Sucess strategies

IT major Infosys needs to sound more confident about its strategy

The Economic Times – July 15, 2012

What’s wrong with Infosys? But wait, that’s not the right question. What’s right with Infosys and what’s wrong with it that it can’t better communicate what’s right – those are the right questions. To see why these are the right questions for a blue-chip company under so much scrutiny, a broader perspective is useful.

It is not hard to recall all the strident criticism of Indian IT majors from industry watchers. That they were not “going up the value chain”, they were merely doing application development and maintenance (ADM), they were not creating products or intellectual property, they were not integrating with their clients’ businesses, they were just a mega labour arbitraging machine.

But despite all the criticism it was a machine that was throwing up large and ever increasing amounts of free cash, the darling of the stock market, the definitive gold standard for businesses in India to benchmark themselves by.

Yet the sector was constantly exhorted by analysts and industry watchers to “evolve” the business model, and no one was asking “why fix what ain’t broke?”

On the demand side, there really was no reason to worry, as Infosys repeatedly pointed out. The size of the IT outsourcing market in North America alone, the percentage of IT which is offshored, and the share of Indian IT in that, all added up to a very large addressable market with plenty of headroom for growth.

Education, Pricing

But analysts and industry watchers frequently warned of the steadily increasing risks on the supply side which could spell big trouble for the business model if not proactively reinforced.

First, the Indian education system was not ramping up fast enough. to provide the large numbers of relevantly educated, capable human resources needed by the present model to provide ‘manufacturing capacity’ to take advantage of market demand.

Then there was the gradually increasing pressure on pricing coming from multiple causes. As is always the case in India, a large herd of small animals soon gathers around any profit pool, allowing the big boys to drink first but insidiously poisoning the well later, with price cuts.

Ironically the big boys also went on a war footing to improve the quality offered by the small software companies – they actively supported Nasscom, the premier industry body, to run programmes to develop the smaller ones and raise the “average industry quality”.
It was not altruism but enlightened self-interest that motivated them. Protecting the “made in India” brand would not add friction to their sales efforts. But it was a double-edged sword.

Customers also figured out costs (if a significant component of your value proposition is about price, then you get customers focused on the same) and negotiated harder. The troubled economic environment of customers overseas further led to harder price negotiations.

All in all, the bang needed to earn the buck perforce had to get bigger; and if net margins were never to be sacrificed, then with this model, a decreasing return on effort caused the vicious cycle of even more effort and hence even more people.

Then there was the Damocles sword that could still go either way. Visa liberalism, everyone agreed, could not be taken for granted any more. If the sword never falls, all is well; but if it does – unexpected things have happened – then it may be too late to scramble to build a new business model with reduced dependence on visas.

Infy Did Change

Looking at all these factors, Infosys decided that ‘linear growth’ from the current business model was not good enough or safe enough. It had done Infy 1.0 brilliantly for 20 years. That delivered PSPD (the Infy mantra of profitability – scalability – predictability – derisking) to the company and its customers.

As Infosys grew bigger and had to generate much more revenue in a more price-pressured environment, it grew, as most Indian businesses have done this past decade, by expanding footprint. That was Infy 2.0, which entailed being present in more geographies, offering more service lines, focusing deliberately on playing in more verticals.