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Infosys vs TCS: Q1 results show Infosys reinventing itself in style, TCS is slow to spot tectonic changes

Infosys founder N R Narayana Murthy was famous for his saying about the challenges of companies reinventing themselves, likening it to "changing the wheels of an aircraft midflight." Infosys turned 36 last week, but the founder's saying seemed more relevant than ever before in the shifting sands of technology. The word "new" occurred time and again during its CXOs talking to TV channels soon after first quarter results that beat market expectations: New services, new software, new technologies, new growth areas.

The telling quote came from CEO Vishal Sikka, and I agree with him. "This is not about visas. This is about innovation and the changing  goalposts." He is proud of a home-built autonomous vehicle he rode for the results show, but mercifully, Infosys itself is not exactly driverless.

Coming a day after industry leader Tata Consultancy Services (TCS) results that disappointed markets, doubts linger on the IT industry, especially from the point of view of hiring that has boosted skilled employment in the country. For those looking for deep insights on that front, the message is clear. Infosys is shifting from a "Hire more to profit more" to "Slog smart to profit more."  The smart part of it applies to both engaging with new technologies (think artificial intelligence, software automation),  and boosting operational efficiency.

Infosys_TCS_380Infosys's headcount is down, revenue per employee up and wage hikes have been effected, suggesting that the IT army is being encouraged to work harder while management keeps an eye on old jobs being irrelevant while looking at new opportunities to drive future growth. TCS has also seen a shrinkage in headcount, though hiring continues.

Typically, you do not go for speed when you are looking to change lanes or turning a corner. That seems to be the case with Infosys, but it seems to be doing a painful reinvention in style for two reasons. It has enough cash reserves and elbow room to press the clutch and change gears. The planned Rs 13,000-crore handout to investors in the form of buybacks and dividends is on the one hand an admission of the fact that they no longer have easy growth-oriented ploughback opportunities, but on the other hand handouts keep markets happy. I would have personally liked Infosys to throw some of those funds into emerging technology startups through its already existing venture arm but let's face it, that is an investment job, not an IT service.

The challenges in the US stemming from President Donald Trump's squeeze in H1B visas may be good for facile headline writers, but the real challenge is in the way new startups are disrupting companies that have in the past paid fat dollars to TCS and Infosys. The emerging challenge lies in partnering the disrupting companies than the ones that are being disrupted.

TCS chief executive Rajesh Gopinathan mentioned how the company was seeing new "bottom of the pyramid" customers from new entrants into the banking and financial services industry.  Emerging companies specialising in the use of financial technologies like blockchain can help crack new customer segments, though the way it is done in the age of cloud computing may be dramatically different from the old-world project-to-project outsourcing.

Similarly, Infosys chief operating officer Pravin Rao spoke of green energy as an area where his company was eyeing new customers.

These areas are not like the sitting ducks of the 1990s when Indian companies played the simple game of wage differentials between the US and India. But the end of a honeymoon does not mean the marriage is over. Far from it. There are two special challenges both companies have faced: a stronger rupee and boardroom tussles. Sikka seems to have put his tensions behind by saying that he is sure that promoters including Murthy have the best interests of the company in mind when they criticise. Now that former TCS chief N. Chandrasekharan heads the entire Tata group, it may ease growth pains for that company as well.

But, having said that, TCS has been underperforming for 11 quarters in a row and it seems it has more difficulty in structural change than Infosys. I am tempted to suggest that TCS has been innovative in global reach with a wider footprint, while Infosys seems better placed on new technologies, thanks to Sikka. TCS seems to be stepping on the gas with a new internal group to court future technologies. Er, could they not have done it at least a year earlier?

A key point is that operating margins are steady at Infosys while slipping at TCS. A company with stronger old-world management as distinct from a geek-led Infosys should have been the one to do it.  TCS definitely owes the world a better explanation , though the strong rupee is the main culprit. Given that TCS is nearly twice as large as Infosys in headcount, maybe it is a heavier bird in flight problems.

(The author is a senior journalist. He tweets as @madversity)

Updated Date: Jul 14, 2017 12:38 PM

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