A year since his return, Narayana Murthy is still far from building a “desirable Infosys”
In June last, Infosys co-founder and its undisputed public face, N.R. Narayana Murthy returned to the company he had founded over three decades ago. The move was greeted with bouquets and brickbats — the latter for bringing along his son Rohan Murthy as executive assistant — by shareholders and investors even as they were positive that his return would turn the tide for the industry bellwether. A year hence, the aura around him has faded — even if only a wee bit — and it is time to ask a few hard questions.
Has the Murthy magic worked for Infosys in his second stint? Has the compromise on self-professed principles of corporate governance hurt the company (and its organisational culture) and has the long-drawn uncertainty over succession eaten away at the company's future prospects? In other words, does Mr. Murthy's year-ago promise of building a “desirable Infosys within 36 months” stand a chance in a highly-competitive and rapidly changing industry?
Return of the giant
In June, when Mr. Murthy returned to his beleagured “middle child”, even his sharpest critics agreed that his return was necessary. Infosys, which had failed to meet its annual revenue guidance for the second consecutive year in 2012-13, was seeing its roughest patch ever: CEO and MD S.D. Shibulal's much-talked-about Infosys 3.0 had left investors confused and overall revenues were on a steady decline. Employee morale was low as their salaries and prospects had stagnated.
Mr. Murthy's first few moves were all necessary interventions: he hiked salaries by around 8 per cent across the board (at some levels this came after a gap of two long years), he opened up channels of communication with employees and started regularly interacting with investors. But it was round two of his interventions that made the rank and file uncomfortable: he cracked the whip on costs. Non-performers would have to go. Investors and analysts lauded this no-nonsense approach to performance at a company where there had been perceptible sluggishness in sales and delivery in the years post the global economic recession.
Over several investor and analyst meets, Murthy continued to harp on about optimising costs to improve margins, touching now and then upon revenues too. Mr. Shibulal’s favourite “3.0 strategy” — which focussed on building products and platforms — appeared to have made way for a sharper focus on Infosys' “bread and butter”, IT services. These went down well with clients, investors and the markets.
In 2013-14, Infosys doubled revenue growth to 11. 5 per cent, added 238 clients and expanded operating margins to 25.5 per cent. Share prices too rose. Despite these positives however, its revenues have been lagging competition. Infosys’ revenue guidance for the current fiscal also lags industry outlook.
So was the focus on cost optimisation misplaced ? No, say insiders. There had been sluggishness in the team, partly due to weak leadership and lack of clarity in direction, and some trimming was for the good. However, there were 10 executive level exits in the last one year. Insiders at Infosys, former executives who have worked in top roles and industry watchers agree on one thing: cost-optimisation is not the only way to address margins. And attrition at the second largest IT exporter has not been confined to these high-profile exits. The company has seen its worst attrition ever in the last one year. At an uncomfortable 18 per cent, Infosys is finding it tough to retain employees across the board in times of perceived uncertainty. A slew of HR measures, apparently the brainchild of Mr. Murthy and his son, have failed to have the desired impact. “Though informal meetings and townhalls with executives have helped gain employee confidence to an extent, employees are not likely to miss the larger writing on the wall,” says a senior team leader.
Mohandas Pai, former CFO, says that the failure to focus on revenue enhancement over the past four years, spilled over into Mr.Murthy's tenure. “The strategic error was that there's just not been enough focus on sales. This coupled with lack of a strong and empowered senior team, impacted the company.” By comparison, competitors TCS, Cognizant and HCL have focussed aggressively on revenues.
Mr.Pai insists that there are two major pieces to this puzzle. One, Infosys has retained a centralised model, while the industry has moved to a “more federated, closer-to-client model”. After 2008-09, sales and markets became a key determinant not execution, he explains. And even when Infosys did see a reorganisation, the structure did not change. “These leaders were not empowered. If an IT company wants to survive today, decision making has to be faster and decentralised. This was not the case,” explains Mr.Pai.
Other executives, including those who have quit recently, agree with Mr.Pai on the centralised model. In fact, a former executive who has quit during this period, says that while Mr.Murthy coming back was a “much-needed move” given he was perceived as an “anchor point, which can bring stability”, consequent developments at the firm were disappointing. “A parallel structure was created, where Rohan Murthy had a prominent role, and this made senior leaders uncomfortable. Before you knew, good people in the sales organisation were leaving,” he said.
The former executive described Infosys of the past as a “middle-class dream” where there was a set of rules and corporate ethic that was admirable, and people aspired to be part of it. “When Murthy returned many of these rules were broken. That Shibu (S.D. Shibulal) was not removed, despite underperforming, only because he was a founder was against the idea of meritocracy that many of us believed was Infosys.”
As Mr. Murthy completes a year into his second innings and the company is hunting for its next CEO, critics are asking the question: will Mr. Murthy revert to a non-executive role after the new CEO arrives or will there be two power centres in the company? Ironically, experts and insiders are now placing their bets on another co-founder, Nandan Nilekani. Over the past week, there's been a growing clamour for his return. Among these voices are former Infoscions such as Mr.Pai and politician-turned-former CFO V. Balakrishnan who believe that the way out of the organisational conundrum now would be to bring back one of the founders, who would be able to work comfortably with this new structure. “Anything else would be too difficult to work around with. An external CEO will find it difficult to function and rebuild a team quickly,” says Mr. Balakrishnan. Mr. Pai agrees that given current circumstances, “someone like Nandan” will be able to command the investor, client and employee confidence required to steer the company, and meanwhile, build a next line of succession.
Will this not be a breach of corporate governance principles all over again? “It will be, but given the centralised manner in which the company is structured now, it is the only stable way out,” says Mr. Pai.