A large portion of our revenue is volatile compared to peers because of our model
Infosys, for long the darling of the stock market and bellwether for the IT industry, was panned by analysts and industry-watchers alike after it declared results for the June quarter. It didn’t help that on the same day, peer and industry leader, TCS, came up with a better performance exuding optimism over its prospects. In this hour-long interview with The Hindu at Infosys’ corporate headquarters in Bangalore last week, CEO and Managing Director, S. D. Shibulal, put up a spirited defence of the company’s performance. One of the original founders of Infosys, the soft-spoken Shibulal maintained an even tone as he answered all the difficult questions. Excerpts:
How would you look at your performance in the first quarter of 2012-13?
Let me give you the context. Under Infosys 1.0, we innovated the global delivery model, pioneered the India brand and so on. Under 2.0, we created a disruptive model for consulting. Now, we are into the next level of transformation which is Infosys 3.0. We believe that this transformation will create a new model for the industry itself. It will address simultaneously the requirements of the client and the challenges for the industry.
Our strategy today is to create a balanced portfolio which consists of consulting and system integration (C&SI), business and IT operations and products/ platforms. The last one is clearly disruptive for the entire industry. It is cloud-based, it is opex-based for the client, it is non-linear and it is intellectual property-based.
We have gone through the transformation, it is complete, and we are now in execution mode. Fortunately or unfortunately, we have done this in a very challenging environment in multiple ways. Our business is modelled in such a way that a large part is impacted by this volatility in the environment, more than some of our peers because of the portfolio. In a volatile environment, the first thing to be affected is discretionary spending, which is about 30 per cent for us.
The second thing to be affected is financial services spend which is about 34 per cent for us. So, totally about 64 per cent of our business is undergoing challenging times, which is reflected in our short-term performance. In relation to this quarter, when I look at the strategy, which is now into the execution phase — we had rolled out this strategy in middle of last year and the execution is three quarters old — the early indicators are all good. I’ll give you examples. If you look at Airtel Money, it is our intellectual property which is running behind it. It is our platform, and it can be duplicated with other clients.
So the thrust of your argument is that you are in the midst of the business model change…
And it is a challenging time, and a large portion of our revenue is volatile compared to peers because of our model.
But TCS says that BFSI business is good, which is the opposite of what you are saying…
There are different strategies that are adopted by companies. You need to look at stuff such as the proportion of BPO revenues to total. Ours is just about 5 per cent. Our approach to BPO is very different. We have created non-linearity even there. When the approaches are different, the results will also be different.
So is there a flaw in your approach then?
The important thing is the results that we are trying to achieve in the long run. Our objective is to have a balanced portfolio, a portfolio that will deliver value to our clients as well as give us high margins. Infosys has always believed that we should have above average growth, and industry-leading margins. So the strategic decisions and choices that we make are based on these fundamental requirements. And, we look at it in the long-term. We feel these are strategies that will deliver the aspirations that we have.
The market seems to be giving the thumbs down to your margin-focussed approach as opposed to revenue-maximisation. What do you think?
We have to execute what we believe is our strategy. We have made the clear choice that high quality growth is important for sustained performance. The means for this are above industry-average growth and superior margins. It is true that we have done this transformation in business model in a challenging environment. But there is no good time for transformation; if it has to be done, it has to be done. We believe that this transformation and these strategies will deliver our aspirations.
Has there ever been a discussion in your board room on whether the focus should shift to revenue-maximisation?
When we decided the strategy, we had a huge amount of debate. It is three quarters since we rolled out our strategy. You have to give it time right? Strategies take time to deliver. What we can do though is look at the early indicators and see if the strategy is effective. If you look at client additions, it has been very good.
If you look at some of our most interesting customer wins, they have all been led by this strategy. For instance, Airtel, GlaxoSmithKline, Syngenta and so on. One of our strategies is to push our products and platforms. Today, we have nine platforms with 22 clients, one of the platforms has reached double-digit clients which means you are deriving ten times revenues for a single investment. We have co-created platforms with clients such as Syngenta and Nordstorm. All these have been done in the last 8-9 months. When you get these kinds of short-term doubts, you should look at early indicators of our strategy’s success. Our cloud and mobility strategy is doing very well. The cloud revenue has crossed $100 million, and is growing much above the company average as is our enterprise mobility business. We have 50-plus partners for cloud, which is a large eco-system.
What was the reason behind your discontinuing quarterly guidance?
The first principle on guidance is that you will prevent assymetrical information in the market. All these years we had fairly good amount of confidence coming into the quarter every year. But now because of our dependencies on the two areas mentioned above (discretionary spending and BFSI) and the overall volatility, we are unable to bring to bear the same confidence.
While we are confident of the yearly picture, quarterly we are finding it difficult to predict because even delay in one programme can upset the prediction. The predictability of the deal getting closed or executed in the same quarter is getting harder, so for the time being we are suspending our quarterly guidance.
What do you say about the different annual projections from you and Nasscom?
We have to give the facts as we see them. Guidance is a statement of fact, and our guidance is based on our clients, our portfolio and our market. We have to say exactly what we see. It may be harsh but we have to say it.
When you say that there is little visibility over three months, how come you are confident about the 12 months picture?
That is because we have good visibility of clients’ annual budgets. We know their spending, we know which programme they are prioritising, which project is being started…. in the portfolio approach when a fairly good programme is started, we believe we can make our guidance.
There have been demands for a return of the cash on your balance sheet to shareholders. What are your thoughts?
It is important you look at our strategy in these matters. We would like to raise the proportion of products and platforms, which is presently 6 per cent of revenues, to a third. Organically growing from 6 per cent to a third of revenues is not easy. So there are some very strategic areas where we can look at inorganic growth, which we have articulated. Products and platforms, C&SI in Europe and life sciences are some targets. We have expanded our search area much wider in the last 6-9 months and we are at it.
There is this impression that the system of promoters taking turns at running the company is leading to discontinuity in management. What are your comments?
There are two questions mixed in this. First, I don’t think the founders occupy any chair just because we are the founders; we were that 30 years back. At that time I was a product manager, that doesn’t qualify me to sit in this chair. We are here because we are thorough professionals, let’s be very clear. I don’t think you will find people who are as professional as we are in any criteria you may want to consider, whether it is Kris (Mr K.Gopalakrishnan), Nandan (Nilekani) or me.
Second, is the strategy. We have had multiple strategies over the last 30 years, and they are independent of the people running the show. There is enormous amount of continuity in execution because we are all part of the strategy evolution.
There are three aspects to how any CEO operates. First is the company strategy, second is the environment and finally, the individual style. The only thing which will change is the style, which is not bad as long as the strategies are implemented. Don’t forget that Infosys has been built on a foundation that is extremely strong. It is that we will be a globally respected corporation, which has not changed. It is that we will have a strong value system, which has not changed. It has a business model called PSPD (predictabe, sustainable, profitable, de-risked) which has not changed. All the fundamentals have not changed.
Do you think there are learnings from the Jay Palmer case for the company?
What is Jay Palmer case? Please take a look at the case. It is a case of employee retaliation. He has claimed that we retaliated. The matter is sub-judice, and I’m not going to comment.
How much do you think the anti-outsourcing debate in the U.S. will affect India’s IT industry?
In an election year, there are always such conversations. Historically, the U.S. has never legislated against corporations. My experience with the U.S., and I have been there many years, is that they take a balanced approach.