What’s wrong with Infosys?

Once touted as the IT bellwether, Infosys today, finds itself in a very precarious situation. Its revenue guidance for FY 12-13 is lower than the industry average. Peers like TCS and Cognizant on the other hand are growing strong. For more than eight quarters Infosys has been under performing. Anyone and everyone related to the IT industry has tried to analyse its problems and all have come up with different reasons. Even the Infosys management is finding it hard to pin down its poor performance to a particular problem. Will Infosys be able to correct its course in time? Or will it be overtaken by the likes of Wipro and Cognizant.

In the group of TCS, Wipro, Cognizant, HCL Tech and Infosys, Infosys has seen its share of revenue addition growth slip from 22% to 14.5%. Other than Wipro, all other have seen a modest to robust growth in their revenue addition. In the last five quarters the company has missed the midpoint of its guidance twice and in the last quarter it even missed out on the lower end of its guidance. This resulted in the stock price tanking by almost 13%!

Ask any critique and the first reason they will point out is the management problem at Infosys. The founders who are still at the helm of the company are being perceived as a major hurdle in the company’s growth. Post the 2008 recession there have been significant changes in the IT outsourcing industry. Critiques say that Infosys management has been slow to adapt to these changes. Infosys still is a very centrally controlled organization, which means that major projects do not get off the ground unless approved by the founders. On the other hand, peers like TCS went into management reshuffle post the recession. N Chandrashekhar became the youngest CEO of the company. At Wipro, Azim Premji, disbanded the co-CEO model and T K Kurien was appointed as the sole CEO of the company.

The firm grip founders have on the company also plays out on the way it carries out deals with its clients. For years Infosys was built on the notion of profitable growth. In a market where Infosys clearly stood out in terms of its quality and deliverables, commanding a premium was not a problem.  But today, as the competition has caught up with Infosys, customers have a easier choice to move on. Expecting a premium in a market where differentiation is very low doesn’t seem justified. However, the top management is still fixated to idea of high margins and that is how the company works out its deals. This has led to many a deals not materializing into orders. The founders however are in no mood to give up on the premium pricing.

Infosys says that cutting the prices is the easy way, and it’s not willing to go that way. Infosys 3.0 is a strategic vision that CEO Shibulal is trying to move the company towards. As traditional IT services become commoditized, Infosys is trying to move up the value chain to maintain its premium margins. It recently struck a deal with WPP, world’s largest advertising and media planning company, which will use a platform created by Infosys to manage its clients marketing campaigns. It also tied up with Bahrti Airtel for its mobile based money transfer service called Aitrel Money. In both cases Infosys will generate revenue based on the number of uses by WPP or money transfers by Airtel’s client, instead of the number of engineers required for the project. The company says that clients have found its new strategy as ‘extremely interesting’. However, it remains to be seen how well the management is able to drive this strategic change and whether there are many such deals out there for Infosys to maintain a healthy revenue growth.

Founders say that a quarter or two of low performance isn’t a reason to review the strategy. They believe that the company has always come up with the right strategy at the right time and has executed it well. Only time will tell whether the current board is capable enough of driving Infosys through the structural changes in IT industry. Critiques believe a change at the top is essential for Infosys to maintain its image as the IT bellwether. The debate, I believe, will continue for some more time. Till then let’s wait and watch how Infosys 3.0 pans out.