Is Infosys on Course for Stability and Growth? | Sherpas in Blue Shirts

Posted On October 25, 2017

The management squabbles of Infosys occupied headlines this year, culminating when CEO Vishal Sikka resigned in August. The same day, the company brought former co-founder and ex-CEO Nandan Nilekani in as non-executive chairman of the board, and I blogged that Infosys was taking a big step toward stability. Nilekani declared in a post-earnings conference call yesterday that Infosys is on course despite the distraction in 2017 and is refreshing its strategy. What does this mean and what are the chances it will succeed? Here’s my take.

The Digital Strategy

The company’s strategy refresh is basically the same strategy to move to the digital world as it adopted when Sikka was CEO. Despite the desires of some company executives to maintain its market leadership in the labor arbitrage business, it is now crystal clear that the IT services industry is moving to a digital model and Infosys must move quickly to digital. But there are some differences in the strategy under Nilekani.

Aggressively acquiring digital companies is a key component of the strategy. The public conflict among Infosys founders and the heavy board scrutiny restrained Sikka’s execution in this effort. With the reconciliation with the founders, Nilekani has a clear path to execute on these necessary acquisitions.

Another nuance in the strategy: senior leadership is reorienting toward Infosys-developed talent rather than the outside team Sikka recruited. This emphasis on returning to the company’s Bangalore talent roots and deemphasizing Palo Alto talent will likely improve company morale in the short term and will save money. But it’s questionable whether this strategy will be effective in the long run, as Infosys needs digital skills and experience to lead the company into a leadership position in the digital marketplace.

Another area of the strategy – building and selling software-based solutions – appears to be gaining momentum. However, if much of the talent recruited by Sikka leaves and is replaced by traditional Infosys talent, these efforts may stall.

The Short-Term Picture

In the short run, I believe that Nilekani’s execution of the firm’s refresh strategy will improve. He has stature and enjoys the confidence of investors, employees, and customers. The reorientation back to Bangalore talent removes a major sore spot for Infosys traditionalists and removes an irritation in the short run. The halt to the open, public war among leadership, the board and the founders, will benefit the firm in the short run with improved morale, less customer and market confusion and a less constrained senior leadership team.

Adopting a more aggressive pricing posture was a major factor in accelerating the growth rate under Sikka. Although this was not specifically called out in any Infosys communications about strategy yesterday, it is clear from market intelligence that the firm continues to pursue new business aggressively and does not appear to be looking for the pricing premium that it traditionally looked to capture. Continuing the aggressive pricing posture will position Infosys to win new business and retain existing business.

The Long-Term Issues

Let’s look at the other side of the coin for the issues I mentioned above. The firm’s ongoing effort to return cash to shareholders may constrain Infosys in investments in developing intellectual property and acquiring digital companies and recruit and retain the talent required for becoming a digital leader.

To ensure flexibility and breathing room to gain share in the digital market, Infosys also needs to reset expectations on margins. The new leadership must be willing to challenge the entrenched company culture that is deeply rooted in the legacy labor arbitrage model. The culture must commit to a technology-led approach and very different digital delivery and new business models. In addition,

Future Success?

Much of the firm’s future success depends on its selection on the new CEO. It appears Infosys is looking at internal or ex-Infosys candidates to be the new CEO. If true, this is a departure from the strategy that resulted in hiring Sikka. At that time, the firm thought an outsider was necessary to challenge the entrenched culture and accelerate change. A CEO drawn from the industry or with an Infosys background may not be as aggressive in leading change. On the other hand, such a CEO may command more loyalty and face fewer internal challenges from divergent interests of the founders, investors, and employees.

I expect execution of the firm’s company to improve in the short run. However, Infosys still faces an uphill battle as it must change to succeed in a fast-changing industry. The significant flaws that became apparent in the Sikka-led strategy have yet to be addressed. If these flaws continue, they will constrain Infosys as it moves forward.

 

 

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