When Infosys’ founder and former chairman N.R. Narayana Murthy returned in June, it was a clear sign that Infosys wanted him to guide the company in reinvigorating growth. But to do that, he would need to change the existing growth strategy.
The new strategy that Murthy has adopted is now clear. He has decided to refocus on Infosys’ great strength in the traditional labor arbitrage talent space and is de-emphasizing the push into platforms. In Infosys 3.0, the growth strategy was to get one-third of their revenue from contracts in the platforms and consulting space. It is not exiting or selling the platforms/consulting business; rather, it plans to give it less attention and will invest less in this space going forward.
The central tenet in Murthy’s strategy aims for a larger share of the labor arbitrage market and aims to capture larger transactions in that market. Accordingly, the company is aligning sales incentives with large application and infrastructure transactions instead of linear growth opportunities in platforms.
In our opinion this is a wise move. As we discussed in a previous blog, the labor arbitrage model is really the only game in town for providers that built their business on this model — and it’s still a huge market. Murthy’s plan also capitalizes on Infosys’ robust and strong reputation —and a proven success strategy of client access — to drive increased focus in this space.
In this focus, Infosys is willing to meet clients where they are rather than create a need for change. Therefore, Murthy’s growth plan emphasizes large transactions more than transformation. That’s not to say that Infosys no longer has an interest in transformation opportunities; it’s just that its focus now is large transactions rather than transformation.
Intended and unintended consequences
There are other consequences of Murthy’s strategy, in addition to realigning incentives. He is reorganizing the leadership team, reassigning senior leaders to focus on the larger application and infrastructure transactions.
He also brought decision making back into a central organization out of India. So they’ve changed the focus they had on moving down a path of more and more decentralized decision making and have recentralized it.
We can see the results of these tactics already in terms of leadership turnover. Some leaders who have been refocused have choosen to exit. The latest — and sixth exit in the five months since Murthy’s return — is Stephen Pratt, who was head of the consulting practice but was reassigned to utilities. This is understandable as leaders brought in specifically to drive a certain agenda would choose to go elsewhere if reassigned to a different agenda.
But we’re also starting to see the consequences in terms of accelerated growth. The last Infosys growth report showed a modest and welcome step up. So we can see that Murthy’s strategy is starting to have a positive effect in terms of growth. We’re also seeing market shifts happening as the sales teams become more focused on arbitrage opportunities.
Infosys’ premium pricing dilemma
Another change Murthy has dealt with is the historic problem that Infosys had in terms of its premium pricing. They were on the horns of a dilemma — Infosys was proud of having robust industry-leading margins, but that translated to a premium price per hour for resources. They are finding that the market is more competitive now and that premium is no longer consistently available to the Infosys brand. This is certainly not to say that the market has a poor view of Infosys; it’s just that the giant can no longer command premium pricing in a highly competitive marketplace.
This has consequently caused Infosys to change its strategic direction. Although Murthy still maintains going after high margins, the company is achieving that objective by taking costs out of the delivery vehicle rather than trying to achieve a market premium in the space. In this respect, Murthy appears to be taking a page from the TCS playbook in driving lower-cost delivery capabilities. He’s doing that through increased utilization, a broader pyramid and more focus on delivery in offshore locations.
Early returns on Murthy’s new strategy are both interesting and modestly good. We’re seeing consequences in both the firm’s internal leadership and go-to-market strategy. Already we see evidence of a pick-up in competitive intensity of Infosys in the marketplace, and we’re seeing that result in its growth. We look forward with interest to see how Murthy’s strategy will play out in an increasingly competitive marketplace.