_447296” align=“alignleft” width=“380”]  Under the strategy, Infosys will focus more on higher-value software and consulting that can be applied across clients and less on labour-intensive plain vanilla outsourcing services. AFP[/caption]

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Under the strategy, Infosys will focus more on higher-value software and consulting that can be applied across clients and less on labour-intensive plain vanilla outsourcing services.

The problem is Infosys is shifting gears at a time when its corporate clients in the United States and Europe, including its core financial services base, are tightening their belts, dealing with fewer vendors, and taking longer to make decisions.

Industry-watchers say Infosys’ position as a premium player, which allowed it to charge more and earn fatter margins, is a liability in this market, to the benefit of rivals like Tata Consultancy Services and HCL Technologies.

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“It is a challenging environment,” Shibulal said in an interview in the tree-lined 80-acre campus on the outskirts of Bangalore that serves as Infosys headquarters.

Shibulal, or Shibu as he is known in the informal Infosys style, is one of the seven engineers who launched the company in 1981 by pooling together $250. He is the fourth person from the group to become CEO, but will be the last – the other three have quit.

The company’s troubles have spurred criticism of everything from its method of choosing CEOs to its pricing strategy to what is seen as an insular and risk-averse culture.

It has also prompted worry that the recent troubles may affect the company’s ability to attract and retain talent.

Investors have reacted harshly, pushing Infosys stock down more than 12 percent this year, making it the fourth-worst performer among 71 stocks around the world in the large and mid-cap IT services sector.

“It should be the right plan, but the issue is implementation and results,” said Walter Rossini, a Milan-based fund manager with Gestielle India, who owns Infosys in his $300 million fund alongside TCS and Tech Mahindra.

LABOUR PAINS?

Infosys has long been ahead of the curve in corporate India, stressing high standards of governance and transparency, paying attractive wages to tens of thousands of young workers, and offering a stock option programme that turned some salaried staff into millionaires.

Instead of offices in business districts, Infosys prefers campus-style locations in places such as Pune and Mysore, a southern city where it has built a $400 million facility it says is the world’s largest corporate training centre, which can train 14,000 staff at a time.

One crucial worry over the company’s recent poor performance is that it will hurt Infosys’ stature as an employer of choice for Indian graduates. It has seen a handful of high-profile executive exits in the past couple of years.

Recently, Shaji Farooq quit his post as the Americas head of financial services to lead a new unit at rival Wipro. Three senior officials at its BPO (business process outsourcing) arm have also recently quit.

While staff turnover varies by season and the state of the industry, Infosys’ attrition rate over the year to June was 14.9 percent, compared with 10.9 percent at larger rival TCS. In June 2009, another challenging time for the industry, attrition at Infosys was 11.1 percent, compared with 10.7 percent at TCS.

“The single most important reason, in my view, as to (why) Infosys needs to demonstrate some bit of growth momentum is employee retention, because ultimately this is a business that is really dependent on people,” said Bhavin Shah, CEO of Equirus Securities in Mumbai and a longtime industry watcher.

At the Bangalore headquarters, this does not seem to be a problem. Throngs of young IT workers stroll the pathways through lush lawns and futuristic steel and glass buildings.

Parts of it seem like a US university campus, although security is tighter and many of the young men wear neckties.

Shibulal said it has not been any more difficult to retain staff since Infosys implemented the 3.0 plan early last year.

“The numbers don’t show any difference. Finally I have to look at data. Perceptions can be very misleading at times, and if you look at single point instances also it can be very misleading,” he said.

“Our conversion rates from (university) campuses remain high,” he said, adding that the pay rise for this year at Infosys had been postponed, not cancelled.

Before economic crises hit the industry in recent years, it was not uncommon for India’s IT workforce to get double-digit pay rises. Still, TCS said its staff in India will get an average of 8 percent increase in salaries this year.

Part of Infosys’ strategy is to break the almost direct link between growth in sales and headcount, which sees the industry hiring tens of thousands of campus recruits every year and spending six or more months training them to be billing-ready.

The idea is to sell more intellectual property, not just the sweat and brainpower of its 150,000-plus employees.

“If you look at the long term, we clearly believe you can’t recruit so much high talent, because there’ll be a bottleneck at some point,” said Shibulal, who at 57 is less than three years shy of Infosys’ mandatory retirement age.

FIGHTING COMMODITISATION

The company’s aim is take more of a problem-solving or solutions-based approach for customers such as Bank of America-Merrill Lynch (BAC.N), as opposed to simply selling technology services.

“What Infosys is doing is absolutely the right thing from the long term standpoint. The only way to offset the immense commoditisation that the industry faces in the business IT services is if one focuses on higher value-added services,” said Kuldeep Koul, an analyst with ICICI Securities in Mumbai.

To that end, Infosys wants its software business to contribute as much as one-third of revenues in five or six years, from a few percentage points now. It wants IT services, the bread-and-butter industry offering that accounts for roughly two-thirds of its business and where competition is the most fierce, to make up just a third of its revenue.

The market is wary, with analysts expecting Infosys to post the slowest earnings growth among key rivals over three to five years, at a compound average annual rate of 12.6 percent, Thomson Reuters data shows. They expect 13.8 percent growth for Wipro, 17.3 percent for TCS, 18.2 percent for HCL and 19.4 percent for Cognizant Technology Solutions

“Medium-term, I think we’ll see the benefits. Medium to long-term we should be fine,” said Shibulal. “In the short term, the only thing we need to do is win deals.”

Reuters