Optimism on Infosys turnaround under Narayana Murthy not matched by numbers

Written by P P Thimmaya | Bangalore | Updated: May 30 2014, 13:43pm hrs
MurthyThe circumstances of Narayana Murthy's return to Infosys were no less dramatic
The last one year has been one of the most daunting periods for Infosys, coinciding with the return of NR Narayana Murthy as executive chairman in June 1, 2013.

This was a time when India's second largest IT services exporter came under the spotlight for the exits of several senior management executives, including CEO contenders V Balakrishnan and BG Srinivas, and a revenue growth performance which lagged the industry benchmark.

Now under Murthy, Infosys is charting a turnaround strategy with the hope and promise that it will regain old glory as the bellwether of the Indian IT industry. The Infosys chairman, in a letter to his employees last week, said: In FY15, it is extremely important that we sustain this growth momentum. We have adopted a simple formula for growth chase more opportunities, increase the size of those opportunities, improve win rates and improve demand fulfillment. I believe we are a great team full of passion and brimming with so many smart ideas."

But the optimism is not reflecting in the numbers. The performance of Infosys for FY14 ever since Murthy's return has not been consistent. From sequential revenue growth of 2.7% in Q1 of FY14, it rose to 3.8% in Q2, but in the remaining two quarters it has been a steady decline, with the fourth quarter posting flattish growth. Also, the company expects to grow in the range of 7-9% for FY15, which is lower than the FY14 growth rate.

The circumstances of Murthy's return to Infosys were no less dramatic. It was least expected, after CEO Shibulal's 3.0 strategy failed to cut ice with investors. The performance of Infosys had showed a steady downward trend since 2011 when it grew by 26% in FY11 but had touched a low of 5.8% in FY13. Son Rohan Murty had joined Murthy senior at Infosys as his executive assistant.

Upon his return, Murthy immediately ensured a salary hike in the range of 8%, which was kept in abeyance for a year. This also found a strong resonance with the employees prompting Murthy to state thus: When I came back, I noticed we had not increased salaries for our staff in India particularly at the middle and senior level for two years and we had not increased salary for anybody in India for one year. The first thing I did within a week of my coming back was to ensure that all these people got a salary hike of about 8%. It does not make sense that on the one hand, we allow our salaries outside India to shoot up by a huge margin of whatever $1.2-1.3 billion while starving our people in India.

This salary hike in June 2013 was followed by another round in March 2014.

However, the tumultuous period began when Murthy began the actual work of setting things in order. This saw a spate of exits at the senior management level. Some of the key executives who left the IT major included Ashok Vemuri, V Balakrishnan, Basab Pradhan, Stephen Pratt and Chandrashekar Kakal. Two of the executives who left the organisation were talked about as potential CEOs.

This also raised questions on why the company was not able to hold on to its key executives and what kind of impact, it would have on its operations. The exits were not just at the top level as scores of employees even at the middle layer had left the organisation, with some of them joining rivals of Infosys such as Wipro and TCS.

Viju George of JP Morgan, a brokerage house, had said, Attrition at the mid-level hurts in execution and day-to-day operations. We believe Infosys will have to ensure that its attrition-controlling measures have the desired effect as quickly as possible.

Murthy defended the exits. Barring exceptions I have to mention that because there were a couple of people, the rest of the people who had to leave unfortunately were people who were deriving very high salary and unfortunately we were not getting value from them.

People aware of the changes within Infosys felt these tough decision were needed as many of them were not keeping pace with the changes in the external market and also they were not effectively driving the key function of sales for the company.

Murthy has provided a three-year timeframe for once again creating a desirable Infosys and this is being done through substantive tweaking of its existing strategy. It is being done through a three-pronged mantra of optimising the cost structure, improving effectiveness of sales and software delivery productivity.

Since the middle of 2011, Infosys lost its focus on the traditional bread and business of IT services, which include segments such as application development and maintenance (ADM), infrastructure, testing, BPO etc. These are typically large business deals which offer a steady stream of revenue with a strong probability of gaining more business.

During this period, Infosys emphasised on its 3.0 strategy whose larger focus is on products, platforms and solutions (PPS), a segment which has still not become mainstream for the Indian IT industry.

S Gopalakrishnan, vice-chairman, Infosys, in the FY14 annual report tacitly admitted, It is difficult to time the technology disruption perfectly. You either run the risk of being too early or too late....Our traditional BITS business slowed down, perhaps due to lack of focus.

Even Murthy admitted that the company had blurred its focus on the traditional businesses and it was taking steps to rectify these mistakes. At the same time, he noted that the company remains committed on the PPS segment.

Infosys for FY14 under the chairmanship of Murthy saw its revenue growth rate double to 11.5% while the operating profit margins has steadily improved to 25.5%.

Partha Iyengar, vice president and distinguished analyst, Gartner, in an earlier interaction with FE, said, If you look at the amount of traction they had lost in the last three years and how he came back, it has been a massive challenge to turn things around. I think the jury is still out on whether he will succeed or has succeeded.

There are still significant challenges for Infosys as it looks for a definite turnaround under Murthy and the biggest priority for them is to select a new chief executive officer (CEO) to replace Shibulal.

It remains to be seen what kind of structure the company will adopt for the new CEO as Murthy remains the lynchpin to hold together the 1.6 lakh employees of the company. With the exit of BG Srinivas on Wednesday, the last of the CEO hopefuls within the company has left its shores.