Infosys reaches its milestone

India's leading provider of IT services has finally come of age: now it needs to increase its presence around the world.

by Morice Mendoza
Last Updated: 23 Jul 2013

Infosys Technologies, a provider of IT services to many of the world's top companies, has reached a triple milestone: it is 25 years old this year, its charismatic founder Narayana Murthy has retired and the company's annual revenues topped $2 billion over the last fiscal year. Infosys started in the early 1980s when seven Indian IT engineers, including Nandan Nilekani, the current chief executive and MD, Kris Gopalakrishnan, president, chief operating officer and joint MD, and Murthy, chairman (non-executive since his retirement in August), met to discuss Murthy's dream to forge a new company from an initial investment of $250.

Before the economic liberalisation of 1991, companies such as Infosys found the going tough, in spite of the global demand for low-cost, offshore IT services. It was difficult to import hardware because of the closed economy and almost impossible to obtain foreign currency. The reforms - which included lowering tariffs and other trade barriers, reduced taxes and a devalued rupee - made life much easier: the company went public (at which point it granted stock options to its employees) and began to grow much faster. Infosys acquired its first clients in Europe - Labinf in Milan and Reebok in France - and within eight years was listed on Nasdaq, a first for an Indian-registered company.

The combination of several other factors such as growing global connectivity through broadband and the availability of vast numbers of Indian technicians (1.43 million students applied for work at Infosys in fiscal 2006 alone, leading to 12,500 new hires) laid the basis for the company's extraordinary growth. In the six years between 2000 and 2006, the company achieved 41% compound annual growth, increasing its revenue from $545 million to $2.16 billion and increasing its number of employees from 10,700 to 52,700.

The last quarterly results, ending 30 June 2006, show first quarter revenues at $660 million, up by 38.7% on the previous year.

Infosys provides software services from the basic application level such as systems upgrades and maintenance to the higher-value level of consulting, enterprise architecture (in which a company's systems are designed to work together) and enterprise security. For instance, it helps global companies with their customer data management, sales and inventory, and sourcing models. But it has added something beyond the ability to manage hyper-growth and deliver IT services, which, some say, sets it apart from its main rivals. Inspired by Murthy, it aims for the highest levels of corporate governance, transparency and ethics.

Nilekani summarises Murthy's legacy to the company: "If Infosys is today regarded as a transparent, respected corporation, Murthy sowed the seeds for it. He taught Infoscions (the name given to employees) the true meaning of the term 'healthy respect for competition' and for entrepreneurs like me the importance of the term 'deferred gratification'."

When I visited the company's campus in Bangalore this summer - where some 17,000 of its staff work out of different buildings dedicated to specific clients - it was a week after IBM's chairman and chief executive Samuel Palmisano had hosted a meeting in Bangalore at which he spoke to 10,000 of the 43,000 Indians who now work for IBM. It was a clear indication that India's IT services industry has forced the US giant to rethink its own strategy. According to Nasscom (National Association of Software and Service Companies), the industry grew by 33% over the last year, reaching a new high of $13.3 billion.

And now Indian companies such as Tata Consulting Services (TCS), Infosys and Wipro are well placed to eat further into IBM's market share.

"About $250 billion of outsourcing contracts are coming up for renewal in the next two years," says Soumitra Dutta, Roland Berger chaired professor in business and technology at INSEAD. "Global majors such as IBM and Accenture are facing strong competition from emerging Indian players such as Wipro, Tata and Infosys in retaining these contracts."

IBM hopes to compete by using both its global reach and its growing base of offshore centres (it has pledged to triple its investment in India from $2 billion to $6 billion over the next three years). In June, Palmisano wrote in the Financial Times: "The globally integrated enterprise fashions its strategy, management and operations to integrate production - and deliver value to clients - worldwide. That has been made possible by shared technologies and shared business standards, built on top of a global IT and communications infrastructure."

Nilekani laughs when I mention Palmisano's article, which appeared also in Foreign Affairs, published by the US-based Council on Foreign Relations: "We began with this model from day one. We designed teams to work seamlessly. You can have individuals, whether they are in Bangalore or Boston, all working together. They do not need to meet. It's not about seeing them as country operations, but about seeing them as part of one global network."

Infosys has built its success on what it calls its Global Delivery Model (GDM). To support this, it already has 38 global development centres, with 20 in India, nine in North America, five in Asia-Pacific and four in Europe. By having almost three-quarters of its staff based in India, where labour is relatively cheap as well as highly skilled, it can offer a highly competitive price for top-level services. The position was summarised in its latest annual report: "Our Global Delivery Model allows us to produce where it is most cost-effective and sell services where it is most profitable."

An INSEAD case study, Infosys: leveraging the Global Delivery Model, written in 2004 by Amit Jain, explains why GDM is so successful: "On the basis of GDM, Infosys divides IT project work into two components: onsite and offshore. The onsite component consists of those parts of the engagement that are executed at the customer site and covers activities that need end-user interaction, proximity to the market, quick turnaround time and testing infrastructure."

The case study includes work done by Infosys for Toshiba America: "Toshiba America wanted to revamp its business processes to reduce order-to-delivery lead-time, minimise inventory, increase customer service levels and enhance supply chain visibility. The company's diverse existing systems were built on heterogeneous technology platforms and needed to be integrated. Infosys completed the project in 18 months compared with an estimated time of 30 months by other vendors."

Nilekani explains: "Our collaborative distributed development model allows us to leverage global capacity, resources and strengths to desegregate sophisticated software work and get parts of it done in Bangalore, Beijing and Boston in a seamless manner. We focus on three key factors to manage and sustain the seamlessness: creating a scalable business model, maintaining the Infosys work ethic across all geographies and retaining a 'small organisation' culture despite growing every day."

Moving up the value chain and increasing global scale are key goals, says analyst Navi Radjou at technology and market research company Forrester Research: "In addition to growing its revenues, Infosys will also need to grow its profits. To achieve that, it will need to offer strategic consulting services that meet clients' innovation needs, and not just plain-vanilla IT implementation and business process outsourcing services.

"Infosys' goal has always been very consistent: it is to stay ahead of the next big trend. It wants to move from being a body shop to a brain shop. It sees the future in the same way as IBM in business performance transformations (advising companies on how they can improve their overall performance by exploiting the latest IT packages). Its aim will not be to hire more bodies like Wipro and TCS." For example, Radjou points out, Infosys provides high-level consultancy advice to big retail chains on their supply management systems based on its own RFID-based intellectual property (Radio Frequency Identification technology is used to tag goods, enabling companies to monitor their movements in the supply chain).

The drive to upgrade its services to the high-value end is epitomised by Infosys' approach to business consulting. It recently formed Infosys Consulting, a subsidiary headquartered in Fremont, California. The new company employs about 180 out of the total number of 2,100 Infosys consultants and, according to Stephanie Moore, vice-president, IT services group at Forrester, is recruiting people with world-class qualifications. More than 70% have MBAs from US and European schools, which provide a better grounding for consultancy work than the more technical and engineering skills found in graduates from Indian schools. Stephen Pratt, for instance, CEO of the new business, has 12 years' experience at Deloitte Consulting.

So far, the nascent consultancy practice has developed some interesting original work. Moore has been particularly impressed by Infosys' Value Realization Methodology (VRM), designed to help businesses understand the value of IT and business process improvement initiatives before they implement changes. "In this way, companies can make defensible investments and get the results they require. The approach has been praised by clients, who report that VRM has changed the way they make IT and business investments."

About 16% of Infosys' business is now in consulting, according to Nilekani, of which Infosys Consulting is a part. The latest quarterly report puts consulting at 3% of the company's revenue. What then would make a client go to Infosys instead of, for example, IBM or Accenture?

BG Srinivas, one of Infosys' global managers, works in Canary Wharf, London, and as senior vice-president EMEA is responsible for the company's projects in Europe, the Middle East and Africa. One of the advantages Infosys brings, he says, is flexibility: "We have our own methodologies and our clients have their own. Rather than imposing our way on them, we will look at the client's context and be flexible. We will say: let's try to find the common methodology. Both sides have benefits, so let's try to find one system that will work for both of us."

Infosys also realises that it must help its clients achieve efficiencies and savings, even if it means reducing its own revenue stream. "For example, we will look at ways to innovate, to improvise and to ultimately eliminate work. So when I start eliminating work, that means I'm cannibalising my own revenue," says Srinivas. "We don't mind that because we know if we do a good job, there will always be some new business coming in." Infosys' success so far suggests it has been pressing the right buttons: it has a track record of 97% repeat business.

Nilekani and Gopalakrishnan have created structures and processes that enable them to recruit thousands of new employees a year without appearing to damage the service to existing clients. Infosys also encourages staff to offer ideas in annual brainstorming sessions and encourages younger employees to contribute to the annual round of strategic discussions.

One of the company's services, modular global sourcing, came out of just such a process. Company systems consist of many different elements and some IT service companies design the whole system from end to end. Infosys, however, believes that it should do only what it can do best and co-operate with other IT service providers to complete the chain.

Srinivas explains why this appealed to clients: "It may sound counter-intuitive because we have the capability to offer end-to end services. But we have been telling clients not to put all their eggs in one basket, go for the best of breed. There are some things we are not good at, so choose what we do well and we will operate in a multi-platform environment."

The company's offshore model is also one of its basic advantages, says Srinivas. "It is integral to our business model. It is not that we offer this as an extra. If you look at the overall cost structures of companies like IBM and Accenture, they are still biased to onshore sites even though they are increasing their offshore presence. They give their offshore model as a customer option, not as part of the business model."

Many companies are still surprised, he continues, that Infosys has been able to offer sophisticated services in this way. "We had no choice. Even today many other companies, including Indian ones, are struggling with how to instigate the remote management of IT infrastructure. We have been able to do this. It has become ingrained into our culture."

Nilekani has big ambitions for the company: "We want Infosys to be in the top echelons of globally respected companies. At the same time, the game is definitely not only about size. In the IT services industry, we have been an agent of change. We want to continue to be an agent of change and be the leader in the industry." He says the company is "constantly evolving and adapting to changes in the market. We are building successfully on our GDM to combine front-end consulting services with the back-end technology and business services support. We see our new model as a disruptive model that is certainly going to change the way business is conducted."

But is Nilekani the right man to lead the company at this time? Forrester's Radjou thinks he is: "Nandan is a good choice for CEO. He is an operations wizard. He and Kris will be very operations-focused. You might see more investment in things like knowledge management. But there is nothing wrong with that at this stage in the company's history."

Infosys is realising its ambitions to gain scale with subsidiary companies in China, Australia and the US. It also has acquired a majority stake in business process management services company Progeon, which has operations in the Czech Republic and the Philippines. In China, the company is gambling that it will become the next offshoring site. Srinivas says: "We have been asking ourselves where is the next best alternative to India. It must have scale, talent and a good infrastructure. We have put our money on China. We need to be there."

A criticism of the company is that it has failed to win some of the big deals because it won't compromise on price. Moore explains: "Infosys tends to be a high-price player. It will rarely win when price is the issue. It's unwilling to chop prices. In itself this is not an issue, but when financial analysts worry that it is losing out on some big deals then it may be a problem."

Although analysts may be looking to see if Infosys can win contracts worth more than $50 million or $100 million, the company has proved it can transform small clients into big ones over time. Srinivas describes Infosys' traditional approach to building its customer base: "The continuous cross-selling of services to our clients has been the path that has taken us to client contracts worth $20 million, moving up to $30 million, $40 million or $50 million. In some cases, we have been able to convert a client into a $20 million client in two years or $40 million in three years. In other cases, it has been slower." In the quarter ended 30 June 2006, Infosys had two clients worth more than $100 million and 221 worth more than $1 million.

The company has also been impressive in the way it has de-risked; for instance, scaling down its dependence on the US market. Srinivas says: "The US used to contribute to 90% of our business eight years ago; now it's 65%." Infosys has also increased the number of sectors it works in, otherwise known as 'verticals' - currently, the company serves clients in numerous areas, including banking and capital markets, insurance, healthcare and life sciences - and it has increased the breadth of its services such as testing services, operations, engineering services and business process consulting and management.

Srinivas says: "We aspire to be a global company, but we're not there yet." It will need to increase its presence around the world and is looking to hire more local people. "We need to be perceived as a company with local presence and global scale."

This is a huge challenge, suggests John McCarthy, vice-president Asia Pacific research at Forrester: "The big issue in globalisation is that just 3% of Infosys' workforce is non-Indian. This is a huge difference compared with companies like IBM and Accenture, which have a large spread of employees across the world. It gives them better global handling."

In an attempt to broaden its global reach, the company runs an annual award with the University of Pennsylvania's Wharton School. The Wharton-Infosys Business Transformation Award seeks to reward excellence and innovation in information technology with industry-wide impact, and provides great branding exposure for Infosys.

So now it has passed its first milestone, what of the next 25 years?

Gopalakrishnan says: "We have become an icon, a respected company in India. There are the beginnings of this happening outside the country. So the challenge for us is to become a respected global company in the next 25 years."

But this is not just about growth: "It is also about being a preferred employer in all the major geographies and one of the leaders in the IT services space." Infosys is entering its first stage of adulthood in a healthy state, ready for the battle ahead. Most gamblers would say it was a good bet.

GROWTH, REVENUE AND CLIENT WEALTH - Growth, 2002-2006 (dollars m)

2000 2006 Compound
annual
growth (%)
Revenue 545 2,152 41.0
Net income 164 555 35.6
Employees 10,700 52,700 49.0


REVENUE BY SERVICE OFFERING (%)
Development 21.3
Maintenance 29.9
Re-engineering 2.6
Package implementation 16.5
Consulting 3.0
Testing 6.2
Engineering services 1.8
Business process management 4.2
Other services 10.8
Total services 96.3
Products 3.7

REVENUE AND NET INCOME GROWTH, 2005-2006 (dollars m)

2005 2006 % change
Revenue 1,592 2,152 35.2
Net income 419 555 32.5


REVENUE BY INDUSTRY (%)
Insurance 7.0
Banking & financial services 29.4
Manufacturing 14.5
Retail 9.7
Telecoms 17.7
Energy & utilities 5.4
Transportation & logistics 3.3
Services 8.7
Others 4.3

GLOBAL SCALE, 2006
Region % of revenue
North America 64.8
Europe 24.5
India 1.8
Rest of world 8.9

NUMBER OF MILLION-DOLLAR CLIENTS
$1 million+ 221
$5 million+ 94
$10 million+ 56
$20 million+ 28
$30 million+ 19
$40 million+ 15
$50 million+ 11
$70 million+ 3
$90 million+ 2

INDIA'S TOP FIVE I.T. SOFTWARE AND SERVICE EXPORTERS 2005-2006
- Tata Consultancy Services (TCS)
- Infosys Technologies
- Wipro Technologies
- Satyam Computer Services
- HCL Technologies

INDIA'S SOFTWARE AND SERVICES SECTOR
2004-05 2005-06
Exports (dollars bn) 13.1 17.3
Employment ('000s) 741 878
Source: Nasscom.

INFOSYS' THREE LEADERS

- NARAYANA MURTHY

Qualifications: Degree in electrical engineering, University of Mysore; MA, Institute of Technology (IIT), Kanpur

1981-2002: CEO

2002-2006: Chairman and chief mentor

2006: Non-executive chairman Murthy is a hugely admired figure around the world largely because of his almost Ghandian philosophy towards business and life. He has described himself as an "average" man and lives according to his own philosophy.

Although he is one of the richest men in India, worth about $500 million, he often travels on the bus along with other 'Infoscions' and has lived in the same two-bedroom apartment since 1981. The Infosys Foundation, set up in 1996 to contribute to healthcare, rehabilitation, learning, culture and art, is a typical example of his view of the world. He is chairman of the governing body of the Indian Institute of Information Technology in Bangalore and a member of the Board of Overseers of the University of Pennsylvania's Wharton School.

- NANDAN NILEKANI

Qualifications: Degree in electrical engineering, Indian Institute of Technology (IIT), Mumbai 1981 Founder of Infosys

1981-2002: COO & head of the banking business unit 2002-2006 CEO, president and MD

2006: CEO and joint MD Thomas L Friedman wrote about Nilekani in his book The World is Flat (Penguin, 2005). He referred to Infosys as one of the "jewels" of the Indian IT industry and Nilekani as "one of the most thoughtful and respected captains of industry". He was inspired by Nilekani's observation about the way in which IT connectivity has made it possible to employ talent from all over the globe. Nilekani regularly attends the World Economic Forum's annual gathering in Davos and is a co-founder of Nasscom (National Association of Software & Service Companies) and the Bangalore Chapter of The Indus Entrepreneurs (TiE). He is also on London Business School's Asia Pacific Regional Advisory Board.

- KRIS GOPALAKRISHNAN

Qualifications: MSc in physics; Master of Technology in computer science, Indian Institute of Technology (IIT), Madras

1981: Founder and technical director 1987-1994 Technical vice-president and manager of a joint venture with KSA in Atlanta, US 1994 Head of technical support services

1996: Head of client delivery and technology

2002-2006: COO and deputy MD

2006: President, COO and joint MD

Gopalakrishnan's initial responsibilities at Infosys were the management of design, development, implementation and support of information systems.

More recently, he has chaired Infosys Consulting, putting him at the head of the company's drive to move up the value chain. He is chairman of the Indian Institute of Technology & Management at Kerala, and vice-chairman of the Information Technology Education Standards Board set up by the government of the Karnataka region.

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