When Infosys had a big fallhttps://indianexpress.com/article/news-archive/print/when-infosys-had-a-big-fall/

When Infosys had a big fall

Global giant. Now,Infosys is just a pale shadow of its former self. What went wrong?

It was a dazzling corporate star of the kind India had never seen,blazing to the very top within a mere two decades of its inception. Its governance ideals were stellar. Its founder-leaders were single-minded about delivering results. A virtuoso performance year after year endeared it to stock-market investors. For entry-level engineers,getting a job offer from Infosys was the equivalent of hitting the lottery.

Then came the decline.

The Infosys story started to unravel in recent quarters almost as fast as it had developed. There were many troubling signs,such as missed targets quarter after quarter until the company altogether stopped the practice of giving out quarterly forecasts last year. Revenues slowed and operating profits shrank until,astonishingly,Infosys was underperforming its industry peers. This April,after yet another desultory quarterly results announcement,its stock price fell precipitously to a 10-year low. Fresh campus hires who were given Infosys offer letters a year ago were kept waiting several quarters without joining dates. The company slid to number three in the Indian IT rankings,overtaken by virtual newcomer Cognizant Technologies,a dozen years its industry junior. This year,Infosys expects to grow at a 6-10 per cent rate,lagging behind the industry’s forecast of 12-14 per cent growth rate.

THE FIX

Desperate situations warrant drastic fixes,and on June 1 came the stunning announcement. Its principal founder,billionaire Narayana Murthy,had pulled himself out of retirement and was rushing to its rescue. A full 11 years after he relinquished an executive role in the company,Murthy was back in the saddle as executive chairman,replacing banking legend K V Kamath,who had been appointed non-executive chairman with much fanfare just a couple of years ago. Returning alongside Murthy was his son,Rohan,30,a computer science PhD with degrees from Cornell and Harvard,as his executive assistant,to make him “more effective”.

In doing so,Infosys was breaking two sacred tenets that Murthy himself had espoused and championed. One,that all its bosses,including founders,would retire from executive roles at 60. And two,that none of the founders’ children would join Infosys. Significantly,the announcement regarding the broken commandments came exactly two weeks prior to the company’s annual shareholders’ meeting on June 15. It was as if the company had finally stepped on the panic button.

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Infosys appeared in deep enough trouble to necessitate that Murthy not only breach his own Murthy’s Law but further,put his personal credibility at risk by arriving back with his son in tow. In the industry,many hailed it as an act of courage. “People are going berserk on the issue of Murthy rescinding on what he said earlier,” said Subroto Bagchi,chairman of IT services firm,MindTree. “But remember,even Gandhi suspended his anti-war stance while he was in South Africa and actually donned army fatigues and served in the British military.”

In many ways,Infosys has been a prisoner of its own birth,some say,cursed for being at the right place at the right time. Tragically,some layers within the company had started believing that success to be real and permanent. “Nobody bargained for the possibility that our luck would run out and that we would need to retool to face a very competitive market,” said one manager. The drift that impelled Murthy’s frantic comeback became obvious two-three years ago but its origins go further back into the past.

READING IT WRONG

When the IT services industry started rapidly commoditising and confronting scalability challenges,Infosys got itself a makeover. Its much-hyped Infosys 3.0 strategy would help the company stay relevant by partnering with clients in business-transforming deals. In other words,not just the same old projects but a rethink on clients’ entire businesses with big,futuristic ideas. This would hoist the company up the value chain,delinking it from the lower-priced application development and maintenance work. “Welcome to the new and improved version of Infosys,” it said when launching its complex technology-based Infosys 3.0 solutions that would allow it to bill more. It was the right stratagem. But what Infosys did not bargain for was that its launch would meet head on with a global economic slowdown. Clients wanted to cut costs rather than spend more.

Somewhere along the way,Infosys seemingly lost sight of sales numbers. The market around it was changing drastically. On the one side,dominant competitors like Cognizant and HCL were snapping up deals at whatever margins. Market leader TCS powered ahead replacing Infosys as industry bellwether. Instead of going after business deals that were at its core—developing applications and maintenance deals—Infosys soldiered on selling “Infosys 3.0” through a sophisticated sales team of “consultants”.

Meanwhile,multinational rivals like IBM and Accenture who had arrived later on the scene,had built up formidably in India and had become bigger than Infosys in its own backyard. Infosys steadfastly stuck to its premium pricing model,refusing to cow down on margins,whether negotiating new deals or re-signing old ones. “They were in denial,arrogantly thinking they had customers in their pockets for life,” said a senior sales head from a rival organisation. “They became unreasonable on margins,despite getting rejected by clients over and over.”

Through all this,competitors were relieved that the Infosys’ top brass was rarely seen at crucial customer meetings,unlike Chandra of TCS (CEO R Chandrasekaran),Nayar of HCL (former CEO Vineet Nayar) or Kurien of Wipro (CEO T K Kurien) who backed their teams at key negotiations. Decision making was excruciatingly slow and bureaucratic. The company just could not make deal-grabbing judgments.

The cash-rich company was also flailing on another front. Making a smart buy at the right time could have helped boost its revenues but Infosys was afflicted by the financial conservatism of its middle-class origins. Even as rivals like Cognizant and HCL made domain and customer-specific acquisitions,the Bangalore-based firm preferred to sit on a substantial pile of cash—a whopping Rs 24,000 crore (nearly $4 billion). Bizarrely,inside Infosys falling margins provoked company-wide cost cutting on essentials like travel and client meets.

MESS AT THE TOP

As things started to blow up in the market outside,Infosys did not present a pretty picture inside either. Top-level leaders were a distracted lot,rumouredly spending more time fighting petty battles and playing little games of one-upmanship rather than shoring up revenues. The Shibu-Bala (current CEO S D Shibulal and former CFO V Balakrishnan) and Vemuri-Srinivas (Ashok Vemuri is head of Americas while BG Srinivas heads Europe) proxy wars were the talk of the company. “Shibu could not rally the troops,and nobody behaved,” one executive said. Morale drooped and,for the first time,star Infosys employees started fleeing the company and were cherry-picked by market rivals. “It was a combination of lack of focus on sales,lack of quick decision-making and lack of team work,” analysed Mohandas Pai,former CFO who quit the firm after being overlooked for the CEO’s job.

The Mohandas Pai episode itself served to highlight another dubious Infosys rite,that of choosing its leaders. The go-getter Mohandas Pai,a Murthy protégé who spent 17 years at the company heading key functions such as finance and HR,was leaning in for the top job but lost out to Murthy’s co-founder Shibulal. Many blame the leadership crisis squarely on Narayana Murthy because Murthy himself propounded the flawed philosophy that leadership had to be rotated through the co-founders. Nandan Nilekani,who took over from Murthy,had risen to the job but the other co-founders were feeble leaders. Yet,they were loath to take a backseat since Murthy himself was rooting for them. Despite the globally-competitive company it was,Infosys had the CEO chair reserved for a select group. Eventually,that served to choke Infosys’ talent pipeline as the meritorious knew they could never make it to the top job in the company.

“By the time it came to the end of the line,the co-founders had already struck it rich—they were not hungry and aggressive enough to make big conquests,” said one analyst. The thwarted Pai said Infosys was a fit case for a “study on how great companies can be hurt if right decisions are not taken and what Boards need to do on succession planning.” Through all these travails,Murthy was very much a looming shadow at Infosys. Even though he had handed over the executive reins a decade prior,many insiders said he never really stepped away.

SQUARE ONE

But all that is in the past and Infosys and Murthy must now look ahead to revive a company that was once the toast of post-liberalisation India. For all practical purposes,Murthy is the new de facto CEO of Infosys,never mind the title that Shibulal will continue to have. Though CEO by designation,Shibulal will go back to doing what he is best at doing—being the COO.

In some ways,Infosys is back where it was in 2002,the year Murthy relinquished his CEO-ship,except that the world outside is a very different place. Today,Murthy is 67 and Infosys is 32. By the rulebook,that might not be an ideal match. Customer needs and the business environment have gone through a 180–degree turn. Still,Murthy and Infosys have both a lot going for them: their brands,the value proposition to customers and their excellence in delivering. Inside and outside,many are rejoicing over Murthy’s return.

Can the ageing but agile Comeback Man do it? To look at him,Murthy is a diminutive man who wears his glasses too thick and his pants too high. But once he starts talking,Murthy is unmistakably a leader. If anybody can rally the Infosys troops,he can. If anybody can reinstate clients’ and investors’ belief in Infosys,he can. If anybody can make quick decisions,Murthy can. In sum,if anybody can pull off a miracle with Infosys,Murthy can. Murthy has a lot to lose and even more to gain. Whichever way it turns out,one thing is clear: there will never be another Infosys.

MURTHY’S SIX FIX

1 Build a new team for a changed world. Murthy has brought in his academically accomplished 30-year-old son Rohan as his executive assistant. Infosys needs to aggressively scour the globe for fresh,young talent,whether proficient Indian returnees or Ivy League consultants,to come in and transform the company.

2 Make quick decisions. Murthy has always been ruthless and quick in making decisions. More than ever,Murthy’s decisive leadership and a willingness to take responsibility for those decisions is needed.

3 Make acquisitions. Murthy has to make Infosys shed its risk-averse stance and make bold,strategic acquisitions to shore up company revenues. One or two fitting assets could be game-changers.

4 Go back to being India’s Most Admired. Murthy has to bring the spotlight back on Infosys’ high ethical standards. Infosys has to stay out of more controversies such as the one it finds itself currently in the middle of—alleged fraud in the United States related to illegal use of B-1 visas.

5 Process strengths and weaknesses. Murthy is used to hero worship. But what he needs now is to rid himself and Infosys of any narcissism so that he can correctly assess where he is going wrong and what needs to be corrected.

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6 No favouritism. Merit should override all preferences,whether within Murthy’s peer group of founders or,now,familial.