Why Vishal Sikka was made Infosys head: The Murthy experiment failed

With the announcement of Vishal Sikka as the new CEO of Infosys Technologies from 1 August, the company’s one-year experiment in calling back its ageing founder-hero, NR Narayana Murthy, to reinvent the company has indirectly been declared a failure. Murthy has been kicked upstairs as Chairman Emeritus, his son Rohan leaves the company on 14 June, and the board has brought back KV Kamath as non-executive chairman. Barring the new CEO, who was till recently chief technology officer of SAP, we are basically back to square one. It is not clear whether Murthy himself decided it was time to go, or whether the board gave him a nudge. Whatever the truth, the decision to induct an outsider means it is ringing out the old and trying something new. [caption id=“attachment_1567517” align=“alignleft” width=“380”]  Vishal Sikka. IBN Live.[/caption] Murthy was unable to do a Steve Jobs in his second coming, but the board is hoping Sikka can do a Lou Gerstner, the man who reinvented IBM. In making this change, the board effectively acknowledges three things: One, the company needs fresh ideas to lift it out of the low-growth quagmire it has gotten into. Two, Murthy, while he brought a flurry of action and hope into the company when he was inducted last year, also brought some baggage with him: his induction saw a procession of senior executives leaving, including some mentioned as prospective CEO prospects. The board’s decision to appoint a a Boomerang Boss boomeranged. Three, in a connected decision, the Infosys board will be ending current CEO SD Shibulal’s term early. The company indicated as much in April when it put out a statement indicating that Shibulal would like to retire as CEO before his superannuation date of 9 January 2015. The question now is: where did Infosys go wrong with Murthy and his immediate predecessor, and is it now right to expect an outsider, someone who does not know the company, to do what the old hands couldn’t? The problem with Murthy’s return, one can say in hindsight, was that second comings bring both positive and negative messages with them. While the tried and trusted hand builds initial confidence with investors, inside the company it sends a different message by blocking off career growth avenues for those who thought they might be in line for the top job. As we noted earlier, the performance of “boomerang CEOs” - those who retire and return to head the company again - is mixed ( read The Economist on this). While Steve Jobs is the best example of success, Harold Shultz at Starbucks is another positive story. But there have been failures too. Writing in Forbes.com, Susan Adams pointed out last year that Kenneth Lay’s return to Enron was a resounding disaster. And Paul Allaire’s return to Xerox in 2000 a year after he left failed to stop the stock from plunging 60 percent in his second innings - which lasted barely 15 months. The return of old hands is not necessarily a plus when the world around you has changed. The Infosys that Murthy created in the final decades of the 20th century faced a different environment from the one he got back to in June 2013. He was older – 67 – and the market was changing rapidly after the 2008 global financial crisis. Infosys wanted to move quickly to selling products, platforms and solutions, but the market, in search of quick cost efficiencies, regressed back to the old IT services model, where labour cost arbitrage was the key. Infosys, in other words, 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, TCS, Cognizant and HCL Technologies had already stepped up to swallow the available business. Most of Infosys’ competitors changed strategies to pluck the available fruit. 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).” Infosys chose the harder option of changing direction with its 3.0 strategy. Wrote Forbes India: “Infosys 3.0 was much broader in scope. It also encompassed the other parts of the company, including the core operations business (application development and maintenance, infrastructure management, BPO), and the transformational business (consulting and systems integration).” The induction of Sikka and the exit of Murthy from the executive chairmanship 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 Infosys board, used to high performance by its old executives in a booming market, also took its eyes off the ball when the environment changed. As I wrote in Firstbiz last month, the board needs to introspect too. Maybe it listened too much to investors’ short-term fixes. One of the pressure points for Infosys’ board last year was deep concern among institutional investors about levelling off quarter-to-quarter earnings growth. After several quarters of mediocre results from Infosys, big investors began demanding quick changes to reverse the showdown and missed guidances. One CLSA analyst, Nimish Joshi, wrote an open letter to the Infosys management in 2012, after it announced another quarter of weak results, suggesting that the growing problems in the company may need the return of its retired founders. Almost exactly a year later, the Infosys board threw in the towel and called Murthy back. The board may have decided Murthy was a good idea on its own, but it also seemed as if it was cocking an attentive ear to what investors were saying. Clearly, Murthy could not pull off a Steve Jobs, who took Apple to great heights on his return to the company, but the bigger question is, will the new man, Vishal Sikka, be able to do a Lou Gerstner – the outsider who changed the fortunes of IBM? As we noted before, when IBM was in trouble in the early 1990s, the board brought Gerstner, an outsider and former CEO of RJR Nabisco, to turn the company around. Gerstner could see what the insiders didn’t – that the industry had changed and IBM would need to reinvent itself. As Pankaj Ghemawat, professor at IESE Business School in Spain, said in an interview to The Economic Times last year, when a company needs big change, it may need a break with past leadership. He said: “It may be time to seriously rethink what geographies to compete it in, what verticals to build capabilities in or what margin to aim for. And that may also call for a different management architecture capable of planning and executing those changes in strategy.” Can Sikka do the job? Former Infosys CFO V Balakrishnan is doubtful. He told CNBC TV-18: “It will take him a while to adjust to the services industry since he comes from a products background…The jury is out on whether Sikka will be able to deliver.” We have to wait for an answer till Sikka gets time to show results, but clearly this was a gamble the Infosys board could not avoid taking. Infy does need new ideas.