Companies around the world are struggling to position themselves in todays economic environment. Bottom lines may be strong, but uncertainty about everything from the outcome of Europes debt crisis to the final shape of financial regulatory reform is inducing caution. Most CEOs are wary of making big investments and determined to keep a tight grip on costs.
Few corporations feel those trends more directly than Infosys. The Bangalore, India-based outfit is a leader in providing information technology services to big banks and multinational companies, a role that puts it at the heart of the global economy. Annual revenue exploded from $400 million to $7 billion over the past decade.
Lately, the pulse has slowed, though. Infosys high market penetration and the cagey attitude of many corporate clients such as Bank of America Corp., which accounts for 5 percent of revenue, analysts estimate have throttled back its once-torrid growth pace. Competition from fast-expanding rivals like Teaneck, New Jerseybased Cognizant Technology Solutions Corp. adds to the pressure.
On January 12, Infosys lowered its estimate of revenue growth for the financial year ending March 31 to 16 percent from a range of 17 to 19 percent, causing its share price to plummet 8.4 percent that day. The stock has since recovered. Infosys Nasdaq Stock Marketlisted American depositary receipts were trading at $60.10 late last month, up from a 12-month low of $46.12 back in September but well below the peak of $77.53 set at the start of 2011.
Sarojini Damodaran Shibulal, a company veteran who stepped up to the CEO post last April after four years as COO, thinks going up-market is the way to restore growth. Under a strategic program called Building Tomorrows Enterprise, hes focusing on several priority areas, from emerging markets and digitally savvy consumers to ways of using IT to lower health care costs and energy use.
Shibulal has reorganized Infosys along its four target industry sectors financial services and insurance; energy, utilities and communications; manufacturing; and retail, consumer goods, logistics and life sciences rather than along IT product lines. Hes ramping up a new consulting and systems integration division and seeking to promote the companys proprietary technology, such as its Finacle IT platform for the banking industry. The aim is to make Infosys more of a technology partner to global companies an Accenture with an Indian accent than a mere provider of IT outsourcing services, which Shibulal fears are becoming commoditized.
Will the strategy work? Some signs are encouraging. Although 70 percent of Infosys 145,000-strong labor force is in India, the 30 percent that works on-site at companies around the world generates half of the companys revenue. Infosys plans to hire at least 2,000 IT specialists in the U.S. and 500 in Europe over the next six to nine months to accelerate the growth of consulting. Still, shifting from an India-centric outsourcing business to a global consulting profile wont happen quickly or cheaply.
For Infosys to move up the food chain, theyre going to have to invest more aggressively, and thats going to put pressure on their margins, says Rod Bourgeois, an analyst who follows the company at research firm Sanford C. Bernstein & Co. in New York.
If anyone can meet the challenge, analysts say, its Shibu, as colleagues call him. The 56-year-old native of Indias southern state of Kerala got the technology bug as a high school student poring over diagrams in Science Student magazine and building motion and sound sensors for turning on lights and fans. He later earned a masters degree in computer science at Boston University, where he now serves as a trustee. In 1981, Shibulal joined six colleagues to found Infosys with a mere $250 in capital. He helped pioneer the companys outsourcing model and has run just about every major division. Shibulal spoke with International Editor Tom Buerkle at the World Economic Forum in Davos, Switzerland.
Institutional Investor: You recently lowered your revenue forecast. Whats going on out there?
Shibulal: It is important to see what we did in Q3 [of 2011]. We had 49 new clients, one of the largest increases in our history. We also closed two $500 million deals one in Europe and one in the U.S. which is substantial. But when you look at the future, you can see economic instability. This makes our clients lives quite hard. They find it hard to make decisions, which results in the velocity of business coming down marginally.
Is this a market issue or an Infosys issue?
Look at some of the things we have done over the past five or six years. We have gone from $1 billion to $7 billion [in annual revenue]. We launched our new strategic action, called Building Tomorrows Enterprise, about 18 months back. It is very much in line with the Davos theme of creating new models of business. We believe that while there are all these challenges, there is still opportunity for growth and differentiation. And that requires corporations to identify a clear framework for innovation, for creating new products and services a clear framework through which they can actually sense the future. Building Tomorrows Enterprise allows our clients to do that.
The financial sector is crucial for you. How is business there?
Even in the 200809 downturn, when there was serious turmoil in the industry, our revenue from financial services never dipped below 33 percent. That means that our relationships are very strong, very strategic. The work we do is mission-critical. And clients really see it.
Is Basel III driving revenue growth in large institutions?
Every financial industry is dealing with regulations in various parts of the world. Cross-border regulations as well as national regulations are being rolled out. So I think that is one of the key focus areas for financial industries, to become regulatory-compliant. The second most important piece we see is risk management.
The talk here at Davos is all about emerging markets, but you still get 87 percent of your revenue from the U.S. and Europe. Is that too much?
Our long-term aspiration five to seven years is to achieve something like 40-40-20. That is, 40 percent of revenue in the U.S., 40 percent in Europe, 20 percent in the rest of the world. Today that [last] figure is about 10 to 11 percent. That doesnt mean that we will not grow in the U.S. or Europe, but the emerging markets will grow faster. We never operated in India on the service side until about three or four years back. Next year our revenue in India will cross $100 million, possibly. We did the income tax automation program for India. We are growing in China.
Even if the growth is faster in those markets, isnt Infosys implanted in large multinationals, which still remain largely based in Europe and the U.S.?
Our client base is predominantly [Forbes] Global 2000 companies; 130 to 140 of our clients are in the Fortune 500. Our latest transformation trend is to become more and more relevant to our clients. One major aspect of that relevancy is being global. So we operate with them in Brazil and in China and in Singapore.
Is this part of a broader shift to be closer to where your clients are?
We aspire to do more and more consulting and systems integration work for our clients. If you want to do that kind of work, you need local talent that understands the local market, local business, local language, local culture.
Youre the last one of the founders running the company. Does this pose a challenge for Infosys?
I dont think I am sitting here because Im a founder. That was 31 years back. Im sitting here because Im a qualified professional. So I see the transition being from one set of professionals to another set of professionals. We have a very well-planned leadership program in place. We have well-planned interventions which will get people ready for various roles. We have no dearth of leadership. We inducted three people into the board in August.
There are plenty of examples of companies in the tech industry that have lost their way when theyve moved beyond the initial generation.
You need to hold on to the value system that made the company what it is; it is not held by the founders alone. It is well documented, well articulated, well institutionalized. We have a core business model, which we call the PSPD: predictability, sustainability, profitability and de-risked. That has been pretty well institutionalized in the system. We are not a personality-based organization. Its a platform-based organization. That platform is built on execution excellence. It gives stability to the environment.
Have you been surprised by anything thats come across your desk since youve been the CEO?
In my case it was a gradual transition. I was chief operating officer for three or four years, so 80 percent of the organization was reporting to me. It is always surprising to see that the buck stops with you. As a CEO you need to focus on performance; thats your responsibility. Then you make choices between long-term and short-term, between whether to invest in China or go to Vietnam.
What do you see as your biggest challenges over the next year or two?
First, some part of the industry is getting commoditized. It is possible that you will have competition taking those low-hanging fruits, like application maintenance.
No. 2, we recruit a very large amount of talent, and we need very high-quality talent in very large numbers. I dont see any immediate problem, but in the long term this can become a challenge. The third challenge is that you are living in a world of uncertainty and instability. If you look at all three challenges, it is important that we articulate a response. Our strategic direction is all about strengthening our partnership with our clients, becoming more relevant to them, delivering higher and higher business value and being truly global for them.
What are the most promising opportunities you see for the company?
Weve identified seven global megatrends. These trends are a result of either technological advance, democratic change or social behavioral changes. For example, the digital consumer is a trend that is causing self-service and co-creation. Look at emerging markets, which are creating a new, broad market and enabling talent to be used anywhere in the world.
These trends give enterprises a framework for looking at the future, creating innovation, creating differentiation and creating growth. That makes us very optimistic because we will be the strategic partner through that process. We also see many enterprises adapting our concept of a smarter organization, driving agility, driving nimbleness, reducing redundancy. That is the cost side of the equation, where we can deliver business value through efficiency and productivity.
What about other territories?
I believe the continent of Europe is an emerging market for us because our revenue share there is quite small. We can also grow in the emerging markets. Australia is 5 percent of our revenue today, which we created in the past six or seven years. Then, if you look at industry verticals, there are some industries where our revenues are not very high, like life sciences, government and energy. They give us higher opportunity to grow.