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.
When I visited India for the first time in the early 2000s, the country was largely unknown in terms of business. The airports were small and dingy. The upscale hotels were really nice but also scarce. That meant they could charge insanely expensive rates…I remember paying US$700 per night at the Leela Palace!
My U.S. colleagues and I were on a mission to visit largely unknown service providers like Infosys, TCS, and Wipro, all of which had around 10K employees. At the end of the trip, we concluded that this was going to be real, and big…very big.
So we, and the other industry analysts in the space, pulled out our crystal ball to see what specifics we could predict. How clear, or cloudy, were our sixth senses back then?
We did well in this category. India, along with many, many other low-cost locations, is absolutely capable of doing the global services job with scale. It’s also capable of doing many sophisticated processes (full disclosure: we might have underestimated this one a bit.) And those “unknown” companies I mentioned above? They’ve become truly global players, by some measures even surpassing the original powerhouses like Accenture, ACS, CSC, EDS, IBM, and HP (many of which have already consolidated).
While inflation slowed in the U.S., it did even more dramatically in recent years in India. This, in turn, slowed the arbitrage difference, creating relatively smaller impacts on our models. And currency moves – such as a change from around 45 to 64 rupees – created a large positive impact, offsetting inflation by roughly 50 percent.
Labor supply was the biggie. All of us in the analyst community completely underestimated the impact of the available supply, which created an ongoing downward pressure on entry-level salaries. Using the best available data, the number of college students in India has risen from 13.6 million in 2008 to more than double that (28.5 million) in 2016.
While we didn’t predict it in the earliest years of the global services industry, by the end of the 2000s we were forecasting the end of labor arbitrage. India salaries were rising at double digit rates, and it seemed that it was only a matter of time before we reached parity (for offshoring purposes, 70 percent of U.S.-based salaries was considered parity.) As you see, we were miles off on that one.
Increased labor in India as well as other locations have ensured limited salary increase, especially for junior roles
Gazing forward to at least a 2040 – 2050 timeframe, other low-cost locations such as eastern Europe may get tapped out, since they don’t have as large a stream of graduates as does India. So, I say: advantage to India in keeping the wages compelling with its tidal wave of ongoing supply. But the looming question will be, what to do with all of those freshly minted grads?
My next blog will tackle the interesting another aspect of my looking back and looking forward retrospectives: “Are the India Heritage Services the new Global Leaders? The answer isn’t obvious. Stay tuned…
Eight years after he relinquished all responsibilities at Infosys to take on the task of building the Aadhaar infrastructure, Nandan Nilekani has returned to the company he co-founded in 1981.
Peter Bendor-Samuel, CEO of outsourcing research firm Everest Group, said Nilekani’s return to Infosys signals a commitment from the board to try and heal the divisions between board members, between board and founders, and internally within the ranks of Infosys employees. But he said the board changes do not by itself self-resolve the underlying issues that caused this split.
The boardroom shake-up at Infosys on Thursday signalled a truce to the blood-letting between the founders and the directors that cost the company and its shareholders dearly . While the exits of R Seshasayee and Jeff Lehman were on the cards along with that of Vishal Sikka, that of John Etchemendy was a bit of a surprise. As was Roopa Kudva and Ravi Venkatesan staying on.
Peter Bendor-Samuel CEO of Everest Group, said “It’s interesting that not all members are stepping down and this probably signals that the board is not raising the white flag to Murthy who, I understand, they are very upset with. Nilekani’s return to Infosys signals a commitment from the board to try and heal the divide between board members, board and founders and internally within the ranks of Infosys employees.“
On the day that Infosys co-founder Nandan Nilekani was brought in as the Board Chairman, analysts said that the move may allay investors’ fears in the short term, but over the long term, all eyes are on who the next chief executive will be.
“Nilekani(‘s) return to Infosys signals a commitment from the board to try and heal the divided between board members, board and founders and internally within the ranks of Infosys employees. Clearly Infosys needs to bring these stakeholders together and present a united front to the Industry, shareholders, and clients,” Peter Bendor-Samuel, CEO of research firm Everest Group told Moneycontrol.
Infosys co-founder Nandan Nilekani was announced as its Board Chairman on Thursday and analysts view the decision as a step in right direction. However, in long term, the challenge remains as to who would be named the next chief executive.
“Nilekani(‘s) return to Infosys signals a commitment from the board to try and heal the divided between board members, board and founders and internally within the ranks of Infosys employees. Clearly, Infosys needs to bring these stakeholders together and present a united front to the Industry, shareholders, and clients,” Peter Bendor-Samuel, CEO of research firm Everest Group told Moneycontrol.
Read more in The American Bazaar
The management squabbling, blaming and furor that played out publicly in the news for months before and since last week’s resignation of Infosys CEO Vishal Sikka is enough to cripple any business. It seemed the firm faced a daunting uphill battle to move beyond the instability and uncertainties the infighting caused and to identify a new CEO strong enough to make decisive moves to position the company for the future. Bringing the disagreeing stakeholders (management, founders, investors, board members, employees and clients) back together is another hurdle on that uphill battle. But anyone who’s questioning “the way things are done around here” just got the answer by the way Infosys addressed this crisis today. Former co-founder and ex-CEO, Nandan Nilekani, is now on board as non-executive Chairman of the Board.
In one fell swoop with his return to the firm, and with the accompanying requested resignation of several board members, Infosys took big steps toward stability. Nilekani is one of the reasons Infosys was so successful in its early years and grew to be the second-largest service provider in India, and major investors asked him to return. He is well respected, knows Infosys’ strengths and culture and understands the mindsets of the various stakeholders. Nilekani also is uniquely suited to manage the issues Infosys faces in gaining digital prowess and aiming for leadership in the digital era. He served as an advisor to the government and rolled out the country’s biggest digital project, the Unique Identification Authority of India.
Nilekani’s return to lead Infosys, and the resignation of board members, does not of itself resolve the underlying issues that caused the split. The problem is the strategic dilemma around how Infosys should move forward. The services market is shifting from the labor-arbitrage model to digital models. But the arbitrage work (75 percent of the services market) is still more profitable than the emerging digital work (25 percent of the market).
Clients are seeking two kinds of services partners:
Co-founder Murthy and stakeholders that rally around him believe over time the digital market will revert to an arbitrage model. They believe Infosys can continue to be an industry leader just by executing better in the old arbitrage model.
Opposing that view, a substantial number of the board members (who resigned today) and Sikka believe it was imperative for Infosys to change its culture, adopt digital models and accelerate as much of its existing business as possible into the digital models.
Although Nilekani’s returning today as vice chairman will bring much-needed stability after the crisis of the last few weeks, it does not resolve this strategic dilemma of whether Infosys will rotate into digital or stand firm as an arbitrage leader. Nilekani’s returning doesn’t worsen this strategic dilemma either. In fact, in this dilemma, his return is a nonevent.
Yes, he will ease tensions, but the way forward for Infosys’ future still remains a big question. Nilekani’s return to Infosys signals a commitment from the board to try to heal the divide between stakeholders. Clearly, Infosys needs to bring them together and present a united front to the industry, shareholders and clients. But it’s too early to know whether Nilekani will also drive a major change in the firm’s direction. It will depend on who replaces the board members that stepped down and who the next CEO is.
BENGALURU: The board of Infosys is coming under fire with experts probing whether it has failed to effectively shield outgoing CEO Vishal Sikka and resolve differences with founders, instead of escalating matters to a warlike situation.
“The board has handled this situation poorly — they brought in Sikka, endorsed his strategy and then did not provide him adequate support and allowed Murthy to undermine him. Sikka also has some of the blame as it became clear early that he needed to build a relationship with Murthy and take him along,” Peter Bendor-Samuel, CEO of US-based research and advisory firm Everest Group, said.
Infosys’ search for a new chief executive, apart from being a challenge for the company, will also be an attempt to shift the power centre at the company back from California to Bengaluru, where the founders are based.
Sikka was based in Palo Alto, California, and ran India’s second largest IT services company majorly sitting in the US.
“This cannot help Infosys positioning in the US and other export markets such as the EU,” Peter Bendor-Samuel, chief executive at consultancy Everest Group said.
Infosys, rocked by internal turmoil and without a permanent chief executive at the helm, is in danger of losing ground to rivals and missing growth targets for the fiscal, say analysts who anticipate further turbulence at India’s second-largest software services company following the sudden exit of its CEO Vishal Sikka on Friday.
“Infosys will have to move quickly to establish a new governance mechanism for its top clients and reassure them it is still committed to the vision Sikka had articulated,” Peter Bendor-Samuel, CEO of IT consultancy Everest Group, told ET.
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