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Infosys

Vishal Sikka’s exit will hit Infosys performance, share price: Analysts | In the News

By | In The News

Many analysts are disappointed with Infosys CEO Vishal Sikka’s exit. They expect more attrition at the top, difficulties in finding a good replacement, continuing tensions between the board and the founders, and confusion around the company’s direction. And all of this is expected impact the company’s performance and weigh on the stock, at least in the short term.

Peter Bendor-Samuel, CEO of outsourcing research firm Everest Group, said the founders may take some pleasure in Sikka’s resignation, however, Infosys faces a difficult task in replacing him and the abrupt departure puts Infosys in a difficult situation. “Few strong or promising executives will want to take on the troubles that Sikka had with a divided board,” he said.

Read more in The Times of India

Infosys CEO Exit Leaves Important Questions | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Vishal Sikka, CEO of Infosys, resigned on August 18. Although he will stay on as executive vice chairman, I believe his departure as CEO calls the current Infosys strategy into question.

Formerly an SAP executive, Sikka was brought on board as CEO in 2014 – the first outsider to head Infosys. He was tasked with transforming Infosys to a global technology brand focused on innovation. This happened as Indian service providers faced a maturing outsourcing market in the labor arbitrage model and businesses began shifting into digital models. I believe Sikka’s departure leaves important looming questions for the company’s clients, employees, and competitors.

What Does Sikka’s Departure Mean for the Infosys Business Model?

As I blogged earlier this year, Infosys, like other Indian service providers, needed to decide whether it would adopt an arbitrage-first model or a digital-first model as the go-forward vision for the company. It was clear after only a few months as CEO that Sikka was reshaping the company’s strategy to optimize existing services. His leadership enabled Infosys to successfully grow again at industry rates. By 2015, he had laid out a clear path to getting to a digital model and began shifting the company away from slow-growth labor-arbitrage business.

It wasn’t that Sikka was unable to gain traction in this digital-first strategy for the future. But as every company leader knows, there is always resistance to deep change. And the rotation into digital requires a new business model – a huge breadth and depth of change as well as risks. With that strategy, achieving necessary growth rates within investors’ time frames is a challenge; and as I mentioned in my earlier blog, it was questionable whether they would have the patience for the difficult, long-term digital journey.

Infosys’ founder and former chairman N.R. Narayana Murthy returned in June, 2013. As I blogged then, he preferred that Infosys focus on its great strength in the traditional labor arbitrage talent space, where Infosys has been a giant.

It’s clear that Sikka performed well, but he faced a huge hurdle in the company’s culture. It appears that he lost the confidence of some board members and its founders; so, he decided to move on. Sikka’s vision of a digital future has defined Infosys for several years.

This situation will not help Infosys as it seeks to reposition itself in the US, EU, and other export markets, where senior executives are looking for digital leadership to help transform their own companies.

What About Sikka’s Replacement?

Pravin Rao, a 30-year Infosys veteran, has been appointed interim CEO and managing director while the company searches for Sikka’s replacement. It remains to be seen whether the board will promote from within.

Those who disagreed with Sikka’s go-forward vision for Infosys may take some pleasure in his resignation. However, it will be difficult to replace him, and the abrupt departure and public knowledge of a divided board will make it even more difficult. Few strong or promising executives will want to take on the troubles that Sikka faced.

One thing is clear: The next CEO must make peace with the founders and the company culture. If Infosys appoints a strong CEO who can capture and maintain the confidence of the board, employees, founders, and clients, then Sikka’s resignation may prove to have worked in Infosys’ favor since he struggled to maintain the combined confidence these stakeholders. However, finding such a leader is far from certain. And the company must move quickly to avoid lasting damage.

What Does Sikka’s Departure Mean for Infosys Current and Potential Clients?

Will existing clients flee Infosys for their arbitrage-based work? I don’t think so. But at least for the short term, it will cause them to rethink Infosys for vital digital work. It’s no secret that client relationships and delivery execution means everything in a services business. So vision and morale matter. Unfortunately, this change in leadership is happening at a time of dramatic change in the services industry, and a slip in execution could prove disastrous.

The CEO loss will likely create headwinds and internal disruption, making digital-based growth at Infosys even harder It certainly will negatively impact its stock price and short-term growth prospects.

Bottom Line

Infosys needs a strong, steady hand in its new CEO. That individual will need to make bold, decisive moves to position the company for the future.

Infosys is still a great firm, but it needs a strong leader and soon. At the same time, Infosys must keep rotating to a digital model, which will mean diverting investment to digital (including acquiring digital companies) and away from other areas. Without the backing of the employees and approval of the founders and board, this is going to be a hard road.

Vishal Sikka quits as Infosys CEO: Hits and misses of his 3-year journey | In the News

By | In The News

Vishal Sikka on Friday resigned as the chief executive (CEO) and managing director (MD) of Infosys Technologies, India’s second-largest software services company. While the board of Infosys accepted the resignation of Sikka with immediate effect and appointed U B Pravin Rao as the interim CEO & MD, Sikka has been appointed the executive vice-chairman of the company.

“He (Sikka) tried to focus on the fast growing digital market, however, this strategy has been less successful with competitors such as Accenture and Cognizant being more successful in digital business. The final strategy Sikka has attempted to deploy is to join Accenture in acquiring companies in the fast growing digital market. However, he has been somewhat constrained by his board led by the Infosys founders in executing this strategy aggressively,” Peter Bendor-Samuel, chief executive of global IT research firm Everest Group, had told Business Standard earlier.

Read more in Business Standard

Vishal Sikka enters 4th year with new challenges | In the News

By | In The News

Vishal Sikka enters his fourth year as Infosys CEO on Tuesday with his back partly to the wall. Ten of the 16 senior executives he hired from his previous company, SAP, have quit over the past year and a half. Most of them were hired to further his innovation agenda. That agenda now appears to be in crisis.

The $10-billion company’s growth has slowed down sharply after having risen in Sikka’s first two years. Consequently, Infosys’ share price is down steeply from the highs it had touched mid-last year. Sikka has, since the beginning, spoken about a dual strategy — to renew the traditional business with automation, and develop new businesses around the new digital technologies such as cloud, AI/machine learning, analytics, big data, and internet-of-things.

Peter Bendor-Samuel, CEO of US-based IT research firm Everest Group, says from an execution point of view, Sikka has not been able to get his company fully behind the changes he is trying to drive. “He has not been able quickly enough to put the challenge from the founders behind him, which has further eroded support for his programmes. He has not yet been able to convince his customer base that Infosys is the digital partner of choice and they continue to see Infosys as a great labour arbitrage company ,” he told TOI.

Read more in the Economic Times

Infosys’ head of $500 million innovation fund Yusuf Bashir resigns | In the News

By | In The News

In another huge setback to Infosys CEO Vishal Sikka’s strategy to strengthen the company’s new digital and innovation capabilities, Yusuf Bashir, MD of the $500-million Infosys Innovation Fund, has resigned.

The MIT-alumnus had worked closely with Sikka at SAP as VP of new products before joining Infosys in March 2015.

Together with another former SAP executive, Ritika Suri, Bashir was to help Infosys take a leap into the new digital world that has become important to global clients. Bashir, based in Palo Alto, had the mandate to identify and invest in early-stage companies doing cutting-edge work in areas including AI, machine learning, big data, cloud and analytics.
Peter Bendor-Samuel, CEO of Everest Group, feels Bashir was caught between Sikka’s stated intent to use acquisitions to drive the digital transformation of Infosys and the board which micromanaged and second guessed decisions. He was not nearly as comfortable with an aggressive acquisition strategy. “This was compounded by the decision to return cash to shareholders and focus on keeping margins high,” he said.

A Cold War | In the News

By | In The News

Peter Bendor Samuel, CEO of Everest Group, a research firm, says the fight is about two competing visions of Infosys’s future. “Arbitrage-first or digital-first. Under the arbitrage-first vision of the founders, Infosys will consolidate its role as the leading labour arbitrage player.” The digital first vision of Sikka’s will ensure that Infosys will transform itself into a digital company in much the same way Accenture is driving its transformation. “Infosys will accelerate its investments in automation, analytics, cloud and cognitive technologies to build a new source of value for its customers,” says Samuel. Read more at Business Today

How to Evaluate Your Service Providers in 2017 | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

In a video discussion, General Electric’s CEO Jeff Immelt discussed digital transformation and stated that companies must “either embrace the future or you’ll find yourself not able to satisfy your customers.” Third-party IT and business service providers also face a changing market and are taking steps to align themselves with the new business realities and new market opportunities — which is what brings me to the discussion in this blog post. You need to understand the current debate in the service industry and how the providers’ decisions can affect your company.  Read more at Peter’s CIO online blog.

The Infosys Dilemma | Sherpas in Blue Shirts

By | Sherpas in Blue Shirts

Is Infosys moving in the right direction? At the end of 2014, I blogged that Vishal Sikka, who had been on board as CEO and MD only a few months, had made an effective start in reshaping the company’s strategy. In Q1 2015, I blogged about how Infosys was aligning with the digital direction of the market and rethinking how to optimize its existing services. And a year ago, I blogged about Sikka shifting the company away from the maturing labor arbitrage market with slowing growth and margin compression and into more fertile growing markets. Recently there has been a lot of noise in the media again and a lot of rumors about disagreement among the company’s founders, board members, and activist investors/shareholders. I want to shed some light on their debate, as the Infosys dilemma is really an industry-wide dilemma.

Infosys has been in the press a lot recently, across a number of issues. However, at the heart of many of these stories is a deeper debate that Infosys is having with its shareholders to determine the go-forward vision for the company. At this time, it appears that the two visions Infosys must choose between are “arbitrage first” or “digital first.” Let’s look at these visions from each side’s perspective.

“Arbitrage First” Vision

The vision: Infosys will consolidate its role as the leading labor arbitrage player. It will grow through industry-leading talent based in India and build on its reputation for premium services.

Proponents: Infosys’ founders and activist shareholders advocate this vision, pointing to the fact that this strategy yielded robust margins for many years and gave Infosys its market-leading position. The company they built was aligned against values of personal sacrifice, frugality and expectation of high margins; and they believe the services industry will continue to be dominated by companies that maintain tight cost controls and pricing discipline.

  • The labor-arbitrage market is mature, has stopped growing, and margins have been declining. Providers’ current robust margins will not be sustained into the future.
  • For the past year, almost all the growth in the services space is in digital and cloud offerings, which currently are growing at over 20 percent.

Under this scenario:

  • Under this scenario, Infosys will offset the effects of a maturing market on its stock price with slowing growth by returning substantial cash to shareholders through stock repurchases and increased dividends.
  • Management will take steps to protect its margins by controlling sales and overhead expense and increasing the efficiency of Infosys – already an excellent delivery organization.

“Digital First” Vision

The vision: Infosys will transform into a digital company to create a new source of value for its customers. The new digital business models will involve a new talent base be less dependent on labor arbitrage.

Proponents: The Infosys board of directors and CEO Sikka. When Sikka was appointed, he was given a mandate to implement a digital-first strategy. He clearly understands the challenges and has been moving the firm in this direction.

Market realities:

  • We estimate digital revenues at 25 percent of Infosys’ current book of business. We also believe that, at this time, digital revenues are not yielding as high a margin as Infosys’ arbitrage business.
  • A digital-first vision requires transforming the Infosys culture, rebranding the firm and resetting investor expectations.
  • Attracting and retaining digital talent means Infosys must compete with US technology companies and be prepared to match compensation with the tech industry, thus driving up labor cost and changing some of its benefit and talent management policies.

Under this scenario:

  • The digital-first vision requires transforming the firm, culture and brand. This transformation is a high-risk strategy, but it could result in substantial value creation for shareholders. Infosys must align investor, founder and board expectations to gain room to execute the necessary change.
  • Infosys will need to accelerate investments in new technologies and acquire companies that have already developed a digital business and have a digital talent base.
  • Bowing to the pressure of activist investors’ demand that the firm return substantial cash to the shareholders through stock repurchases and increased dividends will handicap the firm’s ability to aggressively invest in mergers/acquisitions.
  • Shareholders would need to forego Infosys returning cash now, recognizing the company would be more valuable in the future.

Hybrid Vision

In theory, both visions could exist simultaneously in a “hybrid” version. However, I believe that a hybrid vision inevitably will lead to an arbitrage-first company. I argue that the difficulty of executing the digital-first component will be overwhelmed by the near-term benefits of the arbitrage-first vision. By forcing a clear choice, Infosys will achieve better results in either strategy and avoid the pitfalls of conflicting goals and poor execution.

Implications of the Vision Choice

Both the arbitrage-first and digital-first visions are legitimate. But each will lead the firm to a different place. These choices have far-reaching consequence across all of Infosys’ constituents – affecting board make-up, firm governance, employee talent models and compensation. Investment decisions, whether to return cash to shareholders and the brand and promise that the firm communicates to customers also will flow from the choice in vision.

For now, it appears that the digital-first vision is in ascendancy. However, it remains to be seen whether the shareholders will have the patience to see this through given the activist shareholder agitation.